The accompanying notes are an integral part
of the condensed consolidated financial statements.
The accompanying notes are an integral part
of the condensed consolidated financial statements.
The accompanying notes are an integral part
of the condensed consolidated financial statements.
The accompanying notes are an integral part
of the condensed consolidated financial statements
Notes to Condensed Consolidated
Financial Statements (Unaudited)
Authentidate Holding
Corp. (“AHC”) and its subsidiaries provide secure web-based revenue cycle management applications and telehealth products
and services that enable healthcare organizations to increase revenues, improve productivity, reduce costs, coordinate care for
patients and enhance related administrative and clinical workflows and compliance with regulatory requirements. Our Web-based services
are delivered as Software as a Service (SaaS) to our customers interfacing seamlessly with billing, information and records management
systems.
Reverse Merger
On January 27, 2016,
Peachstate Health Management, LLC d/b/a AEON Clinical Laboratories (“AEON”) merged into a newly formed acquisition
subsidiary of AHC pursuant to a definitive Amended and Restated Agreement and Plan of Merger dated January 26, 2016, as amended
on May 31, 2016 (collectively the “Merger Agreement”) (the “AEON Acquisition”). The merger certificate
was filed with the Secretary of State of Georgia on January 27, 2016. AEON survived the merger as a wholly-owned subsidiary of
AHC (collectively the “Company”). AEON contracts with health care professionals to provide urine and oral fluid testing
to patients. The four primary tests provided by AEON are Medical Toxicology, Pharmacogenomics, Cancer Genetic Testing and Molecular
Biology. Following the completion of the reverse merger, the business conducted by AEON became primarily the business conducted
by the Company.
Under accounting principles
generally accepted in the United States of America (“U.S. GAAP”), the merger is treated as a “reverse merger”
under the purchase method of accounting (see Note 3). The condensed consolidated financial statements reflect the historical results
of AEON prior to the completion of the reverse merger since it was determined to be the accounting acquirer, and do not include
historical results of AHC prior to the completion of the merger.
|
2.
|
Summary of Significant Accounting Policies
|
Basis of Presentation
The Company’s
condensed consolidated financial statements have been prepared in accordance with U.S. GAAP and following the requirements of the
Securities and Exchange Commission (the “SEC”) for interim reporting. As permitted under those rules, certain footnotes
or other financial information that are normally required by U.S. GAAP can be condensed or omitted. These financial statements
have been prepared on the same basis as the Company’s annual financial statements and, in the opinion of management, reflect
all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair statement of the Company’s
financial information. These interim results are not necessarily indicative of the results to be expected for the year ending June
30, 2016 or for any other interim period or for any other future year. The balance sheet as of June 30, 2015 has been derived from
audited financial statements at that date but does not include all of the information required by U.S. GAAP for complete financial
statements.
These condensed consolidated
financial statements should be read in conjunction with the annual consolidated financial statements and notes thereto included
in the Company’s Form 10-KT for the fiscal year ended June 30, 2015 and the corresponding Management’s Discussion
and Analysis of Financial Condition and Results of Operations.
Use of Estimates
The preparation of
consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
AUTHENTIDATE HOLDING CORP.
AND SUBSIDIARIES
Notes to Condensed Consolidated
Financial Statements (Unaudited)
The most sensitive
accounting estimates affecting the financial statements are revenue recognition, the allowance for doubtful accounts, depreciation
of long lived assets, fair value of intangible assets and goodwill, amortization of intangible assets, income taxes and associated
deferrals and valuation allowances, and commitments and contingencies
Principles of Consolidation
The consolidated financial
statements include the accounts of the Company and its wholly owned subsidiaries. Intercompany transactions and balances have been
eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include
all cash balances and highly liquid investments with maturities of three months or less.
Accounts receivable
Accounts receivable
represent customer obligations due under normal trade terms, net of allowance for doubtful accounts. The allowance for doubtful
accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine the allowance
based on known troubled accounts, historical experience and other currently available evidence. The allowance for doubtful accounts
was approximately $109,000 and $0 as of March 31, 2016 and June 30, 2015, respectively.
Notes Receivable
During December 2014,
the Company entered into an agreement with an unrelated party for the sale of certain equipment for $258,405. The note was non-interest
bearing and was paid off during December 2015.
Inventory
Inventory amounts are
stated at the lower of cost or market using the first in, first out basis.
Property and Equipment
Property and equipment
are recorded at cost. Depreciation is recorded using the straight-line method. Estimated useful lives of the assets range from
three to seven years.
Repairs and maintenance
are charged to expense as incurred. Renewals and betterments are capitalized. When assets are sold, retired or otherwise disposed
of, the applicable costs and accumulated depreciation or amortization are removed from the accounts and the resulting gain or loss,
if any, is recognized.
Intangible Assets
Intangible assets consist
primarily of trademarks and acquired technologies. The Company acquired approximately $2,340,000 of intangible assets in conjunction
with the reverse merger discussed in Note 1 and Note 3. Intangible assets with finite lives are amortized on a straight-line basis
over their useful lives.
Goodwill
Goodwill is not amortized,
but is assessed annually for impairment. The Company evaluates the carrying value of goodwill on an annual basis and between annual
evaluations if events occur or circumstances change that would more likely than not reduce the fair value of goodwill below its
carrying amount. When assessing whether goodwill is impaired, management considers first a qualitative approach to evaluate whether
it is more likely than not the fair value of the goodwill is below its carrying amount; if so, management considers a quantitative
approach by analyzing changes in performance and market based metrics as compared to those used at the time of the initial acquisition.
For the periods presented, no impairment charges were recognized.
AUTHENTIDATE HOLDING CORP.
