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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: SEPTEMBER 30, 2003
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/ / 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
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AUTHENTIDATE HOLDING CORP.
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(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
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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
-- --
25,027,196 shares of Common Stock, par value $.001 per share, were
outstanding at November 5, 2003.
Page 1
AUTHENTIDATE HOLDING CORP.
FORM 10-Q
INDEX
Page No.
--------
Part I Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets -
September 30, 2003 and June 30, 2003 3
Consolidated Statements of Operations -
Three months ended September 30, 2003
and September 30, 2002 5
Consolidated Statements of Cash Flows -
Three months ended September 30, 2003
and September 30, 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 19
Item 4 - Submission of Matters to a Vote of
Security Holders 19
Item 5 - Other Information 19
Item 6 - Exhibits and Reports on Form 8-K 19
Safe Harbor Statement 20
Signatures 20
Certifications 21
Page 2
PART I FINANCIAL INFORMATION
AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited except for the June 30, 2003 balance sheet)
September 30, June 30,
2003 2003
------------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $4,635,853 $3,460,446
Accounts receivable, net of allowance
for doubtful accounts of $372,808 at Sept,
30, 2003 and $460,740 at June 30, 2003 1,938,754 3,642,221
Due from related parties 3,524 2,279
Inventories:
Finished goods 60,150 129,986
Purchased components & raw material 248,918 63,115
Prepaid expenses and other current assets 51,737 69,248
----------- -----------
Total current assets 6,938,936 7,367,295
Property and equipment, net 3,679,260 3,764,846
Other assets:
Software development costs, net 292,073 355,082
Goodwill 12,795,501 12,795,501
Patent costs, net 267,100 277,406
Other intangible assets 157,392 189,479
Deferred financing fees 518,816 268,935
Other assets 80,469 27,296
----------- -----------
Total assets $24,729,547 $25,045,840
=========== ===========
Page 3
AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited except for the June 30, 2003 balance sheet)
September 30, June 30,
2003 2003
------------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,366,965 $1,436,943
Accrued expenses and other liabilities 2,325,775 2,772,710
Line of credit 160,684 877,863
Current portion of long-term debt 218,811 218,811
Current portion of obligations under capital leases 96,477 112,520
Income taxes payable 6,664 24,843
----------- -----------
Total current liabilities 4,175,376 5,443,690
Convertible debentures 3,798,311 3,316,815
Long-term debt, net of current portion 1,276,729 1,331,129
Deferred grant 268,000 1,000,000
Obligations under capital leases, net of current portion 61,097 85,556
----------- -----------
Total liabilities 9,579,513 11,177,190
----------- -----------
Commitments and contingencies
Shareholders' equity:
Preferred stock - $.10 par value, 5,000,000 shares authorized:
Series B - 28,000 shares issued and outstanding 2,800 2,800
Series C - 3,100 shares issued and outstanding 310 360
at Sept. 30, 2003 and 3,600 issued and
outstanding at June 30, 2003
Common stock - $.001 par value; 40,000,000
shares authorized; shares issued and outstanding:
20,754,088 at September 30, 2003 and
20,388,174 at June 30, 2003 20,754 20,388
Additional paid-in capital 69,918,202 66,916,663
Accumulated deficit (54,815,483) (53,062,512)
----------- -----------
15,126,583 13,877,699
Currency translation adjustment 23,451 (9,049)
----------- -----------
Total shareholders' equity 15,150,034 13,868,650
----------- -----------
Total liabilities and shareholders' equity $24,729,547 $25,045,840
=========== ===========
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
----------------------------------
September 30, September 30,
2003 2002
------------- -------------
Net sales $3,271,223 $5,464,576
Cost of goods sold 2,044,940 4,164,643
---------- ----------
Gross profit 1,226,283 1,299,933
Selling, general and
administrative expenses 2,697,073 2,916,838
Product development costs 579,540 580,585
---------- ----------
Operating loss (2,050,330) (2,197,490)
Other income (expense):
Interest expense (457,456) (44,164)
Interest and other income 789,863 331,248
Equity in net loss of affiliated companies (82,378)
---------- ----------
Loss before income taxes (1,717,923) (1,992,784)
Income tax (expense)/benefit 17,904 (2,082)
---------- ----------
Net loss (1,700,019) (1,994,866)
========== ==========
Per share amounts basic and
diluted:
Net loss per common
share ($0.09) ($0.10)
========== ==========
See accompanying notes to the consolidated financial statements.
