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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: DECEMBER 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
_______________ ______________
Commission File No. 0-20190
AUTHENTIDATE HOLDING CORP.
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 14-1673067
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(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
2165 Technology Dr., Schenectady, NY, 12308
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (518) 346-7799
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark 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 [ ]
20,080,221 shares of Common Stock, par value $.001 per share, were
outstanding at February 6, 2003.
Page 1
AUTHENTIDATE HOLDING CORP.
FORM 10-Q
INDEX
PAGE NO.
--------
PART I FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets -
December 31, 2002 and June 30, 2002 3
Consolidated Statements of Operations -
Three and six months ended December 31, 2002
and December 31, 2001 5
Consolidated Statements of Cash Flows -
Six months ended December 31, 2002
and December 31, 2001 6
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk 15
Item 4 - Controls and Procedures 15
PART II OTHER INFORMATION
Item 1 - Legal Proceedings 16
Item 2 - Changes in Securities 16
Item 3 - Defaults Upon Senior Securities 17
Item 4 - Submission of Matters to a Vote of
Security Holders 17
Item 5 - Other Information 17
Item 6 - Exhibits and Reports on Form 8-K 17
Safe Harbor Statement 18
Signatures 18
Certifications 19
Page 2
PART I FINANCIAL INFORMATION
AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited except for the June 30, 2002 balance sheet)
December 31, June 30,
ASSETS 2002 2002
------------- -------------
Current Assets:
Cash and cash equivalents $ 3,822,930 $ 2,269,353
Accounts receivable, net of allowance
for doubtful accounts of $521,085 at Dec.
31, 2002 and $609,185 at June 30, 2002 3,346,780 4,222,472
Due from related parties 27,662 27,444
Inventories:
Finished goods 181,542 161,930
Purchased components & raw material 262,192 317,772
Prepaid expenses and other current assets 329,524 123,766
Note receivable 197,287
------------- -------------
Total current assets 7,970,630 7,320,024
Property and equipment, net 3,883,408 4,008,925
Other assets:
Software development costs, net 777,172 1,161,650
Goodwill 12,441,722 12,439,145
Investment in affiliated companies 338,380 294,427
Patent costs, net 279,853 235,789
Other intangible assets 237,039 258,766
Note receivable 302,713
Other assets 177,531 30,547
------------- -------------
Total assets $ 26,105,735 $ 26,051,986
============= =============
See accompanying notes to the consolidated financial statements.
Page 3
AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited except for the June 30, 2002 balance sheet)
December 31, June 30,
LIABILITIES AND SHAREHOLDERS' EQUITY 2002 2002
------------- -------------
Current liabilities:
Accounts payable $ 992,008 $ 1,899,786
Accrued expenses and other liabilities 2,290,574 1,932,034
Line of credit 714,171 1,753,394
Current portion of long-term debt 35,747 35,747
Current portion of obligations under capital leases 88,827 88,827
Income taxes payable 21,718 17,800
------------- -------------
Total current liabilities 4,143,045 5,727,588
Convertible debentures 1,808,278
Long-term debt, net of current portion 1,264,261 1,281,768
Deferred grant 1,000,000 1,000,000
Obligations under capital leases, net of current portion 60,968 97,296
------------- -------------
Total liabilities 8,276,552 8,106,652
------------- -------------
Commitments and contingencies
Shareholders' equity:
Preferred stock - $.10 par value, 5,000,000 shares authorized:
Series A - 100 shares issued and outstanding 10 10
Series B - 28,000 shares issued and outstanding 2,800 2,800
Series C - 3,900 shares issued and outstanding 390 400
at Dec. 31, 2002 and 4,000 issued and
outstanding at June 30, 2002
Common stock - $.001 par value; 40,000,000
shares authorized; shares issued and outstanding:
20,058,286 at December 31, 2002 and
19,308,594 at June 30, 2002 20,058 19,309
Additional paid-in capital 65,298,731 61,376,632
Accumulated deficit (47,062,009) (42,999,497)
------------- -------------
18,259,980 18,399,654
Other equity (453,437) (507,431)
Currency translation adjustment 22,640 53,111
------------- -------------
Total shareholders' equity 17,829,183 17,945,334
------------- -------------
Total liabilities and shareholders' equity $ 26,105,735 $ 26,051,986
============= =============
See accompanying notes to the consolidated financial statements.
Page 4
AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the 3 months ended For the 6 months ended
December 31, December 31, December 31, December 31,
2002 2001 2002 2001
------------ ------------ ------------- ------------
Net sales $ 5,920,575 $ 4,131,286 $ 11,385,151 $ 7,394,789
Cost of goods sold 4,147,192 2,939,474 8,311,835 5,231,235
------------ ------------ ------------- ------------
Gross profit 1,773,383 1,191,812 3,073,316 2,163,554
Selling, general and
administrative expenses 3,079,117 2,755,773 5,995,955 5,469,492
Product development costs 584,080 531,733 1,164,665 1,181,607
------------ ------------ ------------- ------------
Operating loss (1,889,814) (2,095,694) (4,087,304) (4,487,545)
Other income (expense):
Interest expense (203,658) (27,983) (247,822) (56,167)
Interest and other income 180,395 36,254 511,643 100,872
Equity in net loss of affiliated companies (38,669) (183,378) (121,047) (436,931)
------------ ------------ ------------- ------------
Loss before income taxes (1,951,746) (2,270,801) (3,944,530) (4,879,771)
Income tax (expense)/benefit (1,809) (6,000) (3,891) (6,000)
------------ ------------ ------------- ------------
Loss before minority interest (1,953,555) (2,276,801) (3,948,421) (4,885,771)
Minority interest 53,846 53,846
------------ ------------ ------------- ------------
Net loss (1,953,555) (2,222,955) (3,948,421) (4,831,925)
============ ============ ============= ============
Per share amounts basic and diluted:
Net loss per common share $ (0.10) $ (0.16) $ (0.20) $ (0.35)
============ ============ ============= ============
See accompanying notes to the consolidated financial statements.