AND SUBSIDIARIES
Notes to Condensed Consolidated
Financial Statements (Unaudited)
Long-Lived Assets
The Company reviews
long-lived assets, such as property and equipment and intangible assets subject to amortization, for impairment using an undiscounted
cash flow approach, whenever events or changes in circumstances such as significant changes in business climate, changes in product
offerings, or other circumstances indicate that the carrying amount may not be recoverable.
Deferred Rent
Rent
expenses for operating leases which included scheduled rent increases is determined by expensing the total amount of rent due over
the life of the operating lease on a straight-line basis. The difference between the amount of expense recognized and the amount
of rent paid is recorded as a liability.
Revenue Recognition
The Company provides
laboratory testing services, web-based hosted software services, telehealth products and post contract customer support services.
Billings for laboratory
testing services are reimbursed by third-party payers net of allowances for differences between amounts billed and the cash receipts
from such payers. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) ASC-605 “
Revenue Recognition
”, the Company recognizes revenues when there is a persuasive
evidence of an arrangement, title and risk of loss have passed, product is shipped or services have been rendered, sales price
is fixed or determinable and collection of the related receivable is reasonably assured.
Historically, the Company
had recognized revenue for these services upon cash receipt because the criteria to recognize revenues under ASC-605 had not been
met at the time test results were delivered since the fee was not fixed and determinable until the third payer remitted payment
given the limited experience and history to develop a reliable estimate of the provision for contractual adjustments (that is,
the difference between established rates and expected third-party payments) and discounts (that is, the difference between established
rates and the amount billable). The Company has continuously reassessed its ability to develop reliable estimates of the provision
for contractual adjustments and discounts and over the past year and has made investments in its systems and process around its
billing system to improve the quality of information generated by the system. Given these ongoing investments and improvements
and based upon the financial framework the Company uses for estimating the provision for contractual adjustments and discounts,
in the second quarter of 2016, the Company concluded that it was able to reasonably estimate its provision for contractual adjustments
and discounts and began recognizing revenue at the time test results are delivered, net of estimated contractual allowances.
Revenue for hosted
software services, telehealth products, and customer support services are recognized when persuasive evidence of an arrangement
exists, delivery has occurred, the selling price is fixed and collectability is reasonably assured. Multiple-element arrangements
are assessed to determine whether they can be separated into more than one unit of accounting. A multiple-element arrangement is
separated into more than one unit of accounting if all of the following criteria are met: the delivered item has value to the customer
on a standalone basis; there is objective and reliable evidence of the fair value of the undelivered items in the arrangement;
if the arrangement includes a general right of return relative to the delivered items, and delivery or performance of the undelivered
item is considered probable and substantially in our control. If these criteria are not met, then revenue is deferred until such
criteria are met or until the period over which the last undelivered element is delivered, which is typically the life of the contract
agreement. If these criteria are met, we allocate total revenue among the elements based on the sales price of each element when
sold separately which is referred to as vendor specific objective evidence or VSOE.
AUTHENTIDATE HOLDING CORP.
AND SUBSIDIARIES
Notes to Condensed Consolidated
Financial Statements (Unaudited)
Advertising Expenses
The Company recognizes
advertising expenses as incurred. Advertising expense for the three and nine months ended March 31, 2016 was approximately $11,000
and $59,000, and was $18,000 and $66,000 for the three and nine months ended March 31, 2015, respectively.
Share-based Compensation
The Company follows
ASC 718,
Share-Based Payments
, which requires the measurement and recognition of compensation expense for all equity based
payment awards made to the Company’s employees and officers, based on their estimated fair values which includes using the
Black-Scholes option pricing model. The Black-Scholes model values options based on the stock price at the grant date, the exercise
price of the option, 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. Restricted stock units granted to employees are
valued using the closing stock price of the Company’s common stock on the grant date.
Concentrations of Credit Risk
The Company maintains
its cash in bank deposit accounts which, at times, may exceed federally insured limits. Accounts are guaranteed by the Federal
Deposit Insurance Corporation (FDIC) up to certain limits. At March 31, 2016 and June 30, 2015, the Company had approximately $2,431,000
and $4,691,000, respectively, in excess of FDIC-insured limits. The Company has not experienced any losses in such accounts.
Income Taxes
The Company accounts
for income taxes under an asset and liability approach that requires the recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns.
In estimating future tax consequences, the Company generally considers all expected future events other than enactments of changes
in tax laws or rates. The effect on deferred tax assets and liabilities of a change in tax rates will be recognized as income or
expense in the period that includes the enactment date. A valuation allowance is established when necessary to reduce deferred
tax assets to the amount expected to be realized.
Prior to the reverse merger, AEON elected
to be taxed as an S Corporation for federal and certain state income tax purposes. Under this election substantially all of the
profits, losses, credits and deductions of the Company are passed through to the individual shareholders. Therefore prior to the
reverse merger no provision or liability for income taxes has been included in these consolidated financial statements except for
state and localities where the S Corporation status has not been recognized. The provision for income taxes consisting of current
franchise and excise taxes for state and localities were $6,000 and $17,600 for the three and nine months ended March 31, 2015.
Prior to the reverse
merger, AHC tax benefits were fully offset by a valuation allowance due to the uncertainty that the deferred tax assets would be
realized. As a result of the reverse merger a deferred tax asset was recorded since it was determined the realization of some of
these assets is more likely than not, due to consolidated earnings resulting in the expected usage of net operating loss carryforwards.
Under income tax regulations
in the United States AHC is the acquirer of AEON. As such the Company must file a consolidated return for both AHC and AEON for
the year ending June 30, 2016. The return will include the operating results of AHC from July 1, 2015 through June 30, 2016, and
AEON’s results from January 27, 2016 through June 30, 2016.
AUTHENTIDATE HOLDING CORP.
AND SUBSIDIARIES
Notes to Condensed Consolidated
Financial Statements (Unaudited)
Management considers
the likelihood of changes by taxing authorities in its filed income tax returns and recognizes a liability for or discloses potential
changes that management believes are more likely than not to occur upon examination by tax authorities. Management has not identified
any uncertain tax positions in filed income tax returns that require recognition or disclosure in the accompanying consolidated
financial statements.
