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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: MARCH 31, 2003
[ ] 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
- --------------------------------------------------------------------------------
(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 [ ]
Indicate by check whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
20,294,176 shares of Common Stock, par value $.001 per share, were
outstanding at May 6, 2003.
Page 1
AUTHENTIDATE HOLDING CORP.
FORM 10-Q
INDEX
PAGE NO.
--------
PART I FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets -
March 31, 2003 and June 30, 2002 3
Consolidated Statements of Operations -
Three and nine months ended March 31, 2003
and March 31, 2002 5
Consolidated Statements of Cash Flows -
Nine months ended March 31, 2003
and March 31, 2002 6
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk 17
Item 4 - Controls and Procedures 17
PART II OTHER INFORMATION
Item 1 - Legal Proceedings 18
Item 2 - Changes in Securities 18
Item 3 - Defaults Upon Senior Securities 18
Item 4 - Submission of Matters to a Vote of
Security Holders 18
Item 5 - Other Information 19
Item 6 - Exhibits and Reports on Form 8-K 19
Safe Harbor Statement 19
Signatures 20
Certifications 21
Page 2
PART I FINANCIAL INFORMATION
AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited except for the June 30, 2002 balance sheet)
ASSETS March 31, June 30,
2003 2002
----------- -----------
Current Assets:
Cash and cash equivalents $ 1,890,874 $ 2,269,353
Accounts receivable, net of allowance
for doubtful accounts of $360,027 at March
31, 2003 and $609,185 at June 30, 2002 5,154,789 4,222,472
Due from related parties 33,255 27,444
Inventories:
Finished goods 200,761 161,930
Purchased components & raw material 226,994 317,772
Prepaid expenses and other current assets 324,915 123,766
Note receivable 197,287
----------- -----------
Total current assets 7,831,588 7,320,024
Property and equipment, net 3,857,984 4,008,925
Other assets:
Software development costs, net 564,637 1,161,650
Goodwill 12,784,923 12,439,145
Investment in affiliated companies 294,427
Patent costs, net 276,678 235,789
Other intangible assets 211,261 258,766
Note receivable 302,713
Other assets 311,148 30,547
----------- -----------
Total assets $25,838,219 $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)
LIABILITIES AND SHAREHOLDERS' EQUITY March 31, June 30,
2003 2002
------------ ------------
Current liabilities:
Accounts payable $ 1,593,636 $ 1,899,786
Accrued expenses and other liabilities 2,575,562 1,932,034
Line of credit 1,737,568 1,753,394
Current portion of long-term debt 35,747 35,747
Current portion of obligations under capital leases 123,776 88,827
Income taxes payable 23,277 17,800
------------ ------------
Total current liabilities 6,089,566 5,727,588
Convertible debentures 1,975,195
Long-term debt, net of current portion 1,255,235 1,281,768
Deferred grant 1,000,000 1,000,000
Obligations under capital leases, net of current portion 106,189 97,296
------------ ------------
Total liabilities 10,426,185 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 - 3,850 shares issued and outstanding 385 400
at Mar. 31, 2003 and 4,000 issued and
outstanding at June 30, 2002
Common stock - $.001 par value; 40,000,000
shares authorized; shares issued and outstanding:
20,242,576 at March 31, 2003 and
19,308,594 at June 30, 2002 20,243 19,309
Additional paid-in capital 65,957,097 61,376,632
Accumulated deficit (50,127,766) (42,999,497)
------------ ------------
15,852,769 18,399,654
Other equity (448,398) (507,431)
Currency translation adjustment 7,663 53,111
------------ ------------
Total shareholders' equity 15,412,034 17,945,334
------------ ------------
Total liabilities and shareholders' equity $ 25,838,219 $ 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 9 months ended
March 31, March 31, March 31, March 31,
2003 2002 2003 2002
----------- ----------- ------------ ------------
Net sales $ 8,105,870 $ 3,592,159 $ 19,491,021 $ 10,986,948
Cost of goods sold 6,652,697 2,505,033 14,964,532 7,736,268
----------- ----------- ------------ ------------