Page 5
AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
For the 3 months ended
----------------------------------
September 30, September 30,
2003 2002
------------- -------------
Cash flows from operating activities:
Net loss ($1,700,019) ($1,994,866)
Adjustments to reconcile net loss to
net cash provided by/(used in) operating activities:
Depreciation and amortization 271,371 432,382
Amortization of discount on convertible debentures 299,826
Provision for doubtful accounts 9,202 13,529
Non-cash foreign currency translation adjustment 32,500 (70,451)
Equity in net loss of affiliates 82,378
Non-cash issuance of warrants for services 14,226
Non-cash interest paid in stock 117,245
NYS Grant recorded as income, recieved fiscal 2000 (732,000)
Amortization of deferred financing costs 26,957
Changes in operating assets and liabilities, net of
business acquired:
Accounts receivable and other receivables 1,693,019 1,717,040
Inventories (115,967) (154,692)
Prepaid expenses and other current assets 17,511 (50,288)
Accounts payable and other current liabilities (534,865) (200,266)
Income taxes (18,179) 2,422
----------- -----------
Net cash provided by/(used in) operating activities (619,173) (222,812)
----------- -----------
Cash flows from investing activities:
Property and equipment expenditures (72,311) (85,821)
Software development costs (17,780) (92,964)
Other intangible assets 9,708 (71,349)
Note receivable, repayment 350,000
Other long term assets (53,173) (10,385)
Investment in affiliates (105,000)
----------- -----------
Net cash used in investing
activities (133,556) (15,519)
----------- -----------
Cash flows from financing activities:
Proceeds issuance of debentures, net of expenses ($82,079) 2,387,921
Net proceeds from sale of common stock, net of exp.($30,000) 470,000 1,946,953
Net payments under line of credit (717,179) (1,088,284)
Principle payments on long-term debt (9,399) (8,663)
Capital leases, net (40,502) (2,683)
Payment of registration costs (10,150) (1,512)
Exercise of warrants and options 64,745 3,300
Deferred financing costs (137,300)
Payback of loan by Company officer 32,687
Preferred stock dividends (35,000)
Other long term debt (45,000)
----------- -----------
Net cash provided by/(used in) financing activities 1,928,136 881,798
----------- -----------
Net increase/(decrease) in cash and cash equivalents 1,175,407 643,467
Cash and cash equivalents, beginning of year 3,460,446 2,269,353
----------- -----------
Cash and cash equivalents, end of period $ 4,635,853 $2,912,820
=========== ===========
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 months ended September 30, 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, 2003.
4. During the three months ended September 30, 2003; 55,700 common stock options
and 805 common stock warrants were exercised.
5. The following represents the reconciliation of the basic and diluted loss per
share amounts for the three months ended September 30, 2003 and 2002,
respectively.
September 30,
Three Months Ended
-------------------------------
2003 2002
---- ----
Net income/(loss) ($1,700,019) ($1,994,866)
Preferred stock dividends (52,952) (57,259)
-------------------------------
Loss applicable to common shareholders ($1,752,971) ($2,052,125)
Weighted average shares 20,435,657 19,640,641
Basic and diluted loss per share ($.09) ($.10)
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.
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 and AG 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
global 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 three months ended:
Sept. 30, 2003: DocStar DJS Authentidate Related Totals
------- --- -------------------- ------
Net sales from external customers $1,225,201 $1,838,750 $207,272 $3,271,223
Intersegment sales 14,549 14,549
Segment profit/(loss) (20,899) (9,016) (1,093,468) (1,123,383)
Sept. 30, 2002:
Net sales from external customers $1,503,760 $3,760,559 $200,257 $5,464,576
Intersegment sales 6,875 25,082 31,957
Segment profit/(loss) 96,130 41,589 (1,380,897) (1,243,178)
Reconciliation: September 30, 2003 September 30, 2002
------------------ ------------------
Total sales from segments $ 3,285,772 $ 5,496,533
Elimination of intersegment sales (14,549) (31,957)
------------ -----------
Total consolidated net sales $ 3,271,223 $ 5,464,576
============ ===========
Total pre-tax loss of segments ($ 1,123,383) ($ 1,243,178)
Product development expenses (579,540) (580,585)
Corporate Division expenses (21,673) (166,795)
Elimination of intersegment profits 6,673 (2,226)
------------ -----------
Loss before income taxes ($ 1,717,923) ($ 1,992,784)
============ ===========
7. 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.
8. 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 $2,470,000 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.
In September 2003, the Company exercised this option and issued
$2,470,000 convertible debentures with an initial conversion price of $3.00 per
share. The Company also issued 247,000 common stock purchase warrants in
connection with these debentures. The warrants have an initial exercise price of
$3.00 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
five years from the date of issuance. 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 8
In May and June 2003 the Company issued similar convertible debentures
in the amount of $2,725,300 to institutional investors and warrants to purchase
419,279 shares of common stock. These debentures have an initial conversion
price of $2.60 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 five
years from the date of issuance and 50% of the warrants are initially
exercisable at $2.60 per share and the remaining 50% of the warrants are
initially exercisable at $2.86 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.