The
Company’s policy is to include penalties and interest expense related to income taxes as a component of other expense and
interest expense, respectively, as necessary.
Recent Accounting Pronouncements
In May 2014, the FASB
issued Accounting Standards Update (“ASU”) 2014-09,
“Revenue from Contracts with Customers”
(Topic
606) (“ASU 2014-09”), which affects any entity that either enters into contracts with customers to transfer goods or
services or enters into contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other
standards. Under ASU 2014-09, an entity should recognize revenue to depict the transfer of promised goods or services to customers
in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
The ASU must be applied for annual periods beginning after December 15, 2017, with early application permitted for annual reporting
periods beginning after December 15, 2016. The Company is currently evaluating the impact on the consolidated financial statements
of adopting the guidance in ASU 2014-09 and has not determined the impact of adoption at this time.
In July 2015, the FASB
issued ASU 2015-11, “
Inventory
(
Topic 330
):
Simplifying the Measurement of
Inventory
”.
ASU 2015-11 requires inventory measured using any method other than last-in, first-out (“LIFO”) or the retail inventory
method to be subsequently measured at the lower of cost or net realizable value, rather than at the lower of cost or market. Under
this ASU, subsequent measurement of inventory using the LIFO and retail inventory method is unchanged. ASU 2015-11 is effective
prospectively for fiscal years, and for interim periods within those years, beginning after December 15, 2016. Early application
is permitted. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.
In November 2015, the
FASB issued a new accounting standard that requires that the deferred tax liabilities and assets be classified as noncurrent on
the consolidated balance sheet. The standard will be effective for the Company beginning July 1, 2017, with early adoption permitted.
The adoption of this standard is not expected to have a material impact on the consolidated financial statements.
In February 2016, the
FASB issues ASU No. 2016-2, “Leases,” which establish a right-of-use- (ROU) model that requires a lessee to record
and ROU asset and lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified
as either finance or operating, with classifications affecting the pattern of expense recognition in the income statement. This
ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early
adoption is permitted. ASU 2016-02 requires modified retrospective adoption for all leases existing at, or entered into after,
the date of initial application, with an option to use certain transition relief. We are currently evaluating the effect of adoption
of this ASU and do not believe the effect will be material to our financial statements.
In March 2016, the
Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, “Compensation–Stock
Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”, which makes several modifications to the
accounting for employee share-based payment transactions, including the requirement to recognize the income tax effects of awards
that vest or settle as income tax expense. This guidance also clarifies the presentation of certain components of share-based awards
in the statement of cash flows. This guidance is effective for annual reporting periods beginning after December 15, 2016, and
interim periods within those annual periods, and early adoption is permitted. The Company is evaluating the effect that ASU No.
2016-09 will have on its consolidated financial statements and related disclosures. We are currently evaluating the effect of adoption
of this ASU and do not believe the effect will be material on its financial statements.
AUTHENTIDATE HOLDING CORP.
AND SUBSIDIARIES
Notes to Condensed Consolidated
Financial Statements (Unaudited)
In June 2016, the FASB
issued ASU No. 2016-13,
Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
,
which requires measurement and recognition of expected credit losses for financial assets held. The amendments in this update are
effective for annual periods beginning after December 15, 2019, and interim periods within such annual period. Early adoption is
permitted for fiscal years beginning after December 15, 2018, including interim periods within such year. The Company is currently
evaluating the potential impacts of adopting the provisions of ASU No. 2016-13.
On January 27, 2016
AHC completed the reverse merger with AEON, an expanding clinical laboratory based in Gainesville, GA. The transaction was structured
as a tax-free exchange, with the former AEON members receiving shares of common stock of AHC at the closing, and potential further
issuances of common stock tied primarily to the earnings of AEON during the five calendar years ending December 2019. The AEON
members received an aggregate of 19.9% (958,030 shares) of the common stock of AHC effective at the closing and will receive an
additional 5% (240,711 shares) of the outstanding common stock of the Company, as defined, upon approval of the merger transaction
by the shareholders of the Company. The shareholders of the Company approved the merger on July 13, 2016, and the Company authorized
the issuance of the shares on September 14, 2016. The AEON members can also earn additional shares of common stock to increase
their aggregate holdings to up to 90% of the outstanding stock of AHC, as defined, based upon meeting the benchmark targets in
the merger agreement, including delivering $16,000,000 in EBITDA for the calendar year ended 2015 which was achieved (1,155,414
shares approved and 0 shares issued), and $100,000,000 in aggregate EBITDA for the calendar years 2016 through 2019. These additional
shares issued to the former AEON members will be treated as dividends. In connection with the completion of the merger, Hanif A.
(“Sonny”) Roshan, founder of AEON, became Chairman of the Company and Richard Hersperger, the CEO of AEON, became CEO
of the Company and both hold seats on the Board of Directors. The former AEON members will have the right to elect one director
for each 10% of the outstanding shares of the Company’s common stock they hold as a group. Accordingly, the transaction was
accounted for as a reverse acquisition under the provisions of ASC 805-40 Business Combinations – Reverse Acquisitions, with
AEON becoming the acquirer for accounting purposes and AHC becoming the accounting acquiree. It was determined that AEON was the
accounting acquirer as a result of the control over the Board of Directors of the combined company by the former AEON members,
the senior management positions in the combined company held by former AEON management, and AEON’s size in comparison to
AHC.
The effective consideration
transferred is determined based upon the amount of shares that AEON would have had to issue to AHC shareholders in order to provide
the same ownership ratios as previously discussed. The fair value of the consideration effectively transferred by AEON should be
based on the most reliable measure. In this case, the quoted market price of AHC shares provide a more reliable basis for measuring
the consideration effectively transferred than the estimated fair value of the shares of AEON. The fair value of AHC common stock
is based upon the closing stock price on January 27, 2016, the effective date of the merger, of $4.71 per share.