Gross profit 1,453,173 1,087,126 4,526,489 3,250,680
Selling, general and
administrative expenses 3,027,959 2,704,177 9,023,914 8,173,669
Product development costs 731,346 468,456 1,896,011 1,650,063
----------- ----------- ------------ ------------
Operating loss (2,306,132) (2,085,507) (6,393,436) (6,573,052)
Other income (expense):
Interest expense (339,912) (29,083) (587,734) (85,250)
Interest and other income 31,178 39,483 542,821 140,355
Equity in net loss of affiliated
companies (393,380) (453,666) (514,427) (890,597)
----------- ----------- ------------ ------------
Loss before income taxes (3,008,246) (2,528,773) (6,952,776) (7,408,544)
Income tax (expense)/benefit (1,512) (4,611) (5,403) (10,611)
----------- ----------- ------------ ------------
Loss before minority interest (3,009,758) (2,533,384) (6,958,179) (7,419,155)
Minority interest 53,846
----------- ----------- ------------ ------------
Net loss (3,009,758) (2,533,384) (6,958,179) (7,365,309)
=========== =========== ============ ============
Per share amounts basic and diluted:
Net loss per common
share ($ 0.15) ($ 0.18) ($ 0.36) ($ 0.51)
=========== =========== ============ ============
See accompanying notes to the consolidated financial statements.
Page 5
AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
For the 9 months ended
March 31, March 31,
2003 2002
----------- -----------
Cash flows from operating activities:
Net loss ($6,958,179) ($7,365,309)
Adjustments to reconcile net loss to
net cash provided by/(used in) operating activities:
Depreciation and amortization 1,398,077 1,195,327
Amortization of discount on convertible debentures 278,195
Provision for doubtful accounts 42,930 89,766
Non-cash foreign currency translation adjustment (45,448)
Non-cash compensation expense 522,868
Equity in net loss of affiliates 514,427 890,597
Non-cash issuance of warrants for services 164,483
Non-cash interest paid in stock 66,394
Other non-cash expenses 27,823
Changes in operating assets and liabilities, net of
business acquired:
Accounts receivable and other receivables (931,058) 1,462,695
Inventories 51,947 206,451
Prepaid expenses and other current assets (201,147) (27,330)
Accounts payable and other current liabilities 262,287 (1,813,429)
Income taxes 5,477 15,312
----------- -----------
Net cash provided by/(used in) operating
activities (5,323,792) (4,823,052)
----------- -----------
Cash flows from investing activities:
Property and equipment expenditures (331,328) (654,300)
Software development costs (225,239) (180,913)
Other intangible assets (86,940) (59,419)
Note receivable, repayment 350,000
Note receivable, issuance (500,000)
Other long term assets (74,625) 23,334
Investment in affiliates (220,000) (220,567)
Goodwill (7,778)
Acquisition of business, net of cash acquired 117,763
----------- -----------
Net cash used in investing activities (595,910) (1,474,102)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of debentures, net of expenses 3,566,798
Net proceeds from sale of common stock 1,955,035
Net payments under line of credit (15,826)
Principle payments on long-term debt (26,533) (24,439)
Capital leases, net 43,842 191,638
Payment of registration costs (63,419) (60,153)
Exercise of warrants and options 199,293 1,557,477
Deferred financing costs (142,000)
Payback of loan by Company officer 59,033
Preferred stock dividends (35,000) (52,264)
Loan to officer (218,031)
----------- -----------
Net cash provided by/(used in) financing
activities 5,541,223 1,394,228
----------- -----------
Net increase/(decrease) in cash and cash equivalents (378,479) (4,902,926)
Cash and cash equivalents, beginning of year 2,269,353 9,040,466
----------- -----------
Cash and cash equivalents, end of period $ 1,890,874 $ 4,137,540
=========== ===========
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.
2. The results of operations for the three and nine months ended March 31, 2003
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 nine months ended March 31, 2003; 96,781 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 nine months ended March 31, 2003 and 2002,
respectively.