On September 22, 2003, we completed the sale of $500,000 of our common
stock to an additional accredited investor. In addition, we also issued warrants
to purchase an aggregate of 50,000 shares of common stock to the investor in
this transaction. The per share purchase price of the common stock and the per
share exercise price of the warrants is $3.00. The investor also agreed to a
twelve-month "lock-up" provision restricting the resale of the securities. We
also issued warrants to purchase an aggregate of 10,000 shares of our common
stock to a consultant for services rendered in connection with this transaction
which are exercisable at $3.00 per share. The consultant also received a cash
fee equal to 6% of the gross proceeds we received.
Each of the foregoing transactions was a private transaction exempt
from the registration requirements of the Securities Act of 1933, as amended, by
reason of Section 4(2) thereof and/or Regulation D, promulgated thereunder.
The Company recorded a debt discount related to the beneficial
conversion feature of the debentures and the value of the warrants. At September
30, 2003 the total unamortized debt discount (including the beneficial
conversion feature) was approximately $5.1 Million for all three debentures
issues. This debt discount is to be amortized and charged to interest expense
over the respective 36 month terms. In the event the investors convert the
debentures prior to the end of respective 36 month terms then generally accepted
accounting principles require the Company to expense the unamortized balance of
the debt discount.
9. In October 2003, the Company forced the conversion of the October 2002
debentures in the amount of $3,700,000 and the May/June 2003 debentures in the
amount of $2,725,300. The Company has or will issue 2,528,192 common shares to
complete the conversion. The Company will also expense the debt discount as
interest expense related to these two debenture issues during the quarter ending
December 31, 2003. At September 30, 2003 the unamortized debt discount on these
two debentures was approximately $2.8 Million. In addition, the Company will
expense unamortized deferred financing costs related to these two debenture
issues during the quarter ending December 31, 2003, in the amount of $242,000 at
September 30, 2003. The Company will save approximately $450,000 in interest
payments annually as a result of the conversion.
10. During the three months ended September 30, 2003 the Company incurred a net
loss of $1,700,019. Cash used in operating activities totaled $619,173 for the
three months ended September 30, 2003 compared to $5,189,117 used in operating
activities for the year ended June 30, 2003. The Company's cash balance
increased from $3,460,446 to $4,635,853 from June 30, 2003 to September 30, 2003
mainly due to the issuance of $2,470,000 of convertible debentures. Further, the
Company's accumulated deficit has increased from $53,062,512 at June 30, 2003 to
$54,815,483 at September 30, 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 its related businesses, Trac Med and AG are currently cash flow
negative and were responsible for the negative cash flow from operations for the
three months ended September 30, 2003. If the Company is unable to attain
projected sales levels for Authentidate and related products during the next
twelve 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.
Page 9
For the period October 1, 2003 through November 7, 2003 the Company
received approximately $4.6 Million from the exercise of employee stock options
and common stock purchase warrants. This cash will be used to fund operations.
11. As described in our report on Form 10-K for the fiscal year ended June 30,
2003, 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 flows. 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) consist of:
September 30,
Three Months Ended
-------------------------------
2003 2002
---- ----
Net loss ($1,700,019) ($1,994,866)
Currency translation adjustment 32,500 (70,451)
----------- -----------
Total comprehensive loss ($1,667,519) ($2,065,317)
=========== ===========
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.
The changes in the carrying amount of goodwill for the quarter ended
September 30, 2003, are as follows:
DJS Authentidate AG Trac Med Total
Balance June 30, 2003 $1,178,765 $3,987,571 $7,291,165 $338,000 $12,795,501
Changes in carrying amount of goodwill
----------------------------------------------------------------------------
Balance September 30, 2003 $1,178,765 $3,987,571 $7,291,165 $338,000 $12,795,501
============================================================================
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
three months ended September 30, 2003, which would require an interim valuation
of goodwill.
Page 10
Intangible asset amortization expense for the three months ended
September 30, 2003 was $32,685. Below is a chart of intangible assets:
June 30, 2003 September 30, 2003
------------- ------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
Patents $321,085 $43,679 $316,870 $49,770
Other Intangible Assets:
Trademarks 138,578 22,583 133,085 24,653
Completed technologies 59,400 37,125 59,400 44,550
Accreditation 121,800 76,125 121,800 91,350
Licenses 15,101 9,567 15,102 11,442
-------- -------- -------- --------
Total $655,964 $189,079 $646,257 $221,765
======== ======== ======== ========
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 May 2003, the Financial Accounting Standards Board (FASB) issued FAS
No. 150, Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity. This Standard establishes how an issuer classifies
and measures certain financial instruments with characteristics of both
liabilities and equity. This standard becomes effective for any financial
instruments entered into or modified after May 31, 2003. The Company does not
expect the adoption of FAS No. 150, to have a material effect on its financial
statements.