Page 5
AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
For the 6 months ended
December 31, December 31,
2002 2001
------------ ------------
Cash flows from operating activities:
Net loss $ (3,948,421) $ (4,831,925)
Adjustments to reconcile net loss to
net cash provided by/(used in) operating activities:
Depreciation and amortization 936,679 763,403
Amortization of discount on convertible debentures 111,278
Provision for doubtful accounts 29,974 66,934
Non-cash foreign currency translation adjustment (30,471)
Non-cash compensation expense 345,174
Equity in net loss of affiliates 121,047 416,930
Non-cash issuance of warrants for services 11,913
Changes in operating assets and liabilities, net of
business acquired:
Accounts receivable and other receivables 895,500 869,489
Inventories 35,968 (80,049)
Prepaid expenses and other current assets (205,757) (56,044)
Accounts payable and other current liabilities (528,330) (1,285,578)
Income taxes 3,918 10,783
------------ ------------
Net cash provided by/(used in) operating activities (2,566,702) (3,780,883)
------------ ------------
Cash flows from investing activities:
Property and equipment expenditures (195,418) (279,406)
Software development costs (162,506) (87,579)
Other intangible assets (83,208) (51,397)
Note receivable, repayment 350,000
Note receivable, issuance (350,000)
Other long term assets (12,872)
Investment in affiliates (167,579) (500,000)
------------ ------------
Net cash used in investing activities (271,583) (1,268,382)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of debentures 3,700,000
Net proceeds from sale of common stock 1,946,953
Net payments under line of credit (1,039,223)
Principle payments on long-term debt (17,507) (16,125)
Capital leases, net (36,328) 39,086
Payment of registration costs (69,805) (42,793)
Exercise of warrants and options 150,778 52,207
Deferred financing costs (262,000)
Payback of loan by Company officer 53,994
Preferred stock dividends (35,000) (52,264)
------------ ------------
Net cash provided by/(used in) financing activities 4,391,862 (19,889)
------------ ------------
Net increase/(decrease) in cash and cash equivalents 1,553,577 (5,069,154)
Cash and cash equivalents, beginning of year 2,269,353 9,040,466
------------ ------------
Cash and cash equivalents, end of period $ 3,822,930 $ 3,971,312
============ ============
See accompanying notes to the consolidated financial statements.
Page 6
AUTHENTIDATE HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of management the accompanying unaudited consolidated
financial statements contain all adjustments, consisting of only normal,
recurring adjustments, necessary for fair presentation . The consolidated
financial statements include the accounts of Authentidate Holding Corp. (AHC)
and its subsidiaries DJS Marketing Group, Inc. (DJS), Authentidate, Inc.,
Authentidate International AG (AG) and Trac Medical Systems, Inc. (Trac Med) and
its DocStar Division and are referred to as the Company.
The Company also is a 50% co-owner in a non-consolidated joint venture
called Authentidate Sports, Inc. (Sports).
2. The results of operations for the three and six months ended December
31, 2002 are not necessarily indicative of the results to be expected for the
full year.
3. Certain information and footnote disclosures normally included in the
consolidated financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted. It is suggested that these consolidated financial
statements be read in conjunction with the annual consolidated financial
statements and notes thereto included in the Company's Form 10-K for the fiscal
year ended June 30, 2002.
4. During the six months ended December 31, 2002; 65,975 common stock
options and 3,000 common stock warrants were exercised.
5. The following represents the reconciliation of the basic and diluted
loss per share amounts for the three and six months ended December 31, 2002 and
2001, respectively.
DECEMBER 31,
------------
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- ------------------------
2002 2001 2002 2001
---- ---- ---- ----
Net income/(loss) $ (1,953,555) $ (2,222,955) $ (3,948,421) $ (4,831,925)
Preferred stock dividends (56,833) (444,139) (114,092) (893,764)
----------------------------------------------------------
Loss applicable to common shareholders $ (2,010,388) $ (2,667,094) $ (4,062,513) $ (5,725,689)
Weighted average shares 19,994,817 16,261,785 19,949,807 16,233,670
Net loss per share $ (0.10) $ (0.16) $ (0.20) $ (0.35)
The impact of options, warrants and convertible notes was antidilutive
to the calculation of basic and dilutive loss per share and were accordingly
excluded from the calculation. The preferred stock dividends for the three and
six months ended December 31, 2001 includes amortization of the beneficial
conversion feature of Series C Preferred Stock approximating $366,000 and
$732,000, respectively.
6. The Company's reportable segments are separate divisions and distinct
businesses which are managed separately. Included in the Authentidate Related
column are operations of Authentidate, Trac Med, AG and Sports which are all in
the authentication software services business. DocStar is in the document
imaging software business and DJS is in the systems integration business.
DocStar sells through a national network of dealers (approximately 100 dealers)
and anticipates the addition of several new dealers each quarter to expand into
markets not currently served. DJS's market is primarily in the Albany, New York
region. Authentidate, Trac Med and AG sell their products and services on a
national basis using a direct sales model. The Corporate Division's expenses are
non-operating expenses which include all public company related activities and
apply to all of the Company's operating divisions and therefore should be
segregated. The Company's segment information follows:
Page 7
SEGMENT INFORMATION
FOR THE SIX MONTHS ENDED:
DECEMBER 31, 2002: DocStar DJS Authentidate Related Totals
------- --- -------------------- ------
Revenues from external customers $ 3,553,901 $ 7,204,532 $ 626,718 $ 11,385,151
Intersegment revenues 9,875 39,283 49,158
Segment profit/(loss) 490,605 38,748 (2,575,429) (2,046,076)
DECEMBER 31, 2001:
Revenues from external customers $ 3,290,113 $ 4,079,432 $ 25,244 $ 7,394,789
Intersegment revenues 35,449 35,449
Segment profit/(loss) 51,165 62,808 (2,885,804) (2,771,831)
RECONCILIATION: December 31, 2002 December 31, 2001
----------------- -----------------
Total revenues from segments $ 11,434,309 $ 7,430,238
Elimination of intersegment revenues (49,158) (35,449)
------------ ------------
Total consolidated revenues $ 11,385,151 $ 7,394,789
============ ============
Total pre-tax loss of segments $ (2,046,076) $ (2,771,831)
Product development expenses (1,164,665) (1,181,607)
Corporate Division expenses (731,564) (939,760)
Elimination of intersegment profits (2,225) 13,427
------------ ------------
Loss before income taxes $ (3,944,530) $ (4,879,771)
============ ============
7. Other Equity represents a collateralized loan to the Chief Executive
Officer.
8. In July and August 2002 the Company sold 660,077 shares of its
common stock at $3.03 per share in a private transaction. The Company received
gross proceeds of approximately $2.0 million. The Company issued 132,015 common
stock purchase warrants to the buyers which have an exercise price of $3.26 per
share and have a five year life. The proceeds have been used to fund business
development, sales and marketing of the Authentidate businesses along with
general working capital of the Company.