MARCH 31,
---------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------- ---------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net income/(loss) ($ 3,009,758) ($ 2,533,384) ($ 6,958,179) ($ 7,365,309)
Preferred stock dividends (55,999) (440,924) (170,091) (1,334,687)
------------ ------------ ------------ ------------
Loss applicable to common shareholders ($ 3,065,757) ($ 2,974,308) ($ 7,128,270) ($ 8,699,996)
Weighted average shares 20,102,062 16,782,339 20,006,547 17,015,704
Net loss per share ($ .15) ($ .18) ($ .36) ($ .51)
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
nine months ended March 31, 2002 includes amortization of the beneficial
conversion feature of Series C Preferred Stock approximating $366,000 and
$1,098,000, 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:
SEGMENT INFORMATION FOR THE NINE MONTHS ENDED:
MARCH 31, 2003: DocStar DJS Authentidate Related Totals
------- --- -------------------- ------
Revenues from external customers $4,854,526 $13,524,741 $ 1,111,754 $ 19,491,021
Intersegment revenues 13,770 45,649 59,419
Segment profit/(loss) 459,901 135,639 (4,137,462) (3,541,922)
MARCH 31, 2002:
Revenues from external customers $4,882,821 $ 6,062,423 $ 41,704 $ 10,986,948
Intersegment revenues 71,630 71,630
Segment profit/(loss) 150,061 89,889 (4,502,161) (4,262,211)
Page 7
RECONCILIATION: March 31, 2003 March 31, 2002
-------------- --------------
Total revenues from segments $ 19,550,440 $ 11,058,578
Elimination of intersegment revenues (59,419) (71,630)
------------ ------------
Total consolidated revenues $ 19,491,021 $ 10,986,948
============ ============
Total pre-tax loss of segments ($ 3,541,922) ($ 4,262,211)
Product development expenses (1,896,011) (1,650,063)
Corporate Division expenses (1,506,437) (1,507,420)
Elimination of intersegment profits (8,406) 11,150
------------ ------------
Loss before income taxes ($ 6,952,776) ($ 7,408,544)
============ ============
7. Other Equity represents a collateralized loan to the Chief Executive Officer.
Of this amount, the Company loaned the Chief Executive Officer $317,000 in
January, 2001 and an additional amount of $203,159 in February 2002. See note 19
to the financial statements for further discussion on these loans.
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 effective date of the
registration statement covering the shares underlying the 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 March 31, 2003, $278,195 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.
10. During the nine months ended March 31, 2003 the Company incurred a net loss
of $6,958,179. Cash used in operating activities totaled $5,323,792 for the nine
months ended March 31, 2003 compared to $6,003,316 used in operating activities
for the year ended June 30, 2002. The Company's cash balance decreased from
$2,269,353 to $1,890,874 from June 30, 2002 to March 31, 2003 mainly due to
operating losses and investments in property, plant and equipment and software
development and investments in affiliates. These uses of cash were offset by the
private sale of common stock of $1,955,035 and the sale of convertible
debentures of $3,700,000, before financing costs. Further, the Company's
accumulated deficit has increased from $42,999,497 at June 30, 2002 to
$50,127,766 at March 31, 2003. 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
Page 8
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 its related businesses, Trac Med and AG are currently cash flow
negative and along with Corporate operations were responsible for the negative
cash flow from operations for the nine months ended March 31, 2003. If the
Company is unable to attain projected sales levels for Authentidate and related
products during the next six months 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 or Trac Med.
In order to address the working capital needs of the Company, the Company
signed a Letter of Intent on May 14, 2003 to issue approximately $2.0 Million
in convertible notes in a private transaction with a group of investors which
includes two directors. The conversion price on the notes is $2.60 and will
bear interest at the rate of 7% per annum payable either in cash or stock. In
addition the Company will issue 230,769 five year common stock warrants. Half
of the warrants will be exercisable at $2.60 per share and half will be
exercisable at $2.86 per share. In the event the Company does not close on this
financing the Company will need to either raise other financing or
significantly reduce its costs. The investors and the Company have agreed to
attempt to close this transaction within approximately 5 to 10 days, although
there can be no assurance it will be completed in such timeframe, or at all, or
upon the terms as described above. It is intended that the securities issued in
this transaction, including the shares issuable upon conversion or exercise of
the notes and warrants, will be restricted securities under the terms of
Regulation D, promulgated under the Securities Act of 1933, as amended, and may
not be transferred or resold unless registered under the Securities Act or
pursuant to an exemption thereunder.