The effective consideration
transferred was $36,800,000 and is comprised of the following (in thousands):
Fair value of AHC common shares
|
|
(A)
|
|
$
|
22,675
|
|
Preferred stock outstanding
|
|
(B)
|
|
|
3,047
|
|
Stock options vested and outstanding
|
|
(C)
|
|
|
1,296
|
|
Warrants vested and outstanding
|
|
(C)
|
|
|
9,782
|
|
|
|
|
|
|
|
|
Consideration effectively transferred
|
|
|
|
$
|
36,800
|
|
|
(A)
|
Based upon 4,814,226 AHC common shares outstanding at a fair value of $4.71 per share, which was
the closing price of AHC common shares on the effective date of the merger.
|
AUTHENTIDATE HOLDING CORP.
AND SUBSIDIARIES
Notes to Condensed Consolidated
Financial Statements (Unaudited)
|
(B)
|
Represents 28,000 shares of Series B and 605,000 shares of Series D preferred stock as converted
into 646,933 common shares with a fair value of $4.71 per share, which was the closing price of AHC common shares on the effective
date of the merger.
|
|
(C)
|
Represents outstanding and vested AHC stock options and warrants acquired in connection with the
reverse merger. The fair value of these stock options and warrants was determined using the Black Scholes model, with the following
assumptions:
|
|
|
Options
|
|
|
Warrants
|
|
Number of shares
|
|
|
559,595
|
|
|
|
3,479,896
|
|
Weighted average exercise price
|
|
$
|
4.46
|
|
|
$
|
5.24
|
|
Volatility
|
|
|
85.10
|
%
|
|
|
85.10
|
%
|
Risk-free interest rate
|
|
|
1.63
|
%
|
|
|
1.63
|
%
|
Expected dividend rate
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected life (years)
|
|
|
4
|
|
|
|
4.16
|
|
Stock Price
|
|
$
|
4.71
|
|
|
$
|
4.71
|
|
The fair value of the
assets acquired and liabilities assumed were based on management estimates. Based upon the preliminary purchase price allocation,
the following table summarizes the estimated provisional fair value of the assets acquired and liabilities assumed at the date
of acquisition (in thousands):
Cash and cash equivalents
|
|
$
|
30
|
|
Restricted cash
|
|
|
121
|
|
Accounts receivable
|
|
|
174
|
|
Inventory
|
|
|
360
|
|
Prepaid expenses and other current assets
|
|
|
464
|
|
Property and equipment
|
|
|
189
|
|
Trade names and licensed technology
|
|
|
2,344
|
|
Deferred tax assets
|
|
|
38,804
|
|
Total assets acquired at fair value
|
|
|
42,486
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
3,860
|
|
Notes payable
|
|
|
4,078
|
|
Warrant liability
|
|
|
1,066
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
9,004
|
|
Net assets acquired
|
|
|
33,482
|
|
Goodwill
|
|
|
3,318
|
|
Total preliminary purchase consideration
|
|
$
|
36,800
|
|
The purchase price
exceeded the fair value of the net assets acquired by approximately $3,318,000, which was recorded as goodwill and assigned to
our Web-Based Software segment.
In connection with
the reverse merger, the Company incurred approximately $323,000 and $974,000 for related transaction costs for the three and nine
months ended March 31, 2016, included in selling, general and administrative expenses in the accompanying statements of operations.
AUTHENTIDATE HOLDING CORP.
AND SUBSIDIARIES
Notes to Condensed Consolidated
Financial Statements (Unaudited)
The following unaudited
pro forma results for the three and nine month periods ended March 31, 2016 and 2015 summarizes the consolidated results of operations
of the Company, assuming the reverse merger had occurred on July 1, 2014 and after giving effect to the reverse acquisition adjustments,
including amortization of tangible and intangible assets acquired in the transaction:
|
|
(in thousands)
|
|
|
|
Three months ended
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
March 31, 2015
|
|
Net revenues
|
|
$
|
7,736
|
|
|
$
|
5,571
|
|
Net income (loss)
|
|
$
|
(812
|
)
|
|
$
|
(458
|
)
|
|
|
(in thousands)
|
|
|
|
Nine months ended
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
March 31, 2015
|
|
Net revenues
|
|
$
|
31,131
|
|
|
$
|
20,995
|
|
Net income (loss)
|
|
$
|
(2,538
|
)
|
|
$
|
296
|
|
Inventory consists
of the following:
|
|
March 31
2016
|
|
|
June 30
2015
|
|
Laboratory testing supplies
|
|
$
|
83,419
|
|
|
$
|
34,664
|
|
Purchased components, net
|
|
|
31,068
|
|
|
|
-
|
|
Finished goods
|
|
|
205,297
|
|
|
|
-
|
|
Total inventory
|
|
$
|
319,784
|
|
|
$
|
34,664
|
|
|
5.
|
Property and Equipment
|
Property and equipment
consists of the following:
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
Useful Life In
|
|
|
|
2016
|
|
|
2015
|
|
|
Years
|
|
|
|
|
|
|
|
|
|
|
|
Machinery and equipment
|
|
$
|
4,960,014
|
|
|
$
|
3,798,927
|
|
|
|
3-6
|
|
Software
|
|
|
392,913
|
|
|
|
265,886
|
|
|
|
3-7
|
|
Furniture and fixtures
|
|
|
105,043
|
|
|
|
105,043
|
|
|
|
5-7
|
|
Leasehold improvements
|
|
|
64,193
|
|
|
|
64,193
|
|
|
|
(1)
|
|
|
|
|
5,522,163
|
|
|
|
4,234,049
|
|
|
|
|
|
Less: Accumulated depreciation and amortization
|
|
|
(2,478,731
|
)
|
|
|
(1,682,666
|
)
|
|
|
|
|
|
|
$
|
3,043,432
|
|
|
$
|
2,551,383
|
|
|
|
|
|
(1) Lesser of lease term or estimated useful life
AUTHENTIDATE HOLDING CORP.