9. In October 2002, the Company sold convertible debentures with a face
value of $3,700,000 to institutional investors and warrants to purchase 444,000
shares of common stock. The debentures are convertible into shares of the
Company's common stock at an initial conversion price of $2.50 per share. The
debentures are due three years from the date of issuance and accrue interest at
the rate of 7% per annum, payable quarterly in arrears. At the option of the
Company, the interest may be paid in either cash or additional shares of common
stock. The warrants are exercisable for a period of four years from the date of
issuance and are initially exercisable at $2.50 per share. The conversion price
of the debentures and the exercise price of the warrants are subject to
adjustment in the event the Company issues common stock or securities
convertible into common stock at a price per share of common stock less than the
conversion price or exercise price on the basis of a weighted average formula.
In addition, the conversion price of the debentures and the exercise price of
the warrants are subject to adjustment at any time as the result of any
subdivision, stock split, combination of shares or recapitalization. The Company
has an option, but not a requirement, to sell another $2,467,000 of convertible
debentures to the same investors provided the Company's common stock maintains a
trading price at or above $3.00 per share for the 15 trading days preceding an
election to sell additional debentures. This option is in effect for 12 months
following the closing on the first sale of convertible debentures.
The Company's common stock was trading at a market price below the
exercise price of $2.50 per share on the date the letter of intent was signed by
the Company and the institutional investors. However, on the date of closing the
Company's stock was trading above the exercise price of $2.50 per share. As a
result of the increase in market price on the date of closing and to allocate a
portion of the debt to the 444,000 warrants, under generally accepted accounting
principles the Company was required to record a debt discount of $2,003,000 on
the balance sheet thereby reducing the liability on the balance sheet from
$3,700,000 to $1,697,000 on the date of the sale. This debt discount will be
amortized and charged to interest expense over a period of 36 months and the
debt discount will be zero when the $3,700,000 debt is due to be repaid 36
months from the closing date. In the event the investors convert the debentures
prior to the end of 36 months then generally accepted accounting principles
require the Company to expense the unamortized balance of the debt discount in
full. Through December 31, 2002, $111,278 has been recorded as non-cash interest
expense on the Company's income statement. Going forward the Company will incur
a non-cash interest expense of approximately $167,000 per quarter or
approximately $668,000 per year.
Page 8
10. During the six months ended December 31, 2002 the Company incurred a
net loss of $3,948,421. Cash used in operating activities totaled $2,566,702 for
the six months ended December 31, 2002 compared to $6,003,316 used in operating
activities for the year ended June 30, 2002. The Company's cash balance
increased from $2,269,353 to $3,822,930 from June 30, 2002 to December 31, 2002
mainly due to a private sale of common stock of $1,946,953 and the sale of
convertible debentures of $3,700,000. Further, the Company's accumulated deficit
has increased from $42,999,497 at June 30, 2002 to $47,062,009 at December 31,
2002. To date the Company has been largely dependent on its ability to sell
additional shares of its common stock or other securities to obtain financing to
fund its operating deficits. Under its current operating plan to introduce the
new Authentidate technology, the Company's ability to improve operating cash
flow is highly dependent on the market acceptance of its products and the
Company's ability to reduce overhead costs. Authentidate and it's related
businesses, Trac Med, AG and Sports are currently cash flow negative and along
with Corporate operations were responsible for the negative cash flow from
operations for the six months ended December 31, 2002. If the Company is unable
to attain projected sales levels for Authentidate and related products it may be
necessary to raise additional capital to fund operations and meet its
obligations. There is no assurance that such funding will be available, if
needed. If the Company is unable to raise additional capital necessary to fund
operations and is unable to attain projected sales levels for Authentidate and
related products then it will implement cost reduction strategies including the
possible shutdown or reduction of operations at Authentidate, AG, Trac Med or
Sports.
11. As described in our report on Form 10-K for the fiscal year ended June
30, 2002, we are involved in the following pending and threatened legal
proceedings. We are the defendant in a third party complaint filed by Shore
Venture Group, LLC in the Federal District Court for the Eastern District of
Pennsylvania. The third party complaint was filed on May 7, 2001. Shore Venture
is the defendant to an action commenced by Berwyn Capital. The third party
complaint alleges a claim of breach of contract and seeks indemnification. A
trial was held in October 2002 and we are awaiting the judge's verdict.
Management believes that the claim will not have a material adverse impact on
our financial condition, results of operations or cash flow. We have also been
advised of a claim by Shore Venture Group concerning additional shares of Common
Stock of our subsidiary, Authentidate, Inc. This claim is not before the court
in the third-party litigation previously discussed. We are conducting settlement
negotiations with Shore Venture and believe that a settlement will not have a
material adverse impact on our financial condition, results of operations or
cash flow. No formal action has been commenced in connection with this claim and
the settlement negotiations are being held at this juncture in an effort to
avoid resorting to litigation on this issue.
We are engaged in no other litigation the effect of which would be
anticipated to have a material adverse impact on our financial condition,
results of operations or cash flows.
12. Total comprehensive income/(loss) consists of:
DECEMBER 31,
------------
2002 2001
---- ----
Net loss $ (3,948,421) $ (4,831,925)
Currency translation adjustment (30,471)
------------------------------
Total comprehensive loss $ (3,978,892) $ (4,831,925)
13. Effective July 1, 2001, the Company adopted FAS 141 and FAS 142. FAS
141 requires business combinations initiated after June 30, 2001 to be accounted
for using the purchase method of accounting. It also specifies the types of
acquired intangible assets that are required to be recognized and reported
separate from goodwill. FAS 142 requires that goodwill and certain intangibles
no longer be amortized, but instead tested for impairment at least annually. The
Company adopted FAS No. 142 effective July 1, 2001. To date the adoption of FAS
142 has not had a material effect on its financial position, results of
operations or cash flows.
The changes in the carrying amount of goodwill for the quarter ended
December 31, 2002, are as follows:
DJS AUTHENTIDATE AG TOTAL
Balance June 30, 2002 $ 1,173,665 $ 3,982,471 $ 7,283,009 $ 12,439,145
Changes in carrying amount of goodwill 2,577 2,577
------------ ------------ ------------ -------------
Balance December 31, 2002 $ 1,173,665 $ 3,982,471 $ 7,285,586 $ 12,441,722
Page 9
The Company retained a third party valuation firm to value goodwill as
of June 30, 2002 and based on that evaluation and management's assessment the
Company does not believe there is an impairment issue at this point in time with
regard to goodwill.
Intangible asset amortization expense for the six months ended December
31, 2002 was $60,871. Below is a chart of intangible assets:
JUNE 30, 2002 DECEMBER 31, 2002
------------- -----------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
Patents $ 260,581 $ 24,792 $ 315,415 $ 35,562
Trademarks 106,803 15,654 133,675 19,205
Completed technologies 59,400 7,425 59,400 22,275
Accreditation 121,800 15,225 121,800 45,675
Licenses 13,600 4,533 15,102 5,783
---------- --------- ---------- ---------
Total $ 562,184 $ 67,629 $ 645,392 $ 128,500
========== ========= ========== =========
No significant residual value is estimated for these intangible assets.