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:
MARCH 31,
-----------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------- -------------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net loss ($3,009,758) ($2,533,384) ($6,958,179) ($7,365,309)
Currency translation adjustment (14,977) 420 (45,448) 420
----------- ----------- ----------- -----------
Total comprehensive loss ($3,024,735) ($2,532,964) ($7,003,627) ($7,364,889)
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.
Page 9
The changes in the carrying amount of goodwill for the quarter ended March
31, 2003, are as follows:
DJS AUTHENTIDATE AG TRAC MED TOTAL
Balance June 30, 2002 $1,173,665 $3,982,471 $7,283,009 $12,439,145
Acquisition of minority interest in Trac Med 338,000 338,000
Changes in carrying amount of goodwill 1,733 1,734 4,311 7,778
---------- ---------- ---------- ----------- -----------
Balance March 31, 2003 $1,175,398 $3,984,205 $7,287,320 $ 338,000 $12,784,923
The Company retains a third party valuation firm to perform an annual
valuation of goodwill as of June 30. There have been no developments during the
nine months ended March 31, 2003, which would require an interim valuation of
goodwill.
The Company acquired the minority interest shares of Trac Med during the
quarter ended March 31, 2003, approximately 14% of the shares outstanding. As a
result of such acquisition the Company now owns 100% of the outstanding shares
of Trac Med and the Company recorded goodwill of $338,000 as a result. The
Company issued 130,000 shares of its common stock to the sellers and 20,000
options to purchase shares of its common stock. In addition the sellers may
receive up to an aggregate of 75,000 additional shares of common stock of the
Company in the event Trac Med achieves certain performance targets during the
current calendar year.
Intangible asset amortization expense for the nine months ended March 31,
2003 was $93,556. Below is a chart of intangible assets:
JUNE 30, 2002 MARCH 31, 2003
------------- --------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
Patents $260,581 $24,792 $318,331 $ 41,653
Other Intangible Assets:
Trademarks 106,803 15,654 134,491 21,274
Completed technologies 59,400 7,425 59,400 29,700
Accreditation 121,800 15,225 121,800 60,900
Licenses 13,600 4,533 15,102 7,658
-------- ------- -------- --------
Total $562,184 $67,629 $649,124 $161,185
======== ======= ======== ========
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 2003 as well as 2004, 2005, 2006 and 2007.
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 is not expected to have 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.
Page 10
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 $1,163,406
and cost of service sales of $460,601 for the nine months ended March 31, 2003.
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. Previously, 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.
18. During the quarter ended March 31, 2003 Authentidate Sports, Inc., in which
the Company owns 50% of the stock, temporarily discontinued operations due to
lack of sales and to reduce the Company's expenses. The Company hopes to find a
strategic partner in the collectibles business before recommencing operations of
Authentidate Sports. Authentidate Sports has been accounted for as a
non-consolidated joint venture and its losses have had an immaterial impact on
the Company's statements of operations in the current fiscal year and prior
fiscal years. As a result of this discontinuation the Company has written off
its investment in Authentidate Sports in the amount of $383,000 during the
quarter ended March 31, 2003.
19. In April 2003, the non executive Directors approved a plan to purchase all
of the outstanding Series A Preferred Stock from the Company's Chairman and
Chief Executive Officer in exchange for loans owed to the Company by the
Chairman and for cash. The Company's Series A Preferred Stock provides the
holder with the ability to elect a majority of the Company's Board of
Directors. The Company and its Chief Executive Officer have agreed on a total
purchase price for this transaction of $850,000 which represents a discount as
compared to the appraised value of the shares of Series A Preferred Stock of
$1.1 million which was determined by an independent nationally recognized
appraisal and valuation firm. The Company's Board ordered this valuation prior
to agreeing upon the purchase price for the shares of Series A Preferred Stock.