In April 2003, the FASB issued FAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities. This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FAS
No. 133, Accounting for Derivative Instruments and Hedging Activities entered
into after June 30, 2003. The Company does not expect the adoption of FAS No.
149 to have a material effect on its financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. This interpretation gives guidance
that determines whether consolidation of a Variable Interest Entity is required
and is effective for all variable interest entities with which the Company
becomes involved beginning in February 2003, and all pre-existing entities
effective December 31, 2003. The Company does not expect the adoption of FIN 46
to have a material effect on its financial statements.
14. Included in net sales and cost of goods sold are service sales of $301,185
and cost of service sales of $133,603 for the three months ended September 30,
2003.
15. 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.
16. 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 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
paid, approximately $455,000 was credited against certain loans owed to the
Company. Of the balance due to the Chief Executive Officer $70,000 was paid at
closing and the balance is being paid in monthly installments of $15,000.
Page 11
17. 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.
Three Months Ended
-------------------------------------------
September 30, 2003 September 30, 2002
------------------ ------------------
Net loss:
As reported ($1,700,019) ($1,994,866)
Deduct: total stock based employee
compensation expense determined
under fair value method (563,046) (708,193)
------------------------------------
Proforma ($2,263,065) ($2,703,059)
------------------------------------
Basic and diluted net loss per common share:
As reported $.09 $.10
Pro-forma .11 .14
18. 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 (ESDC) (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, 2004 or some or all of the grant will have to be repaid. Although we have not
achieved the agreed upon employment levels to date, we reached an agreement with
the ESDC to restructure the grant terms relating to this covenant. We agreed to
repay $268,000 of the grant amount at the rate of $10,000 per month, interest
free, in consideration of the ESDC's agreement to permanently reduce our
employment level requirement to 99. We made our first $10,000 payment in October
2003. The Company had 99 qualifying employees on the last date it reported to
the ESDC. In the event our employment level falls below 99 at the next
measurement date, we may be required to make an additional repayment in the
future. As a result of this arrangement, we recorded $732,000 as other income in
the Corporate Division.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 2.
Overview
We are involved in the development of security software technology,
document imaging software products and services and systems integration services
and products. Our products include DocStar document imaging software products
and services, the Authentidate authentication and security software products and
services and system integration services and products through our DJS
subsidiary. We also offer, through our Trac Medical Solutions subsidiary, the
CareCert(TM) Internet-based medical forms processing service. Authentidate
products are sold by Authentidate, Inc., Trac Medical Solutions, Inc., and
Authentidate International, AG. Revenues generated during the quarter ended
September 30, 2003 were primarily derived from our DocStar and DJS segments. Our
Authentidate-related business generated $207,000 in revenues during the fiscal
quarter ended September 30, 2003.
Page 12
DJS is an authorized sales and support provider for software products
such as Microsoft Solutions and Lotus Notes. DJS sells computer hardware and
provides software and professional services to businesses to meet their data
management needs.
Authentidate engages in the business of providing end users with a
software-based security service designed to accept and store a digital code
through the Internet which enables users to prove the authenticity of the date,
time and the content of any electronic document. The Authentidate product was
released for sale in May, 2001. We contemplate that product integration
development work will be necessary for each application or customer. We are in
the process of selling this product and began to record revenue during the
fiscal year ended June 30, 2002. We currently own approximately 98% of
Authentidate, Inc.
On July 31, 2002, we entered into a strategic alliance agreement with
the United States Postal Service to serve as the preferred provider of the USPS
Electronic Postmark(R) (EPM) service. Under the terms of the agreement, our
subsidiary, AuthentiDate, Inc., provides the management, technology and support
for the United States Postal Service's EPM system. The USPS Electronic
Postmark(R) provides evidence that the content of a document or file existed at
a specific date and time and is intended to protect the integrity of the
document or file by ensuring that it cannot be altered without detection. The
EPM uses our patent pending technology offering highly sophisticated encryption
methodology ensuring document authenticity and is intended to be able to be
added to any application regardless of the computing platform or operating
system. In order to facilitate this product launch, we entered into development
and promotional agreements with Microsoft Corporation and an affiliate of
Microsoft in order to create the necessary software interfaces to Microsoft
Office(R). We announced a general release of this product on October 21, 2003.