Patent, trademark and other amortization expense is expected to be immaterial
the remainder of fiscal 2002 as well as 2003, 2004, 2005 and 2006.
In August 2001, the FASB issued FAS No.143, Accounting for Asset
Retirement Obligations. FAS No. 143 requires the fair value of a liability for
an asset retirement obligation to be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. FAS No. 143 is effective for fiscal years beginning after
June 15, 2002. The adoption of this Statement has not had a material impact on
the Company's financial statements
In August 2001, the FASB issued FAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which supercedes FAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for the Long-Lived Assets
to be Disposed of, and the accounting and reporting provisions of APB No. 30.
FAS No. 144 addresses financial accounting and reporting for the impairment or
disposals of long-lived assets and is effective for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years. The adoption
of this Statement has not had a material impact on the Company's financial
statements.
In April 2002, the FASB issued FAS No. 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections as of April 2002. This Statement addresses a number of items related
to leases and other matters. The adoption of this Statement has not had a
material impact on the Company's financial statements.
14. Present Accounting Standard Not Yet Adopted:
In June 2002, the FASB issued FAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This Standard addresses the
recognition, measurement and reporting of costs that are associated with exit or
disposal activities. FAS No. 146 is effective for exit or disposal activities
that are initiated after December 31, 2002. The adoption of FAS No. 146 has not
had a material impact on the Company's financial statements.
In December 2002, the FASB issued FAS No. 148 Accounting for Stock
Based Compensation-Transition and Disclosure - an amendment of FAS 123. This
Statement amends FAS 123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of Statement 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The Statement has varying effective dates
commencing with interim periods beginning after December 15, 2002.
15. In November 2002, the FASB issued FAS Interpretation No. 45 (FIN 45),
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Guarantees of Indebtedness of Others, FIN 45 requires that upon issuance of a
guarantee, the guarantor must recognize a liability for the fair value of the
obligation it assumes under that guarantee. The initial recognition and
measurement should be applied on a prospective basis to guarantees issued or
modified after December 31, 2002. Disclosure requirements are effective for
financial statements of both interim and annual periods that end after December
15, 2002. The Company has no guarantees to unaffiliated third parties so the
adoption of FIN 45 has had no impact on the Company's financial statements.
16. Included in net sales and cost of goods sold are service sales of
$793,335 and cost of service sales of $308,359 for the six months ended December
31, 2002.
Page 10
17. On October 30, 2002, the Company filed a Certificate of Amendment of
the Certificate of Designations, Preferences and Rights and Number of Shares of
Series B Preferred Stock with the Secretary of State of the State of Delaware.
The Amendment provides that the conversion rate applicable to the outstanding
shares of Series B Preferred Stock will be fixed at $1.40. Presently, the
conversion rate was equal to the lower of $1.875 and the average of the closing
bid and asked prices of our common stock for the immediately preceding ten
consecutive trading days ending one day prior to the notice of conversion;
provided, however, that the conversion rate would not be below $0.875.
Accordingly, the outstanding 28,000 shares of Series B Preferred Stock are
presently convertible into an aggregate of 500,000 shares of the Company's
common stock. Prior to the amendment, the outstanding shares of Series B
Preferred Stock were convertible into a maximum of 800,000 shares of the
Company's common stock. In consideration of obtaining the consent of the holder
of the outstanding Series B Preferred Stock, the Company agreed to defer its
ability to redeem those shares for a period of two years.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
ITEM 2. FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Authentidate Holding Corp.("AHC" or "the Company") together with its
subsidiaries and joint venture is involved in the sales and marketing of
document imaging software products (DocStar), systems integration services and
products (DJS) and security software services (Authentidate, Trac Med, AG and
Sports). Revenues during the current fiscal year have been derived primarily
from DocStar and DJS. Our DocStar document imaging system enables users to scan
paper documents and retrieve those documents electronically. Our computer
integration services are carried out by DJS. As a systems integrator, DJS
configures various computer hardware and software to meet the needs of
business/organization customers. The Authentidate security software service is
designed to accept and store a digital code used to prove authenticity of
content, date and time via the Internet of any electronic document or image. Our
Authentidate subsidiary has entered into an alliance agreement with the United
States Postal Service to operate the Postal Service's Electronic Postmark(R)
service, which incorporates our Authentidate software. Trac Med uses the
Authentidate service in the medical supply industry to assist in the processing
of Certificates of Medical Necessity and other electronic healthcare forms over
the Internet. AG is the Company's European subsidiary which sells the
Authentidate software services to certain international markets. Sports is the
Company's joint venture to develop a service using the Authentidate software in
the sports collectibles market to prove authenticity of collectibles. The
following analysis of the financial condition and results of operations of the
Company should be read in conjunction with the Company's consolidated financial
statements and notes contained elsewhere in this Form 10-Q as well as the
Company's Form 10-K.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of its financial condition and
results of operations are based on its consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires the Company to make estimates and judgments that affect reported
amounts of assets, liabilities, revenues and expenses, and related disclosures
of contingent assets and liabilities. On an ongoing basis, the Company evaluates
its estimates, including those related to new product launches, bad debts,
inventory obsolescence, recoverability of equity investments, intangible assets,
software capitalization and deferred tax assets and contingencies and
litigation. The Company bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results for which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results could differ from these estimates under different
assumptions.
The Company believes the following critical accounting policies require
more significant judgments and estimates used in the preparation of its
consolidated financial statements. The Company maintains allowances for doubtful
accounts for estimated losses resulting from the inability of its customers to
make required payments. If the financial condition of the Company's customers
were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required.
The Company writes down its inventory for estimated obsolescence or
unmarketable inventory equal to the difference between the cost of the inventory
and the estimated market value based upon assumptions about future demand and
market conditions. If actual market conditions are less favorable than those
projected by management, additional inventory write downs may be required.
Page 11
The Company holds an interest in a joint venture company having
operations or technology in areas within its strategic focus, which is not
publicly traded. The Company monitors the financial condition and results of
such company; however, future adverse changes in market conditions or poor
operating results of the underlying investments could result in losses or an
inability to recover the carrying value, thereby possibly requiring an
impairment charge in the future.
The Company has capitalized software development costs related to the
Authentidate product and significant goodwill related to acquisitions, for which
the recoverability of such capitalized costs and goodwill is highly dependent on
the future success of the marketing and sales of the Authentidate product line.