Of the purchase price to be paid, an amount equal to approximately $478,000
would be credited against the purchase price in order for the Chief Executive
Officer to satisfy in full the amounts outstanding to the Company. The balance
due to the Chief Executive Officer would be partially paid at closing and in
monthly installments of $15,000 thereafter. The Company's repurchase of the
Series A Preferred Stock, however, is subject to various conditions, including
its receipt of the consent of the holders of its outstanding convertible
debentures, shares of Series B Preferred Stock and Series C Preferred Stock in
addition to its ability to successfully raise additional capital. The Company
cannot guarantee that it will obtain the consent of all necessary security
holders or that it will successfully raise additional capital.
Page 11
20. The Company does not expense options granted under the Company's option
plans. The Company applies FAS No.123 to determine the compensation cost on a
pro-forma basis for footnote disclosure. The pro-forma amounts in the table
below were determined using the Black Scholes option-pricing model which values
options based on the stock price at the grant date, the expected life of the
option, the estimated volatility, expected dividend payments and the risk-free
interest rate over the expected life of the options.
NINE MONTHS ENDED
-----------------
Net loss: MARCH 31, 2003 MARCH 31, 2002
-------------- --------------
As reported $ 6,958,179 $ 7,365,309
Pro-forma 9,294,988 10,724,747
Basic and diluted loss per common share:
As reported $ .36 $ .51
Pro-forma .47 .71
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 is involved in the sales and marketing of document imaging software
products (through DocStar), systems integration services and products (through
DJS) and security software services (through Authentidate, Trac Med and AG).
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
industry to assist in the processing of Certificates of Medical Necessity and
other electronic healthcare forms over the Internet. AG is our European
subsidiary which sells the Authentidate software services to certain
international markets. The following analysis of the financial condition and
results of operations of AHC should be read in conjunction with our consolidated
financial statements and notes contained elsewhere in this Form 10-Q as well as
our 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 12
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 AND NINE MONTHS ENDED MARCH 31, 2003 COMPARED TO THE THREE AND NINE
MONTHS ENDED MARCH 31, 2002.
The Company realized a consolidated net loss of $3,009,758 ($.15 per
share) and $6,958,179 ($.36 per share) for the three and nine months ended March
31, 2003. This loss compares to the prior year loss of $2,533,384 ($.18 per
share) and $7,365,309 ($.51 per share) for the three and nine months ended March
31, 2002, 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 complete the
product development efforts and generate sales.
The consolidated net loss for the nine months ended March 31, 2003 is
approximately $407,000 less 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 $309,840. This increase in profit is due to an
improvement in gross margins as a result of reduced cost of goods sold caused by
a reduction in direct material costs.
Also contributing to the reduction in the consolidated net loss is the
Authentidate segment whose segment loss was $364,699 lower than the previous
year as a result of an increase of sales from $41,704 to $1,111,754. Corporate
Division expenses were unchanged compared to last year and product development
increased by $245,948. The DJS segment income increased by $45,750 compared to
last year.
Consolidated sales were $8,105,870 and $19,491,021 for the three and nine
months ended March 31, 2003. This is a significant increase over the prior year
when sales were $3,592,159 and $10,986,948 for the three and nine months ended
March 31, 2002, 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. The increase in
DJS sales was primarily the result of an increase in direct computer hardware
sales this year compared to last year. Last fiscal year, during the nine months
ended March 31, 2002, 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 that 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 and 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
Authentidate Segment by $1,070,050 as a result of increased customer acceptance
of Authentidate software services. DocStar sales were about the same as last
year.
Consolidated gross profit for the three and nine months ended March 31,
2003 was $1,453,173 and $4,526,489, respectively. This compares to consolidated
gross profit of $1,087,126 and $3,250,680 for the same periods last year. The
increase is due to the DocStar Division as a result of a decrease in cost of
sales. The consolidated gross profit margin was 17.9% and 23.2% for the three
months and nine months ended March 31, 2003, respectively. This compares to a
consolidated gross profit margin of 30.3% and 29.6% 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 52.1% to 63.6% from March
31, 2002 to March 31, 2003. 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 13
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 $3,027,959 and $9,023,914 for the three and nine months ended March
31, 2003, respectively. This compares to $2,704,177 and $8,173,669 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.