Authentidate generates sales both from the sale of EPM's and the sale of
professional services.
In March 2002, we acquired all the outstanding capital stock of
Authentidate International, AG. We previously owned 39% of Authentidate
International. Authentidate International sells the Authentidate product in the
European marketplace and is currently focusing on the German market.
Authentidate International entered into revenue generating agreements during the
2003 fiscal year through which it expects to realize revenue from a combination
of professional services and transactions fees.
We also organized Trac Medical Solutions during the fiscal year ended
June 30, 2001 in order to develop a business model to apply the Authentidate
technology to the medical supply business relating to the automation and
processing of Certificates of Medical Necessity. Trac Med generates sales
through both the sale of transactions and professional services. During the
fiscal year ended June 30, 2002, Trac Medical developed its CareCert(TM) service
and entered into its first revenue-generating agreements during the 2003 fiscal
year. In March 2003, we acquired the outstanding minority interest of Trac
Medical Solutions (approximately 14%) and now own 100% of Trac Medical
Solutions.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of
operations are based on our 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
us 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, we evaluate our estimates, including those
related to new product launches, bad debts, inventory obsolescence,
recoverability of equity investments, goodwill, intangible assets, software
capitalization and deferred tax assets and contingencies and litigation. We base
our 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.
We believe the following critical accounting policies require
significant judgments and estimates used in the preparation of our consolidated
financial statements. We maintain allowances for doubtful accounts for estimated
losses resulting from the inability of our customers to make required payments.
If the financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.
Page 13
We write down our inventory for estimated obsolescence or nonmarketable
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.
We hold an interest in a non-consolidated joint venture having
operations or technology in areas within our strategic focus, none of which are
publicly traded. We monitor 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. We ceased operations of this entity during the fiscal year ended June
30, 2003.
We have capitalized goodwill related to our acquisitions of
Authentidate International AG and Trac Medical Solutions, Inc., for which the
recoverability of such capitalized goodwill is highly dependent on the future
success of the marketing and sales of such product. If the product is not well
received by the market place and our future forecasted revenue and profitability
from such product launch is less than anticipated, the carrying value of
goodwill may be impaired and require an impairment charge in the future.
We record a full valuation against our deferred tax assets when we
believe it is more likely than not that such deferred tax assets will not be
realized.
Results of Operations
The Three Months Ended September 30, 2003 Compared to the Three Months
Ended September 30, 2002.
The Company realized a consolidated net loss of $1,700,019 ($.09 per
share) for the three months ended September 30, 2003 loss compared to a
consolidated net loss of $1,994,866 ($.10 per share ) for the three months ended
September 30, 2002.
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 three months ended September 30, 2003
is approximately $295,000 less than it was for the same period last year.
Contributing to this improvement is an increase in segment profit realized by
the Authentidate Segment which realized an improvement of approximately
$287,000. This improvement in segment profit is due to a reduction in segment
costs.
DocStar segment profit decreased by approximately $117,000 due to a
decline in sales of approximately $279,000. DJS segment profit decreased by
approximately $51,000.
Consolidated sales were $3,271,223 and $5,464,576 for the three months
ended September 30, 2003 and 2002, respectively. This decrease versus the prior
year is a result of a decline in direct hardware sales by DJS, offset somewhat
by an increase in indirect hardware sales at DJS. Although, DJS sales declined
by approximately $1.9 million during the quarter ended September 30, 2003
compared to the prior year segment income only declined by approximately $51,000
because the sales decline was on low margin computer hardware and also because
DJS reduced overhead costs substantially to compensate for the reduction in
computer hardware sales. Sales in the Authentidate segment increased by $7,000.
DocStar sales declined by approximately $279,000 due to weak demand during the
summer months this year.
Consolidated gross profit for the three months ended September 30, 2003
and 2002 was $1,226,283 and $1,299,933, respectively. The consolidated gross
profit margin was 37.5% and 23.8% for the three months ended September 30, 2003
and 2002, respectively. Gross profit margin is defined as gross profit as a
percentage of sales.
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 $2,697,073 and $2,916,838 for the three months ended
September 30, 2003 and 2002, respectively. This decrease is the result of a
decrease in DJS ($137,000) and the Corporate ($168,000) divisions due to cost
controls.
As a percentage of net sales, S,G&A costs were 82.4% and 53.4% for the
three months ended September 30, 2003 and 2002, respectively. This percentage
increase is primarily due to the decrease in DJS low margin sales as discussed
above.