If the product is not well received by the market place and the future revenue
generated from such product launch is less than anticipated, the carrying value
of the related software development costs and goodwill may be impaired and
require an impairment charge in the future.
RESULTS OF OPERATIONS
THE THREE MONTHS AND SIX ENDED DECEMBER 31, 2002 COMPARED TO THE THREE AND SIX
MONTHS ENDED DECEMBER 31, 2001.
The Company realized a consolidated net loss of $1,953,555 ($.10 per
share) and $3,948,421 ($.20 per share) for the three and six months ended
December 31, 2002. This loss is an improvement over the prior year when the
Company realized a net loss of $2,222,955 ($.16 per share) and $4,831,925 ($.35
per share) for the three and six months ended December 31, 2001, respectively.
As reported in Footnote 6 (Segment Information) to the Consolidated
Financial Statements appearing in this Form 10-Q, the net loss is the result of
losses incurred primarily by the Company's Authentidate segment. Our
Authentidate segment has incurred significant sales, marketing, development and
general administrative expenses this year and last in an effort to generate
sales.
The consolidated net loss for the six months ended December 31, 2002 is
approximately $884,000 lower than it was for the same period last year.
Contributing to this improvement is an increase in segment profit realized by
the DocStar Division of $439,440. This increase in profit is due an increase in
sales and an improvement in gross margins as a result of reduced component
costs.
Also contributing to the reduction in the consolidated net loss is the
Authentidate segment whose segment loss was $310,375 lower than the previous
year as a result of an increase of sales from $25,244 to $626,718. Corporate
Division expenses decreased by $208,196 and product development expenses
remained about the same as the prior year. The DJS segment income was virtually
unchanged from a year ago.
Consolidated sales were $5,920,575 and $11,385,151 for the three and
six months ended December 31, 2002. This is a significant increase over the
prior year when sales were $4,131,286 and $7,394,789 for the three and six
months ended December 31, 2001, respectively. As reported in Footnote 6, most of
the increase is due to DJS as a result of a shift in its product mix of sales.
DJS had more direct hardware sales ($5,085,000) this year compared to last year
($927,000). In the six months ended December 31, 2001, DJS had a significant
amount of indirect sales. In an indirect sale DJS passes the hardware sale to a
national distributor or manufacturer and realizes a fee from the distributor
which DJS records as a sale. The fee is generally a percentage of the total
sale. In a direct sale DJS would purchase the hardware from the distributor or
manufacturer and resell it to its customer and would record the entire hardware
sale. In a direct sale, the sales revenue is much higher than an indirect sale,
so is the cost of sale. However, in either scenario the gross profit dollars are
about the same. The DJS sales mix of direct sales to indirect sales is dictated
by market conditions and is determined by the customer and/or vendor. Sales also
increased in the DocStar Segment/Division by $263,788 and in the Authentidate
Segment by $601,474, these sales primarily coming from Trac Med and AG.
Consolidated gross profit for the three and six months ended December
31, 2002 was $1,773,383 and $3,073,316, respectively. This compares to
consolidated gross profit of $1,191,812 and $2,163,554 for the same periods last
year. The increase is due to the DocStar Division as a result of an increase in
sales and also a decrease in cost of sales. The consolidated gross profit margin
was 30.0% and 27.0% for the three months and six months ended December 31, 2002,
respectively. This compares to a consolidated gross profit margin of 28.8% and
29.3% for the same periods last year. DJS realized a decrease in profit margins
compared to last year due to the change in product mix discussed above, direct
sales have a lower gross profit margin than indirect sales. In addition, the DJS
profit margins have been negatively affected by competitive pressure in the
current economy. Offsetting the reduced profit margins of DJS was an increase in
gross profit margins for DocStar. DocStar's gross profit margin increased from
51.5% to 63.8% from December 31, 2001 to December 31, 2002. This increase is due
to reduced direct material costs due to better purchasing and a general
reduction in component parts throughout the computer industry. Gross profit
margin is defined as gross profit as a percentage of sales.
Page 12
Selling, general and administrative expenses (S,G&A) consist of all
other Company expenses except product development costs and interest. S,G&A
expenses amounted to $3,079,117 and $5,995,955 for the three and six months
ended December 31, 2002, respectively. This compares to $2,755,773 and
$5,469,492 for the same periods last year. This increase in S,G&A expenses is
primarily the result of the addition of AG this year. Last year AG was treated
as an unconsolidated affiliate until the Company purchased 100% of the shares of
AG in March 2002 and AG became a fully consolidated subsidiary. This Segment is
still in the market development stage and is incurring significant costs to
market its products and develop brand awareness.
As a percentage of sales, S,G&A costs were 52.0% and 52.7% for the
three and six months ended December 31, 2002, respectively. This compares to
66.7% and 74.0% for the same periods last year. This percentage decrease is
primarily due to the increase in consolidated sales as discussed above.
Interest expense was $203,658 and $247,822 for the three and six months
ended December 31, 2002, respectively. This compares to $27,983 and $56,167 for
the same periods last year. The increase is primarily due to interest on the
convertible debentures. The Company recorded a non-cash interest expense of
$111,278, for both the quarter and six months ended December 31, 2002, relative
to the amortization of debt discount on the convertible debentures which is more
fully explained in Footnote 9 to the Consolidated Financial Statements in this
Form 10-Q. In addition, the Company is required to pay interest on the
convertible debentures in the amount of 7% per annum which resulted in interest
expense of $48,786 for both the quarter and six months ended December 31, 2002.
In addition the Company incurred additional interest expense this year as a
result of new equipment and software leases entered into by the Authentidate
Segment and by DJS from borrowings on its line of credit which did not exist a
year ago this time. The DJS line of credit was established in May 2002.
Product development expenses, excluding capitalized costs, relate to
software development for the Authentidate Segment, primarily. These costs were
$584,080 and $1,164,665 for the three and six months ended December 31, 2002,
respectively, compared to $531,733 and $1,181,607 for the same periods last
year. The Company has a policy of capitalizing qualified software development
costs after technical feasibility has been established and amortizing those
costs over three years as cost of goods sold The amortization expense of
software development costs amounted to $546,984 during the 6 months ended
December 31, 2002.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds to date have been the issuance
of equity and the incurrence of third party debt. The principal balance of
long-term debt at December 31, 2002 totaled $1,300,008 all of which relates to a
mortgage loan on the Company's principle office located in Schenectady, NY. The
Company also has long-term convertible debentures in the amount of $1,808,278
net of debt discount of $1,891,722 at December 31, 2002.