As a percentage of sales, S,G&A costs were 37.4% and 46.3% for the three
and nine months ended March 31, 2003, respectively. This compares to 75.3% and
74.4% for the same periods last year. This percentage decrease is primarily due
to the increase in consolidated sales as discussed above.
Interest expense was $339,912 and $587,734 for the three and nine months
ended March 31, 2003, respectively. This compares to $29,083 and $85,250 for the
same periods last year. The increase is primarily due to interest on $3.7
million of convertible debentures which were issued during October 2002. The
Company recorded non-cash interest expense of $278,195, during the nine months
ended March 31, 2003, 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 $113,536 for the nine months ended
March 31, 2003. Finally and to a much lesser extent, 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, primarily
relate to software development for the Authentidate Segment. These costs were
$731,346 and $1,896,011 for the three and nine months ended March 31, 2003,
respectively, compared to $468,456 and $1,650,063 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 $822,252 during the 9 months ended March
31, 2003.
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 March 31, 2003 totaled $1,290,982 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 $1,975,195
net of debt discount of $1,724,805 at March 31, 2003.
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 agreement restricts DJS from making cash advances to the
parent Company, AHC, without obtaining a waiver from the financial institution.
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 $1,737,568 at March 31, 2003.
Property, plant and equipment expenditures totaled $331,328 and
capitalized software development expenditures totaled $225,239 for the nine
months ended March 31, 2003, 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 March 31, 2003 was $1,890,874 and total
assets were $25,838,219 and the Company received approximately $3.7 million in
October 2002 in a financing described more fully below. A portion of this cash
balance, however, secures the outstanding line of credit held by DJS and DJS
would need to obtain the consent from the lender prior to advancing such funds
to the parent Company, AHC. 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 14
In order to address the working capital needs of the Company, the Company
signed a Letter of Intent on May 14, 2003 to issue approximately $2.0 Million
in convertible notes in a private transaction with a group of investors which
includes two directors. The conversion price on the notes is $2.60 and will
bear interest at the rate of 7% per annum payable either in cash or stock. In
addition the Company will issue 230,769 five year common stock warrants. Half
of the warrants will be exercisable at $2.60 per share and half will be
exercisable at $2.86 per share. In the event the Company does not close on this
financing the Company will need to either raise other financing or
significantly reduce its costs. The investors and the Company have agreed to
attempt to close this transaction within approximately 5 to 10 days, although
there can be no assurance it will be completed in such timeframe, or at all, or
upon the terms as described above. It is intended that the securities issued in
this transaction, including the shares issuable upon conversion or exercise of
the notes and warrants, will be restricted securities under the terms of
Regulation D, promulgated under the Securities Act of 1933, as amended, and may
not be transferred or resold unless registered under the Securities Act or
pursuant to an exemption thereunder.
During the nine months ended March 31, 2003 the Company incurred a net
loss of $6,958,179. Cash used in operating activities totaled $5,323,792 for the
nine months ended March 31, 2003 compared to $6,003,316 used in operating
activities for the year ended June 30, 2002. The Company's cash balance
decreased from $2,269,353 to $1,890,874 from June 30, 2002 to March 31, 2003
mainly due to operating losses and investments in property, plant and equipment
and software development and investments in affiliates. These uses of cash were
offset by the private sale of common stock of $1,955,035 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 $50,127,766 at March 31,
2003. 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 and AG are currently cash flow negative and along with
Corporate operations were responsible for the negative cash flow from operations
for the nine months ended March 31, 2003. If the Company is unable to attain
projected sales levels for Authentidate and related products during the next six
months 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 or Trac
Med.
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. Further, the Company is exploring various alternatives for a
strategic investment. If the Company is successful in raising additional
capital it intends to use such proceeds 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 for general working capital
purposes. Further, the Company would apply a portion of such proceeds to
repurchase the shares of Series A Preferred Stock held by its Chief Executive
Officer, as discussed in greater detail below. 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 quarter ended March 31, 2003 the Company incurred a non-cash
charge of $383,000 which represents the write off of its investment in a 50/50
joint venture known as Authentidate Sports, Inc. Authentidate Sports, Inc. has
temporarily discontinued operations due to lack of sales and in order to reduce
the Company's expenses. Authentidate Sports was accounted for as a non
consolidated joint venture. The Company hopes to find a strategic partner in the
collectibles industry but no assurances can be given that it will be successful
and that Authentidate Sports will become operational again.