Page 14
Interest expense was $457,456 and $44,164 for the three months ended
September 30, 2003 and 2002, respectively. The increase is due to interest
expense on convertible debentures, much of which (about $300,000) is non cash
interest expense. For the three months ended September 30, 2003 the Company
recorded $299,826 of non-cash interest due to the amortization of debt discount
on the convertible debentures, which is more fully discussed in the footnotes
contained herein.
Product development expenses, excluding capitalized costs, primarily
relate to software development for the Authentidate Segment. These costs were
unchanged compared to the prior 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 $80,789
during the three months ended September 30, 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 September 30, 2003 totaled $1,495,540 most of which
($1,272,301) relates to a mortgage loan on the Company's principle office
located in Schenectady, NY. The balance ($223,239) relates to a note owed to the
Company's Chief Executive Officer The Company also has long-term convertible
debentures in the amount of $3,798,311 net of debt discount of $5,096,989 at
September 30, 2003. As discussed below, subsequent to September 30, 2003, an
aggregate of $6,425,300 principal amount of convertible debentures were
converted into 2,528,192 shares of our common stock.
The Company's DJS subsidiary has a $2.5 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 $160,684 at
September 30, 2003.
Property, plant and equipment expenditures totaled $72,311 and
capitalized software development expenditures totaled $17,780 for the three
months ended September 30, 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 (ESDC) (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, 2004 or some or all of the grant will have to be repaid. Although we have not
achieved the agreed upon employment levels to date, we reached an agreement with
the ESDC to restructure the grant terms relating to this covenant. We agreed to
repay $268,000 of the grant amount at the rate of $10,000 per month, interest
free, in consideration of the ESDC's agreement to permanently reduce our
employment level requirement to 99. We made our first $10,000 payment in October
2003. The Company had 99 qualifying employees on the last date it reported to
the ESDC. In the event our employment level falls below 99 at the next
measurement date, we may be requirement to make an additional repayment in the
future. As a result of this arrangement, we recorded $732,000 as other income in
the Corporate Division.
The Company's cash balance at September 30, 2003 was $4,635,853 and
total assets were $24,729,547. A portion of this cash balance, however,
collateralizes the outstanding line of credit held by DJS. DJS would need to
obtain the consent from the lender prior to advancing 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.
In order to address our working capital needs, on September 12, 2003,
we completed the sale of $2,470,000 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 $2,300,000, after paying all fees and expenses. We intend to use
the proceeds for working capital and general corporate purposes. In the
transaction, we sold $2,470,000 of convertible debentures to the investors and
warrants to purchase an aggregate of 247,000 shares of common stock. The
debentures are convertible into shares of our common stock at an initial
conversion price of $3.00 per share and the warrants are exercisable into shares
of common stock at an initial price of $3.00 per share. The other terms and
conditions of the debentures and warrants are the same as set forth in the
debentures and warrants issued in the first tranche of this transaction in
October 2002.
Page 15
We also issued warrants to purchase an aggregate of 49,400 shares of
common stock to certain consultants for services rendered in connection with
this transaction which are exercisable at $3.00 per share. The consultants also
received a cash fee equal to 6% of the gross proceeds we received.
Further, on September 22, 2003, we completed the sale of $500,000 of
our common stock to an additional accredited investor pursuant to Section 4(2)
of the Securities Act of 1933, as amended, and Regulation D, promulgated
thereunder. We intend to use the proceeds for working capital and general
corporate purposes. In addition, we also issued warrants to purchase an
aggregate of 50,000 shares of common stock to the investor in this transaction.
The per share purchase price of the common stock and the per share exercise
price of the warrants is $3.00. The investor also agreed to a twelve-month
"lock-up" provision restricting the resale of the securities. We also issued
warrants to purchase an aggregate of 10,000 shares of our common stock to a
consultant for services rendered in connection with this transaction which are
exercisable at $3.00 per share. The consultants also received a cash fee equal
to 6% of the gross proceeds we received.
The securities sold in each of the foregoing transactions 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 Securities and Exchange Commission to register the shares of common
stock issued and issuable to the investors in both transactions, which is
currently pending before the Commission. If the registration statement is not
declared effective within sixty days (or within 120 days in the event of a
Commission review) following the closing date, then we shall pay to the
investors penalties equal to 2% of the offering proceeds per each month that we
are not in compliance with these registration covenants.
During the three months ended September 30, 2003 the Company incurred a
net loss of $1,700,019. Cash used in operating activities totaled $619,173 for
the three months ended September 30, 2003 compared to $5,189,117 used in
operating activities for the year ended June 30, 2003. The Company's cash
balance increased from $3,460,446 to $4,635,853 from June 30, 2003 to September
30, 2003 mainly due to the issuance of $2,470,000 of convertible debentures.
Further, the Company's accumulated deficit has increased from $53,062,512 at
June 30, 2003 to $54,815,483 at September 30, 2003.