The Company's DJS subsidiary has a $2 Million revolving line of credit
with a financial institution collateralized by all assets of DJS and guaranteed
by the Company. The interest rate is prime plus 1.75% with a minimum rate of 7%.
DJS may borrow on this line based on a formula of qualified accounts receivable
and inventory. The outstanding balance on this line of credit is $714,171 at
December 31, 2002.
Property, plant and equipment expenditures totaled $195,418 and
capitalized software development expenditures totaled $162,506 for the six
months ended December 31, 2002, respectively. There are no significant purchase
commitments outstanding.
In June 1999, the Company completed construction of a new office and
production facility in Schenectady, New York for approximately $2,300,000 which
was financed with a $1,000,000 grant from the Empire State Development
Corporation (an agency of New York state) and a mortgage loan from a local
financial institution. The grant stipulates that the Company is obligated to
achieve certain annual employment levels between January 1, 2002 and January 1,
2005 or some or all of the grant will have to be repaid. The Company has not
achieved the agreed upon employment levels to date but expects to achieve such
levels by 2005. No assurances can be given that such employment levels will be
achieved by 2005 so the grant has been classified as a long term liability on
the balance sheet. In the event some or all of the grant will be required to be
repaid the Company will either seek refinancing from a financial institution,
sell the building or pay the grant off out of cash reserves.
The Company's cash balance at December 31, 2002 was $3,822,930 and
total assets were $26,105,735 and the Company received approximately $3.7
million in October in a financing described more fully below. Management
believes existing cash and short-term investments should be sufficient to meet
the Company's operating requirements for the next twelve months provided the
Authentidate Segment generates material sales. In the event the Authentidate
Segment does not increase its sales materially then the Company will either need
to obtain outside financing or reduce expenses or a combination of both.
Page 13
During the six months ended December 31, 2002 the Company incurred a
net loss of $3,948,421. Cash used in operating activities totaled $2,566,702 for
the six months ended December 31, 2002 compared to $6,003,316 used in operating
activities for the year ended June 30, 2002. The Company's cash balance
increased from $2,269,353 to $3,822,930 from June 30, 2002 to December 31, 2002
mainly due to a private sale of common stock of $1,946,953 and the sale of
convertible debentures of $3,700,000. Further, the Company's accumulated deficit
has increased from $42,999,497 at June 30, 2002 to $47,062,009 at December 31,
2002. To date the Company has been largely dependent on its ability to sell
additional shares of its common stock or other securities to obtain financing to
fund its operating deficits. Under its current operating plan to introduce the
new Authentidate technology, the Company's ability to improve operating cash
flow is highly dependent on the market acceptance of its products and the
Company's ability to reduce overhead costs. Authentidate and it's related
businesses, Trac Med, AG and Sports are currently cash flow negative and along
with Corporate operations were responsible for the negative cash flow from
operations for the six months ended December 31, 2002. If the Company is unable
to attain projected sales levels for Authentidate and related products it may be
necessary to raise additional capital to fund operations and meet its
obligations. There is no assurance that such funding will be available, if
needed. If the Company is unable to raise additional capital necessary to fund
operations and is unable to attain projected sales levels for Authentidate and
related products then it will implement cost reduction strategies including the
possible shutdown or reduction of operations at Authentidate, AG, Trac Med or
Sports.
The Company has engaged an investment banking firm to assist the
Company in arranging private financing as well as providing general advisory
services to the Company. If the Company is successful in raising additional
capital it intends to use the capital to further develop the Authentidate
technology and to fund the sales and marketing efforts of this product and
related products such as Trac Med and AG as well as general working capital
purposes. The agreement is not a commitment to provide financing and there can
be no assurances that the Company will be successful in securing any equity or
debt investments in the future.
During the fiscal quarter ended September 30, 2002, we consummated a
private placement of our securities pursuant to Rule 4(2) of the Securities Act
of 1933, as amended, and/or Rule 506 promulgated thereunder. The securities
offered have a purchase price of $3.03 per unit. We sold an aggregate of 660,077
units of our securities, each unit comprised of one share of common stock and
one warrant to purchase .20 shares of common stock. The warrants are exercisable
at $3.26 per share for a period of five years from the date of issuance. We
received approximately an aggregate of $1,950,000 in net proceeds after payment
of expenses. The proceeds were be used to fund business development, marketing
and sales efforts for the Authentidate software services, along with our general
working capital needs. A registration statement filed with the U.S. Securities
and Exchange Commission was declared effective by the Commission during the
quarter ending December 31, 2002 for these shares and the underlying warrant
shares.
On January 9, 2002, we announced that we had entered into a letter of
intent to acquire the assets of Zylab International, Inc., a privately owned
company based in Germantown, Maryland for shares of AHC common stock. The letter
of intent contemplated that the purchase price will range between a minimum of
725,000 and a maximum of 1,000,000 shares of AHC common stock. Pursuant to the
letter of intent, we loaned to Zylab an aggregate principle amount of $500,000,
which loan was collateralized by all of the assets of Zylab, including its
intellectual property. As of June 30, 2002, Zylab had defaulted on the notes. On
September 23, 2002, we closed on a transaction pursuant to which our loan was
repaid on the following terms. Zylab made payment to us of $350,000 in cash,
$50,000 in prepaid license fees for a product DocStar licenses from Zylab, and
agreed to pay to us 18% of the future net income of Zylab or a successor company
up to $100,000, after a $75,000 threshold. Accordingly, our planned acquisition
of Zylab has been cancelled. During the quarter ended December 31, 2002 Zylab
has ceased operations making it highly unlikely any of the $100,000 of future
net income of Zylab or a successor company will ever be received.
In October 2002, the Company sold convertible debentures with a face
value of $3,700,000 to institutional investors and warrants to purchase 444,000
shares of common stock. The debentures are convertible into shares of the
Company's common stock at an initial conversion price of $2.50 per share. The
debentures are due three years from the date of issuance and accrue interest at
the rate of 7% per annum, payable quarterly in arrears. At the option of the
Company, the interest may be paid in either cash or additional shares of common
stock. The warrants are exercisable for a period of four years from the date of
issuance and are initially exercisable at $2.50 per share. The conversion price
of the debentures and the exercise price of the warrants are subject to
adjustment in the event the Company issues common stock or securities
convertible into common stock at a price per share of common stock less than the
conversion price or exercise price on the basis of a weighted average formula.
In addition, the conversion price of the debentures and the exercise price of
the warrants are subject to adjustment at any time as the result of any
subdivision, stock split, combination of shares or recapitalization.