AND SUBSIDIARIES
Notes to Condensed Consolidated
Financial Statements (Unaudited)
Depreciation on property
and equipment for the three and nine months ended March 31, 2016 was approximately $320,000 and $796,000, respectively, and was
approximately $333,000 and $535,000 for the prior year period, respectively.
The following table
sets forth intangible assets as follows:
|
|
March 31, 2016
|
|
|
June 30, 2015
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Book
Value
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Book
Value
|
|
|
Useful Life
In Years
|
|
Trademarks
|
|
$
|
550,000
|
|
|
$
|
13,110
|
|
|
$
|
536,890
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
7
|
|
Acquired technologies
|
|
|
1,794,000
|
|
|
|
66,937
|
|
|
|
1,727,063
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3-5
|
|
Total
|
|
$
|
2,344,000
|
|
|
$
|
80,047
|
|
|
$
|
2,263,953
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
Amortization expense
was approximately $80,000 for both the three and nine months ended March 31, 2016. Amortization expense for the next five fiscal
years and thereafter is expected to be as follows:
June 30,
|
|
|
|
2016 (three months)
|
|
$
|
113,500
|
|
2017
|
|
|
450,300
|
|
2018
|
|
|
450,300
|
|
2019
|
|
|
362,300
|
|
2020
|
|
|
237,300
|
|
2021
|
|
|
236,100
|
|
Thereafter
|
|
|
414,153
|
|
|
|
$
|
2,263,953
|
|
The Company’s
provision for income taxes consists of the following (
in thousands
):
|
|
For the three months ended
|
|
|
For the nine months ended
|
|
|
|
March 31, 2016
|
|
|
March 31, 2016
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
8
|
|
|
|
-
|
|
Total current
|
|
|
8
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
|
368
|
|
|
|
368
|
|
State
|
|
|
61
|
|
|
|
61
|
|
Total current
|
|
|
429
|
|
|
|
429
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
437
|
|
|
$
|
429
|
|
In
connection with the reverse merger, AEON elected to change from a cash basis tax payer to an accrual basis tax payer. This
resulted in a change of accounting methodology which resulted in a built in gain that resulted in a deferred tax liability of
approximately $672,000 at March 31, 2016. The built in gain will be recognized for tax purposes over a four year period.
Additionally, AEON elected to change their tax reporting year end from a December 31 year end to a June 30 year end. This
change was done to mirror AHC’s tax and reporting year.
AUTHENTIDATE HOLDING CORP.
AND SUBSIDIARIES
Notes to Condensed Consolidated
Financial Statements (Unaudited)
Deferred income taxes
The Company’s deferred tax assets
and liabilities consist of the following as of March 31, 2016
(in thousands)
:
Deferred tax assets:
|
|
|
|
|
Prepaid expenses
|
|
$
|
10
|
|
Inventory reserve
|
|
|
148
|
|
Accounts receivable allowance
|
|
|
6
|
|
Other liabilities
|
|
|
25
|
|
Accrued compensation
|
|
|
450
|
|
Net operating loss and other carry forwards
|
|
|
55,972
|
|
Total gross deferred assets
|
|
|
56,611
|
|
Less: Valuation allowance
|
|
|
(16,542
|
)
|
Total deferred tax asset
|
|
|
40,069
|
|
Deferred tax liabilities
|
|
|
|
|
Intangible assets
|
|
|
(976
|
)
|
Depreciation
|
|
|
(46
|
)
|
Change in accounting method
|
|
|
(672
|
)
|
Total deferred tax liability
|
|
|
(1,694
|
)
|
|
|
|
|
|
Net Deferred Tax Asset
|
|
$
|
38,375
|
|
As of March 31, 2016,
the Company has net operating loss carryforwards of approximately $209,730,000. As of March 31, 2016, U.S. Federal net operating
loss carryforwards comprise approximately $149,737,000, which expire between 2019 and 2036. U.S. state net operating loss
carryforwards are approximately $59,993,000 which expire between 2016 and 2035.
The gross deferred
tax asset for these net operating losses is approximately $55,972,000 with recorded valuation allowances of approximately $16,542,000.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes. The Company believes that it is more likely than
not that it will generate sufficient taxable income to utilize part of its deferred tax asset and has therefore recorded a partial
valuation allowance.
Secured
The
Company has a convertible note payable in the aggregate principal amount of $950,000. The convertible note is convertible into
shares of common stock at an initial conversion price of $2.25 per share, subject to adjustment. The convertible note is convertible
beginning July 1, 2016 and is due December 17, 2016. Based on the initial conversion price, the note will be convertible into
up to 422,222 shares of common stock. If the Company issues or sells shares of its common stock, rights to purchase shares of its
common stock, or securities convertible into shares of its common stock for a price per share that is less than the conversion
price then in effect, such conversion price will be decreased to equal 85% of such lower price. The foregoing adjustments to the
conversion price will not apply to certain exempt issuances, including issuances pursuant to certain employee benefit plans. In
addition, the conversion price is subject to adjustment upon stock splits, reverse stock splits, and similar capital changes. The
convertible note bears interest at 9% per annum with interest payable upon maturity or on any earlier redemption date. Following
the date on which the convertible note first becomes convertible, the Company will have the right to redeem all or any portion
of the outstanding principal balance of the note, plus all accrued but unpaid interest at a price equal to 110% of such amount.
The holder of the convertible note shall have the right to convert any or all of the amount to be redeemed into common stock prior
to redemption. Subject to certain exceptions, the convertible note is senior to existing and future indebtedness of the Company
and will be secured to the extent and as provided in the amended security agreement entered into between the Company and the holder.