During the quarter ended March 31, 2003, AHC acquired all of the
outstanding shares of capital stock of its subsidiary, Trac Medical Solutions,
Inc., previously held by four other shareholders. Prior to the acquisition, AHC
owned 85.8% of the outstanding stock of Trac Med. As a result of the
acquisition, AHC now owns 100% of Trac Med. Pursuant to the Stock Purchase
Agreement dated as of March 13, 2003, AHC issued an aggregate of 130,000 shares
of its common stock to the sellers, and also issued 20,000 options to purchase
shares of common stock at an exercise price equal to the closing price of AHC's
common stock as of the closing date of the transaction. In addition, the sellers
may receive, up to an aggregate amount of 75,000 additional shares of common
stock of AHC in the event that Trac Med achieves certain performance targets
during this calendar year. In addition, the sellers agreed to place an aggregate
of 52,000 shares of the AHC Common Stock issued to them into a six month escrow
to provide for the potential breaches of representations and warranties
contained in the Stock Purchase Agreement regarding the financial condition and
operations of Trac Med. The parties completed the transaction effective on March
18, 2003. The acquisition does not have a material effect upon the financial
condition of AHC.
Page 15
In April 2003, the non executive Directors approved a plan to purchase
all of the outstanding Series A Preferred Stock from the Company's Chairman and
Chief Executive Officer in exchange for loans owed to the Company by the
Chairman and for cash. The Company's Series A Preferred Stock provides the
holder with the ability to elect a majority of the Company's Board of
Directors. The Company and its Chief Executive Officer have agreed on a total
purchase price for this transaction of $850,000 which represents a discount as
compared to the appraised value of the shares of Series A Preferred Stock of
$1.1 million which was determined by an independent nationally recognized
appraisal and valuation firm. The Company's Board ordered this valuation prior
to agreeing upon the purchase price for the shares of Series A Preferred Stock.
Of the purchase price to be paid, an amount equal to approximately $478,000
would be credited against the purchase price in order for the Chief Executive
Officer to satisfy in full the amounts outstanding to the Company. The balance
due to the Chief Executive Officer would be partially paid at closing and in
monthly installments of $15,000 thereafter. The Company's repurchase of the
Series A Preferred Stock, however, is subject to various conditions, including
its receipt of the consent of the holders of its outstanding convertible
debentures, shares of Series B Preferred Stock and Series C Preferred Stock in
addition to its ability to successfully raise additional capital. The Company
cannot guarantee that it will obtain the consent of all necessary security
holders or that it will successfully raise additional capital.
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 $1,955,000 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.
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.
Page 16
The securities sold in this offering were 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.
Below is a chart disclosing future minimum operating lease payments and
aggregate principle maturities of long-term debt as of March 31, 2003, for the
next five years.
LONG-TERM DEBT OPERATING LEASES CAPITAL LEASES(1) CONVERTIBLE DEBENTURES (2)
For fiscal year
ending June 30,
2003 $ 9,214 $230,355 $ 42,169
2004 38,810 738,183 141,098
2005 42,136 727,164 75,724
2006 45,747 428,259 15,230 $ 3,700,000
2007 49,668 148,805 4,984
Thereafter 1,105,407
(1) Capital lease payments include $49,240 of interest, excluding interest the
future minimum lease payments total $229,965.
(2) 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 17
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 continue to await 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 ISSUANCE OF WARRANTS TO CONSULTANT
During the quarter ended March 31, 2003 we issued 200,000 warrants to our
public relations firm, exercisable for a period of four years from the option
date at an exercise price of $3.10 per share. The Company recorded a non-cash
expense of $138,000 in connection with these warrants using the Black Scholes
Model.
ACQUISITION OF TRAC MEDICAL SOLUTIONS, INC.