Page 14
The Company has an option, but not a requirement, to sell another
$2,467,000 of convertible debentures to the same investors provided the
Company's common stock maintains a trading price at or above $3.00 per share for
the 15 trading days preceding the election to sell additional debentures. This
option is in effect for 12 months following the effectiveness of a registration
statement covering the resale of the shares of common stock issuable upon
conversion of the debentures.
The securities sold in this offering are restricted securities under
the terms of Regulation D and may not be transferred or resold for a period of
one year, except pursuant to registration under the Securities Act or an
exemption hereunder. The Company filed a registration statement with the
Securities and Exchange Commission to register the shares of common stock
underlying the debentures and the warrants which was declared effective by the
Commission during the quarter ended December 31, 2002. For additional
information regarding this transaction, see Part II, Item 2, "Sale of Debentures
and Warrants."
Below is a chart disclosing future minimum operating lease payments and
aggregate principle maturities of long-term debt as of December 31, 2002, for
the next five years.
LONG-TERM DEBT OPERATING LEASES CONVERTIBLE DEBENTURES
For fiscal year ending June 30,
2003 $ 18,241 $ 371,052
2004 38,810 734,445
2005 42,136 723,449
2006 45,747 421,175 $ 3,700,000 *
2007 49,667 150,583
Thereafter 1,105,407
* Assumes the investors do not convert the debentures into the Company's common
stock prior to the maturity date
PRESENT ACCOUNTING STANDARDS NOT YET ADOPTED
In June 2002, the FASB issued FAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This Standard addresses the
recognition, measurement and reporting of costs that are associated with exit or
disposal activities. FAS No. 146 is effective for exit or disposal activities
that are initiated after December 31, 2002. The adoption of FAS No. 146 has not
had a material impact on the Company's financial statements.
In December 2002, the FASB issued FAS No. 148 "Accounting for Stock
Based Compensation-Transition and Disclosure-an amendment of FAS 123". This
Statement amends FAS 123, "Accounting for Stock-Based Compensation", to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of Statement 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The Statement has varying effective dates
commencing with interim periods beginning after December 15, 2002.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not believe that any of our financial instruments have
significant risk associated with market sensitivity. We are not exposed to
significant financial market risks from changes in foreign currency exchange
rates and are only minimally impacted by changes in interest rates. However, in
the future, we may enter into transactions denominated in non-U.S. currencies or
increase the level of our borrowings, which could increase our exposure to these
market risks. We have not used, and currently do not contemplate using, any
derivative financial instruments.
ITEM 4. CONTROLS AND PROCEDURES.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our management, under the supervision and with the participation of our
chief executive officer and chief financial officer, conducted an evaluation of
our "disclosure controls and procedures" (as defined in the Securities Exchange
Act of 1934 (the "Exchange Act") Rules 13a-14 (c)) within 90 days of the filing
date of this Quarterly Report on Form 10-Q (the "Evaluation Date"). Based on
their evaluation, our chief executive officer and chief financial officer have
concluded that as of the Evaluation Date, our disclosure controls and procedures
are effective to ensure that all material information required to be filed in
this Quarterly Report on Form 10-Q has been made known to them in a timely
fashion.
CHANGES IN INTERNAL CONTROLS
There have been no significant changes (including corrective actions
with regard to significant deficiencies or material weaknesses) in our internal
controls or in other factors that could significantly affect these controls
subsequent to the Evaluation Date set forth above.
Page 15
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS:
As described in our report on Form 10-K for the fiscal year ended June
30, 2002, we are involved in the following pending and threatened legal
proceedings.
We are the defendant in a third party complaint filed by Shore Venture
Group, LLC in the Federal District Court for the Eastern District of
Pennsylvania. The third party complaint was filed on May 7, 2001. Shore Venture
is the defendant to an action commenced by Berwyn Capital. The third party
complaint alleges a claim of breach of contract and seeks indemnification. There
was a trial in October 2002 and we are awaiting the judge's decision. Management
believes that the claim will not have a material adverse impact on our financial
condition, results of operations or cash flow.
We have also been advised of a claim by Shore Venture Group concerning
additional shares of Common Stock of our subsidiary, Authentidate, Inc. This
claim is not before the court in the third-party litigation previously
discussed. We are conducting settlement negotiations with Shore Venture and
believe that a settlement will not have a material adverse impact on our
financial condition, results of operations or cash flow. No formal action has
been commenced in connection with this claim and the settlement negotiations are
being held at this juncture in an effort to avoid resorting to litigation on
this issue.
We are engaged in no other litigation the effect of which would be
anticipated to have a material adverse impact on our financial condition,
results of operations or cash flows.
ITEM 2. CHANGES IN SECURITIES
SALE OF DEBENTURES AND WARRANTS
On October 25, 2002, we completed the sale of $3,700,000 of our
securities to certain accredited investors pursuant to Section 4(2) of the
Securities Act of 1933, as amended and Regulation D, promulgated thereunder. We
received net proceeds of approximately $3,400,000, after paying fees and
expenses. We intend to use the proceeds for working capital and general
corporate purposes. In the transaction, we sold $3,700,000 of convertible
debentures to three institutional investors and warrants to purchase an
aggregate of 444,000 shares of our common stock. The debentures are convertible
into shares of our common stock at an initial conversion price of $2.50 per
share. The debentures are due three years from the date of issuance and accrue
interest at the rate of 7% per annum, payable quarterly in arrears. At our
option, the interest may be paid in either cash or additional shares of common
stock. The warrants are exercisable for a period of four years from the date of
issuance and are initially exercisable at $2.50 per share. The conversion price
of the debentures and exercise price of the warrants are subject to adjustment
in the event we issue common stock or securities convertible into common stock
at a price per share of common stock less than the conversion price or exercise
price on the basis of a weighted average formula. In addition, the conversion
price of the debentures and exercise price of the warrants are subject to
adjustment at any time as the result of any subdivision, stock split,
combination of shares or recapitalization.
The sale of the $3,700,000 of the securities constitutes the first
tranche of a sale of such securities to the investors. The second tranche is
expected to result in the sale of an additional $2,467,000 of the securities.
The second tranche, however, will only be consummated if our common stock
maintains a trading price at or above $3.00 per share for 15 consecutive trading
days over the 12 months following the effective date of the registration
statement filed with the U.S. Securities and Exchange Commission covering the
underlying shares of common stock. . Consummation of the second tranche is at
our option. If there is a closing of the second tranche, the conversion price
and exercise price of the Securities will be equal to $3.00 per share.
We also issued to two consultants for services rendered in connection
with this transaction five year warrants to purchase an aggregate of 86,863
shares of our common stock and a total cash fee of $222,000. The warrants issued
to the consultants are exercisable at $2.50 per share and are on terms
substantially similar to the warrants issued to the investors.