Subject to certain exceptions, the new convertible note contains customary covenants against incurring additional indebtedness
and granting additional liens and contains customary events of default. Upon the occurrence of an event of default under the convertible
note, the holder may require the Company to repay all or a portion of the note in cash, at a price equal to 110% of the principal
and accrued and unpaid interest.
AUTHENTIDATE HOLDING CORP.
AND SUBSIDIARIES
Notes to Condensed Consolidated
Financial Statements (Unaudited)
The
Company has senior secured convertible notes in the aggregate principal amount of $900,000. These notes, subject to certain exceptions,
rank senior to existing and future indebtedness of the Company and are secured to the extent and as provided in the security agreement
entered into between the Company and the purchasers. Each note matures on June 8, 2016 and, subject to certain limitations, is
convertible at any time at the option of the holder into shares of the Company’s common stock at an initial conversion price
of $2.25 per share. Subject to certain exemptions, if the Company issues or sells shares of its common stock, rights to purchase
shares of its common stock, or securities convertible into shares of its common stock for a price per share that is less than the
conversion price then in effect, the conversion price then in effect will be decreased to equal 85% of such lower price. The foregoing
adjustments to the conversion price will not apply to certain exempt issuances, including issuances pursuant to certain employee
benefit plans. In addition, the conversion price is subject to adjustment upon stock splits, reverse stock splits, and similar
capital changes. The senior secured convertible notes bear interest at 9% per annum with interest payable upon maturity or
on any earlier redemption date. At any time after the issuance date, the Company will have the right to redeem all or any portion
of the outstanding principal balance of the notes, plus all accrued but unpaid interest at a price equal to 110% of such amount
and the holders shall have the right to convert any or all of the amount to be redeemed into common stock prior to redemption.
The notes are secured by a first priority lien on the Company’s assets related to its “Inscrybe Referral and Order
Management” and “Inscrybe Hospital Discharge” solutions. Subject to certain exceptions, the notes contain customary
covenants against incurring additional indebtedness and granting additional liens and contain customary events of default. Upon
the occurrence of an event of default under the notes, a holder may require the Company to repay all or a portion of its notes
in cash, at a price equal to 110% of the principal and accrued and unpaid interest.
The
Company also agreed to file a registration statement covering the resale of the shares of the Company’s common stock issuable
upon conversion of the $900,000 notes and exercise of the warrants and to use commercially reasonable efforts to have the registration
declared effective in a timely manner. The Company will be subject to certain monetary penalties, as defined in the agreement if
the registration statement is not filed, does not become effective on a timely basis, or does not remain available for the resale,
as such term is defined in the registration rights agreement.
The
Company has a promissory note in the aggregate principal amount of $320,000 to an accredited investor in a private transaction.
The note is due and payable on April 15, 2016 and interest shall accrue on the note at the rate of 10.0% per annum. The
note is secured by a first priority lien on certain of our assets, as described in a security agreement entered into between the
Company and the purchaser . Subject to certain exceptions, the note contains customary covenants against incurring additional indebtedness
and granting additional liens and contains customary events of default. The note is convertible into shares of common stock of
the Company at an initial conversion price of $4.86 per share. Based on the conversion price, the principal amount of the note
will be convertible into up to 65,844 shares of common stock. The conversion price is only subject to adjustment upon stock splits,
reverse stock splits, and similar capital changes. On September 1, 2016, the Company entered into an amendment agreement which
extended the maturity date to December 1, 2016. In consideration for such agreement, the Company agreed that the note would be
further modified so that it would be convertible into shares of common stock of the Company at a conversion price of $3.00 per
share, which was equal to the most recent consolidated closing bid price of the Company’s common stock immediately prior
to the execution of the amendment agreement. Based on the conversion price, the principal amount of the note will be convertible
into up to 106,667 shares of common stock. The holder shall not have the right to convert the note to the extent that such conversion
would result in the holder being the beneficial owner in excess of 4.99% of the Company’s common stock. The other terms and
conditions of the note were not amended.
Unsecured
The
Company has a note/exchange agreement with Lazarus Investment Partners, LLLP the beneficial owner of approximately 15.0% of the
Company’s common stock in the aggregate principal amount of $532,811. The note bears interest at 20% per annum, payable
in arrears, and is due upon the earlier of (i) December 17,2016, or (ii) within 5 days of the closing of a sale of equity
or debt securities of the Company, or series of closings, as part of the same transaction, of equity or debt securities within
a period of 90 days, in the gross amount of at least $5,000,000 in cash proceeds. The note is neither secured by any of the Company’s
assets nor convertible into equity securities of the Company. The note contains certain events of default that are customary for
similar transactions.
AUTHENTIDATE HOLDING CORP.
AND SUBSIDIARIES
Notes to Condensed Consolidated
Financial Statements (Unaudited)
The Company has promissory
notes in the aggregate principal amount of $400,000 to Lazarus Investment Partners LLLP, the beneficial owner of approximately
15.0% of the Company’s common, and an entity affiliated with J. David Luce, former member of the Board of Directors. The
notes are unsecured obligations of the Company and are not currently convertible into equity securities of the Company. The notes
bear interest at 20% per annum, payable in arrears, and are due upon the earlier of (i) August 26, 2016, or (ii) the
closing of a sale of equity or debt securities of the Company, or series of closings, as part of the same transaction, of equity
or debt securities within a period of 90 days, in the gross amount of at least $5,000,000 in cash proceeds. The holders have the
right, at their option, to convert interest and principal due on the note into any alternative financing that may be undertaken
by the Company while the notes are outstanding. The Company repaid $200,000 of these notes during March, 2016. On September 1,
2016, the note with the entity affiliated with J. David Luce was amended to extend the maturity date to December 1, 2016 and to
allow the investor to elect to further extend the note for an additional 90 days. In consideration for such agreements, the Company
agreed that the promissory note would be further modified so that it would be convertible into shares of common stock of the Company
at an initial conversion price of $3.00 per share, which was equal to the most recent consolidated closing bid price of the Company’s
common stock immediately prior to the execution of the amendment agreement. Based on the conversion price, the principal amount
of the note will be convertible into up to 66,667 shares of common stock. The conversion price is only subject to adjustment upon
stock splits, reverse stock splits, and similar capital changes.