During the quarter ended March 31, 2003, AHC acquired all of the
outstanding shares of capital stock of its subsidiary, Trac Medical Solutions,
Inc., previously held by four other shareholders. Prior to the acquisition, AHC
owned 85.8% of the outstanding stock of Trac Med. As a result of the
acquisition, AHC now owns 100% of Trac Med. Pursuant to the Stock Purchase
Agreement dated as of March 13, 2003, AHC issued an aggregate of 130,000 shares
of its common stock to the sellers, and also issued 20,000 options to purchase
shares of common stock at an exercise price equal to the closing price of AHC's
common stock as of the closing date of the transaction. In addition, the sellers
may receive, up to an aggregate amount of 75,000 additional shares of common
stock of AHC in the event that Trac Med achieves certain performance targets
during this calendar year. In addition, the sellers agreed to place an aggregate
of 52,000 shares of the AHC Common Stock issued to them into a six month escrow
to provide for the potential breaches of representations and warranties
contained in the Stock Purchase Agreement regarding the financial condition and
operations of Trac Med. The parties completed the transaction effective on March
18, 2003. The acquisition does not have a material effect upon the financial
condition of AHC.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES:
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS:
The Company held its Annual Meeting of shareholders on February 10,
2003. As of the record date of November 27, 2002, there were 19,993,786 shares
outstanding and eligible to vote at the Annual Meeting. At the Annual Meeting,
shareholders approved the election of directors.
Shareholders were requested to vote on the election of the following five
directors, each of whom were elected by the shareholders:
Nominee Votes Cast in Favor Votes Against Percentage in Favor
John T. Botti 18,014,589 144,582 90%
J. Edward Sheridan 18,043,692 115,479 90%
Charles C. Johnston 18,044,692 114,479 90%
Steven A. Kriegsman 17,933,097 307,546 90%
J. David Luce 18,044,302 114,869 90%
Page 18
ITEM 5 OTHER INFORMATION:
In April 2003, the non executive Directors approved a plan to purchase all
of the outstanding Series A Preferred Stock from the Company's Chairman and
Chief Executive Officer in exchange for loans owed to the Company by the
Chairman and for cash. The Company's Series A Preferred Stock provides the
holder with the ability to elect a majority of the Company's Board of
Directors. The Company and its Chief Executive Officer have agreed on a total
purchase price for this transaction of $850,000 which represents a discount as
compared to the appraised value of the shares of Series A Preferred Stock of
$1.1 million which was determined by an independent nationally recognized
appraisal and valuation firm. The Company's Board ordered this valuation prior
to agreeing upon the purchase price for the shares of Series A Preferred Stock.
Of the purchase price to be paid, an amount equal to approximately $478,000
would be credited against the purchase price in order for the Chief Executive
Officer to satisfy in full the amounts outstanding to the Company. The balance
due to the Chief Executive Officer would be partially paid at closing and in
monthly installments of $15,000 thereafter. The Company's repurchase of the
Series A Preferred Stock, however, is subject to various conditions, including
its receipt of the consent of the holders of its outstanding convertible
debentures, shares of Series B Preferred Stock and Series C Preferred Stock in
addition to its ability to successfully raise additional capital. The Company
cannot guarantee that it will obtain the consent of all necessary security
holders or that it will successfully raise additional capital.
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.
*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 - March 19, 2003
Item(s) Reported - Item 5 - Other Events. Acquisition of outstanding
shares of capital stock of majority owned subsidiary, Trac Medical
Solutions, Inc.
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, the immediate need of capital 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 Statements on Form S-3 declared effective on July 8, 2002,
December 9, 2002 and December 11, 2002 all of which risk factors could adversely
affect the Company's business and the accuracy of the forward-looking statements
contained herein.
Page 19
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.
May 15, 2003 /s/ John T. Botti
- ------------ ----------------------------
DATE JOHN T. BOTTI
PRESIDENT & CHIEF EXECUTIVE OFFICER
/s/ Dennis H. Bunt
------------------
DENNIS H. BUNT
CHIEF FINANCIAL OFFICER
Page 20
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: May 15, 2003
/s/ John T. Botti
- --------------------------
John T. Botti
Chief Executive Officer
Authentidate Holding Corp.
Page 21
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: May 15, 2003
/s/ Dennis H. Bunt
- ----------------------------
Dennis H. Bunt
Chief Financial Officer
Authentidate Holding Corp.
Page 22