The securities sold in this offering are restricted securities under
the terms of Regulation D and may not be transferred or resold for a period of
one year, except pursuant to registration under the Securities Act or an
exemption thereunder. We filed a registration statement with the U. S.
Securities and Exchange Commission to register the shares of common stock
underlying the debentures and the warrants which was declared effective during
the quarter ended December 31, 2002.
The Company's common stock was trading at a market price below the
exercise price of $2.50 per share on the date the letter of intent was signed by
the Company and the institutional investors. However, on the date of closing the
Company's stock was trading above the exercise price of $2.50 per share. As a
result of the increase in market price on the date of closing and to allocate a
portion of the debt to the 444,000 warrants, under generally accepted accounting
principles the Company was required
Page 16
to record a debt discount of $2,003,000 on the balance sheet thereby reducing
the liability on the balance sheet from $3,700,000 to $1,697,000 on the date of
the sale. This debt discount will be amortized and charged to interest expense
over a period of 36 months and the debt discount will be zero when the
$3,700,000 debt is due to be repaid 36 months from the closing date. In the
event the investors convert the debentures prior to the end of 36 months then
generally accepted accounting principles require the Company to expense the
unamortized balance of the debt discount in full. Through December 31, 2002,
$111,278 has been recorded as non-cash interest expense on the Company's income
statement. Going forward the Company will incur a non-cash interest expense of
approximately $167,000 per quarter or approximately $668,000 per year.
AMENDMENT OF THE CERTIFICATE OF DESIGNATION OF SERIES B PREFERRED STOCK
On October 30, 2002, the Company filed a Certificate of Amendment of
the Certificate of Designations, Preferences and Rights and Number of Shares of
Series B Preferred Stock with the Secretary of State of the State of Delaware.
The Amendment provides that the conversion rate applicable to the outstanding
shares of Series B Preferred Stock will be fixed at $1.40. Presently, the
conversion rate was equal to the lower of $1.875 and the average of the closing
bid and asked prices of our common stock for the immediately preceding ten
consecutive trading days ending one day prior to the notice of conversion;
provided, however, that the conversion rate would not be below $0.875.
Accordingly, the outstanding 28,000 shares of Series B Preferred Stock are
presently convertible into an aggregate of 500,000 shares of the Company's
common stock. Prior to the amendment, the outstanding shares of Series B
Preferred Stock were convertible into a maximum of 800,000 shares of the
Company's common stock. In consideration of obtaining the consent of the holder
of the outstanding Series By Preferred Stock, the Company agreed to defer its
ability to redeem those shares for a period of two years.
ISSUANCE OF WARRANTS TO CONSULTANT
We issued an aggregate of 10,000 warrants to a consultant in connection
with a consulting agreement entered into between the Company and the consultant.
The warrants are exercisable for a period of three years from the issue date at
an exercise price of $3.77 per share.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES:
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS:
None
ITEM 5 OTHER INFORMATION:
None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits
The exhibits designated with an asterisk (*) are filed herewith. All other
exhibits have been previously filed with the Commission and, pursuant 17 C.F.R.
Section 230.411, are incorporated by reference to the document referenced in
brackets following the description of such exhibits.
*3.1 Certificate of Amendment of Certificate of Designations,
Preferences and Rights and Number of Shares of Series B Convertible Preferred
Stock.
4.1 Form of Debenture Issued in Private Placement (filed as
Exhibit 4.1 to Report on Form 8-K dated October 25, 2002).
4.2 Form of Warrant Issued in Private Placement (filed as Exhibit
4.2 to Report on Form 8-K dated October 25, 2002.
10.1 Form of Securities Purchase Agreement entered into in Private
Placement (filed as Exhibit 10.1 to Report on Form 8-K dated October 25, 2002).
10.2 Form of Registration Rights Agreement entered into in Private
Placement (filed as Exhibit 10.2 to Report on Form 8-K dated October 25, 2002).
Page 17
*99.1 Certificate of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
*99.2 Certificate of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K
(1) Date of Report - October 11, 2002
Item(s) Reported - Item 2 - Acquisition of disposal of assets
Item 7 - Pro forma financial statements
(2) Date of Report - October 25, 2002
Item(s) Reported - Item 5 - Other events, Regulation FD
Disclosure
SAFE HARBOR STATEMENT
Certain statements in this Form 10-Q, including information set forth
under Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations constitute "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995 (the Act). The Company
desires to avail itself of certain "safe harbor" provisions of the Act and is
therefore including this special note to enable the Company to do so.
Forward-looking statements in this Form 10-Q or hereafter included in
other publicly available documents filed with the Securities and Exchange
Commission, reports to the Company's stockholders and other publicly available
statements issued or released by the Company involve known and unknown risks,
uncertainties and other factors which could cause the Company's actual results,
performance (financial or operating) or achievements to differ from the future
results, performance (financial or operating) or achievements expressed or
implied by such forward-looking statements. Such future results are based upon
management's best estimates based upon current conditions and the most recent
results of operations. These risks include, but are not limited to risks
associated with the market acceptance of the DocStar, Authentidate and related
product lines, competition, pricing, technological changes, technological
implementation of the Authentidate business plan and other risks as discussed in
the Company's filings with the Securities and Exchange Commission, in particular
its Annual Report on Form 10-K for the year ended June 30, 2002. the
Registration Statement on Form S-3 declared effective on July 8, 2002 all of
which risk factors could adversely affect the Company's business and the
accuracy of the forward-looking statements contained herein.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AUTHENTIDATE HOLDING CORP.
February 7 2003 /s/ John T. Botti
DATE ---------------------
JOHN T. BOTTI
PRESIDENT & CHIEF EXECUTIVE OFFICER
/s/ Dennis H. Bunt
---------------------
DENNIS H. BUNT
CHIEF FINANCIAL OFFICER
Page 18
CERTIFICATIONS
I, John T. Botti, Chief Executive Officer of Authentidate Holding Corp.
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Authentidate
Holding Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d- 14) for the registrant
and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: February 7, 2003
/s/ John T. Botti
- -----------------------
John T. Botti
Chief Executive Officer
Authentidate Holding Corp.
Page 19
CERTIFICATIONS
I, Dennis H. Bunt, Chief Financial Officer of Authentidate Holding
Corp. certify that:
1. I have reviewed this quarterly report on Form 10-Q of Authentidate
Holding Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d- 14) for the registrant
and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: February 7, 2003
/s/ Dennis H. Bunt
- --------------------------
Dennis H. Bunt
Chief Financial Officer
Authentidate Holding Corp.
Page 20