The
Company has promissory notes in the aggregate principal amount of $525,000 to accredited investors. The notes are unsecured and
are not convertible into equity securities of the Company. The notes bear interest at 20% per annum, payable in arrears, and
are due upon the earlier of (i) September 18, 2016 for the $400,000 note, September 25, 2016 for the $50,000 note and
September 30, 2016 for the $75,000 note , or (ii) within 30 days of the closing of a sale of equity or debt securities of
the Company, or series of closings, as part of the same transaction, of equity or debt securities within a period of 90 days, in
the gross amount of at least $5,000,000 in cash proceeds. The $400,000 note was repaid on September 16, 2016.
The
Company has a promissory note in the aggregate principal amount of $450,000 to Optimum Ventures, LLC, a related party through common
ownership. The note is unsecured and is not convertible into equity securities of the Company. The note bears interest at 20% per
annum, payable in arrears, and is due upon the earlier of (i) October 28, 2016, or (ii) within 30 days of the closing
of a sale of equity or debt securities of the Company, or series of closings, as part of the same transaction, of equity or debt
securities within a period of 90 days, in the gross amount of at least $5,000,000 in cash proceeds.
Further
discussion of the notes follows:
March 31, 2016
|
|
|
Principal
|
|
|
Interest Terms
|
Secured
|
|
|
|
|
|
|
|
|
$
|
950,000
|
|
|
9% interest paid upon maturity or early redemption
|
|
|
|
900,000
|
|
|
9% interest paid upon maturity or early redemption
|
|
|
|
320,000
|
|
|
10% interest paid annually
|
|
|
|
2,170,000
|
|
|
|
Unsecured
|
|
|
|
|
|
|
|
|
|
532,811
|
|
|
20% interest paid annually
|
|
|
|
200,000
|
|
|
20% interest paid annually
|
|
|
|
525,000
|
|
|
20% interest paid annually
|
|
|
|
450,000
|
|
|
20% interest paid annually
|
|
|
|
1,707,811
|
|
|
|
Total
|
|
$
|
3,877,811
|
|
|
|
There was no notes payable outstanding as
of June 30, 2015.
On June 30, 2014 the
Company entered into a $1,000,000 credit agreement (the “Revolver”) with Bank of America with an original maturity
date of June 30, 2015. The balance outstanding as of March 31, 2015 was $0. The balance of the Revolver was paid in full on May
14, 2015, and subsequently closed.
AUTHENTIDATE HOLDING CORP.
AND SUBSIDIARIES
Notes to Condensed Consolidated
Financial Statements (Unaudited)
The Company entered
into a 10 year lease for office and warehouse space from a related party (see Note 15) commencing in April 2014, and amended in
January 2016. The amendment increased monthly rent expense to $46,500 with a 3% annual increase after 12 months. Beginning in January
of 2014, the Company began leasing office space in Kentucky on a month-to-month basis from a third party. Additionally, the Company
entered into an amended lease agreement in late 2015, for the New Jersey office, for a six year term with annual rental rates ranging
from $135,000 to $148,000. There are certain provisions which allow for early termination and extension of the lease.
Rental expense for
the three and nine months ended March 31, 2016 was approximately $155,000 and $311,000, respectively and $78,000 and $234,000,
for the prior year periods, respectively.
At March 31, 2016,
as part of our lease agreement for the New Jersey office, restricted cash of approximately $121,000 was being held as collateral
for a letter of credit securing certain lease payments.
The future minimum
lease payments under non-cancelable operating leases are approximately as follows for the years ending March 31:
2017
|
|
$
|
694,000
|
|
2018
|
|
|
715,000
|
|
2019
|
|
|
735,000
|
|
2020
|
|
|
756,000
|
|
2021
|
|
|
776,000
|
|
Thereafter
|
|
|
3,506,000
|
|
Total
|
|
$
|
7,182,000
|
|
The Company has approximately
$39,000 of capital lease obligations for equipment as of March 31, 2016, which is included in accounts payable and accrued expenses
on the condensed consolidated balance sheets.
Preferred Stock
As of March 31, 2016,
there are 28,000 shares of Series B convertible preferred stock outstanding. The Company has the right to repurchase the outstanding
Series B preferred stock at a redemption price equal to $25.00 per share, plus accrued and unpaid dividends. The holder of such
shares has the right to convert shares of preferred stock into an aggregate of approximately 28,000 shares of our common stock
at a conversion rate of $25.20 per share. In the event the Company elects to redeem these securities, the holder will be able to
exercise its conversion right subsequent to the date that we issue a notice of redemption but prior to the deemed redemption date
as would be set forth in such notice. Dividends on the Series B preferred stock accrue at a rate of $17,500 a quarter. At March
31, 2016, the Company has accrued dividends in the amount of $17,500 which remain unpaid.
As of March 31, 2016,
there are 605,000 shares of Series D convertible preferred stock outstanding. The Series D preferred stock can be converted by
the holders into an aggregate of 639,622 shares of common stock at an initial conversion rate of $9.77139 per share. The holders
of such shares have the right to convert the preferred shares at any time; however, the shares received upon conversion may not
be offered or sold except pursuant to an effective registration statement or an applicable exemption from the registration requirements
of the Securities Act and applicable state securities laws. The Company has the right to repurchase the outstanding Series D preferred
stock at a redemption price equal to $10.00 per share, plus accrued and unpaid dividends, and to require holders to convert their
Series D preferred stock beginning in June 2016. Dividends on the Series D preferred stock accrue at a rate of 5% per annum and
are payable semi-annually in cash or stock at the Company’s option. At March 31, 2016, the Company has accrued dividends
in the amount of approximately $248,000 which remain unpaid.