To date, we have been largely dependent on our ability to sell
additional shares of our common stock or other securities to fund our operating
deficits. Under our current operating plan to introduce our Authentidate
technology, our ability to improve operating cash flow is highly dependent on
the market acceptance of our Authentidate related businesses and reduce our
overhead costs. Authentidate and its related businesses, Trac Med and AG are
currently cash flow negative and were responsible for the negative cash flow
from operations for the three months ended September 30, 2003. If the Company is
unable to attain projected sales levels for Authentidate and related products
during the next twelve 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.
As a result of net losses incurred during fiscal 2003, we reduced our workforce.
If we are unable to raise additional capital necessary to fund operations for
fiscal 2004 and are unable to attain projected sales levels for Authentidate and
related products, then we will implement additional cost reduction strategies in
early fiscal 2004, including the possible shutdown or reduction of operations at
Authentidate, Authentidate International or Trac Medical, as well as reductions
in corporate expenses (including salary, marketing, professional fees and other
costs). In the event we are required to shut down or reduce operations at
Authentidate, Authentidate International and/or Trac Medical, goodwill
approximating $11,600,000 could potentially become impaired and result in a non
cash charge to operations. Our available cash balance at September 30, 2003
totaled $4.6 million. We believe that our existing cash and cash equivalents,
including the funds raised in September 2003 and funds received due to the
recent option and warrant exercises, will be sufficient to meet our working
capital and capital expenditure requirements for at least the next twelve
months.
Subsequent to September 30, 2003, the Company received significant
amounts of cash from the exercise of employee stock options and common stock
purchase warrants. As of November 7, 2003 the cash received was approximately
$4.6 Million since October 1, 2003. This cash will be used to fund operations.
Page 16
Following is a summary of the contractual commitments associated with
our debt and lease obligations, as well as our purchase commitments as of
September 30, 2003:
Long-term debt Operating leases Capital leases (1) Convertible debentures (2)
For fiscal year
ending June 30,
2004 $ 164,410 $ 457,053 $72,083
2005 130,382 582,337 67,222
2006 45,754 483,953 13,160 $6,425,300
2007 49,674 142,618 5,109 2,470,000
2008 53,931
Thereafter 1,051,389
(1) Capital lease payments exclude interest of $26,243
(2) Assumes the investors do not convert the debentures into the Company's
common stock prior to the maturity date.
(3) There are no significant purchase commitments.
Present Accounting Standards Not Yet Adopted
In May 2003, the Financial Accounting Standards Board (FASB) issued FAS
No. 150, Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity. This Standard establishes how an issuer classifies
and measures certain financial instruments with characteristics of both
liabilities and equity. This standard becomes effective for any financial
instruments entered into or modified after May 31, 2003. The Company does not
expect the adoption of FAS No. 150, to have a material effect on its financial
statements.
In April 2003, the FASB issued FAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities. This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FAS
No. 133, Accounting for Derivative Instruments and Hedging Activities entered
into after June 30, 2003. The Company does not expect the adoption of FAS No.
149 to have a material effect on its financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. This interpretation gives guidance
that determines whether consolidation of a Variable Interest Entity is required
and is effective for all variable interest entities with which the Company
becomes involved beginning in February 2003, and all pre-existing entities
beginning after June 15, 2003. The Company does not expect the adoption of FIN
46 to have a material effect on its financial statements.
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 Securities Exchange Act
of 1934 (the "Exchange Act") Rules 13a-14(c)) as of the end of the period
covered by this Quarterly Report on Form 10-Q. Based on their evaluation, the
chief executive officer and chief financial officer have concluded that 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 Over Financial Reporting
There have been no significant changes (including corrective actions
with regard to significant deficiencies or material weaknesses) in our internal
controls over financial reporting or in other factors during our last fiscal
quarter that could have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.
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, 2003, 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
On September 12, 2003, we completed the sale of $2,470,000 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.
The sale of these securities constitutes the second tranche of a sale of such
securities to these investors, the first tranche of which was completed in
October 2002. We received net proceeds of approximately $2,300,000, after paying
all fees and expenses. We intend to use the proceeds for working capital and
general corporate purposes.
In the transaction, we sold $2,470,000 of convertible debentures to the
investors and warrants to purchase an aggregate of 247,000 shares of common
stock. The debentures are convertible into shares of our common stock at an
initial conversion price of $3.00 per share and the warrants are exercisable
into shares of common stock at an initial price of $3.00 per share. The other
terms and conditions of the debentures and warrants are the same as set forth in
the debentures and warrants issued in the first tranche of this transaction in
October 2002.
We also issued warrants to purchase an aggregate of 49,400 shares of
common stock to certain consultants for services rendered in connection with
this transaction which are exercisable at $3.00 per share. The consultants also
received a cash fee equal to 6% of the gross proceeds we received.
On September 22, 2003, we completed the sale of $500,000 of our common
stock to an additional accredited investor pursuant to Section 4(2) of the
Securities Act of 1933, as amended, and Regulation D, promulgated thereunder. We
intend to use the proceeds for working capital and general corporate purposes.
In addition, we also issued warrants to purchase an aggregate of 50,000 shares
of common stock to the investor in this transaction. The per share purchase
price of the common stock and the per share exercise price of the warrants is
$3.00. The investor also agreed to a twelve-month "lock-up" provision
restricting the resale of the securities.
We also issued warrants to purchase an aggregate of 10,000 shares of
our common stock to a consultant for services rendered in connection with this
transaction which are exercisable at $3.00 per share. The consultants also
received a cash fee equal to 6% of the gross proceeds we received.
The securities sold in each of the foregoing transactions 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 Securities and Exchange Commission to register the shares of common
stock issued and issuable to the investors in both transactions, which is
currently pending before the Commission. If the registration statement is not
declared effective within sixty days (or within 120 days in the event of a
Commission review) following the closing date, then we shall pay to the
investors penalties equal to 2% of the offering proceeds per each month that we
are not in compliance with these registration covenants.
During the period covered by this report, we issued 10,000 warrants to
a former employee in connection with the termination of his employment. The
warrants issued to him are exercisable at a per share price of $3.80 until
July 9, 2004. Additionally, we issued 30,000 warrants to a consultant during the
period covered by this report, pursuant to a consulting agreement entered into
with such person. The warrants issued to this consultant are exercisable for a
three year period at a per share price of $3.06.
Page 18
Item 3 Defaults Upon Senior Securities:
None
Item 4 Submission of Matters to a Vote of Securities Holders:
None
Item 5 Other Information:
During the quarter ended September 30, 2003, Series C Preferred
shareholders converted 500 shares of Series C Preferred Stock into 103,199
shares of common stock. Subsequent to the quarter end, the holder of the
remaining 1,600 shares of Series C Preferred Stock converted all such shares
into an aggregate of 330,237 shares of common stock.
Subsequent to the quarter end, on October 2, 2003, we announced that we
exercised our right to require the holders of an aggregate amount of $6,425,300
of convertible debentures to convert the entire outstanding principal amount of
their debentures into shares of our common stock. The conversion of these
debentures resulted in the issuance of an aggregate amount of 2,528,192 shares
of our common stock to the holders of the debentures. The specific debentures
subject to this conversion requirement were an aggregate principal amount of
$3,700,000 of convertible debentures issued in October 2002 and an aggregate
principal amount of $2,725,300 of convertible debentures issued in May 2003.
In September, 2003, we entered into an agreement with ChoicePoint
Services, Inc., whereby we agreed to develop a Web-based authentication portal
to allow Internet users to apply for a verified digital identity. ChoicePoint
will provide its identity authentication service to customers through the portal
and receive certain preferred rights to supply their services via the portal.
Pursuant to the agreement, ChoicePoint paid $250,000 as a deposit for the
professional services related to portal development. When the portal is accepted
and achieves specified functionality ChoicePoint will pay an additional
$250,000. ChoicePoint will receive a percentage of digital certificate
transaction revenue generated through this portal.
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.
ss. 230.411, are incorporated by reference to the document referenced in
brackets following the description of such exhibits.
*31.1 Certificate of Chief Executive Officer
*31.2 Certificate of Chief Financial Officer
*32.1 Certificate of Chief Executive Officer and 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
During the quarter ended September 30, 2003 we filed the following reports on
Form 8-K:
---------------------------------------------------------------------------------------------------------------
Date of Report Item(s) Description
---------------------------------------------------------------------------------------------------------------
September 12, 2003 5, 7 Announcement of partial closing of private financing and including
related press release.
---------------------------------------------------------------------------------------------------------------
September 22, 2003 5, 7 Announcement of partial closing of private financing and including
related press release.
---------------------------------------------------------------------------------------------------------------
September 29, 2003 7, 12 Announcement of quarterly financial information and including related
press release.
---------------------------------------------------------------------------------------------------------------
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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, 2003.
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.
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.
November 12, 2003 /s/ John T. Botti
- ----------------- --------------------------
DATE JOHN T. BOTTI
PRESIDENT & CHIEF EXECUTIVE OFFICER
/s/ Dennis H. Bunt
--------------------------
DENNIS H. BUNT
CHIEF FINANCIAL OFFICER
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