AUTHENTIDATE HOLDING CORP.
AND SUBSIDIARIES
Notes to Condensed Consolidated
Financial Statements (Unaudited)
Common Stock
As discussed in Note
1 and 3 the AEON Acquisition on January 27, 2016 has been accounted for as a reverse merger under US GAAP. As such, AEON is considered
the acquiring entity for accounting purposes; and therefore, legacy AEON’s historical results of operations replaced legacy
AHC’s historical results of operations for all periods prior to the reverse merger. Additionally, the legacy AEON equity
accounts at March 31, 2016 were retroactively restated to reflect the number of shares received in the business combination as
defined by Note 3.
Earnings Per Share
FASB ASC Topic 260,
Earnings Per Share, requires the presentation of basic and diluted earnings per share. Basic earnings per share is calculated based
on the weighted-average number of ordinary shares outstanding during the period, while diluted earnings per share is calculated
to include any dilutive effects to ordinary shares. For the three months and nine months ended March 31, 2016, our ordinary share
equivalents consisted of stock options, restricted stock units, convertible debt, preferred stock and warrants.
|
|
Three Months Ended
March 31,
|
|
|
Nine Months Ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Net (loss) income
|
|
$
|
(45,198
|
)
|
|
$
|
1,690,871
|
|
|
$
|
9,032,947
|
|
|
$
|
7,137,922
|
|
Preferred stock dividends
|
|
|
67,082
|
|
|
|
-
|
|
|
|
67,082
|
|
|
|
-
|
|
(Loss) income available to common
shareholders
|
|
|
(112,280
|
)
|
|
|
1,690,871
|
|
|
|
8,965,865
|
|
|
|
7,137,922
|
|
Weighted average shares used in the computation of basic earnings per share
|
|
|
4,327,990
|
|
|
|
958,030
|
|
|
|
2,064,951
|
|
|
|
958,030
|
|
(Loss)/Earnings per share - basic
|
|
$
|
(0.03
|
)
|
|
$
|
1.76
|
|
|
$
|
4.34
|
|
|
$
|
7.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income available to common shareholders
|
|
$
|
(112,280
|
)
|
|
$
|
1,690,871
|
|
|
$
|
8,965,865
|
|
|
$
|
7,137,922
|
|
Less increase in fair value of warrants, net of income tax
|
|
|
-
|
|
|
|
-
|
|
|
|
205,360
|
|
|
|
-
|
|
Interest on convertible debt, net of income tax
|
|
|
-
|
|
|
|
-
|
|
|
|
19,982
|
|
|
|
-
|
|
Preferred stock dividends
|
|
|
-
|
|
|
|
-
|
|
|
|
67,082
|
|
|
|
-
|
|
(Loss) income applicable to common shareholders plus
assumed conversions
|
|
$
|
(112,280
|
)
|
|
$
|
1,690,871
|
|
|
$
|
9,258,289
|
|
|
$
|
7,137,922
|
|
Shares used in the computation of basic earnings per share
|
|
|
4,327,990
|
|
|
|
958,030
|
|
|
|
2,064,951
|
|
|
|
958,030
|
|
Dilutive effect of options and
warrants convertible debt and convertible preferred
|
|
|
-
|
|
|
|
-
|
|
|
|
630,039
|
|
|
|
-
|
|
Shares used in the computation of diluted earnings per share
|
|
|
4,327,990
|
|
|
|
958,030
|
|
|
|
2,694,990
|
|
|
|
958,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/Earnings per share - diluted
|
|
$
|
(0.03
|
)
|
|
$
|
1.76
|
|
|
$
|
3.44
|
|
|
$
|
7.45
|
|
AUTHENTIDATE HOLDING CORP.
AND SUBSIDIARIES
Notes to Condensed Consolidated
Financial Statements (Unaudited)
Common Stock Warrants
A schedule of common
stock warrant activity is as follows:
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
Per Share
|
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding, July 1, 2015
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants assumed in reverse merger
|
|
|
4,313,180
|
|
|
$
|
5.24
|
|
|
|
-
|
|
|
|
-
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding March 31, 2016
|
|
|
4,313,180
|
|
|
$
|
5.24
|
|
|
|
4.81
|
|
|
$
|
4,905,352
|
|
Exercisable, March 31, 2016
|
|
|
3,496,507
|
|
|
$
|
5.93
|
|
|
|
4.17
|
|
|
$
|
3,855,019
|
|
|
12.
|
Share-Based Compensation
|
On December 22, 2015,
the Company and its owners approved a 10% pro-rata donation of members’ equity units to treasury units for no consideration.
These units were used to retain and attract key members of management in contemplation of the reverse merger. During 2015, the
units were committed to three key members of management. On January 12, 2016, the units were awarded with full rights and privileges.
The Company has recognized $1,418,000 of share based compensation based on the fair value of the units issued. The fair value of
the unit based compensation was determined by using the value of AHC based on published stock values, and discounting them accordingly
for lack of marketability and a probability discount associated with certain earn-outs.
Stock option activity
under the Company’s stock option plans for employees and non-executive directors for the period ended March 31, 2016 is as
follows:
Employees Information
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
|
Aggregate
Intrinsic
value
|
|
Outstanding July 1, 2015
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Options acquired in merger
|
|
|
182,259
|
|
|
|
12.45
|
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired/forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding March 31, 2016
|
|
|
182,259
|
|
|
|
12.45
|
|
|
|
6.55
|
|
|
|
49,160
|
|
Exercisable March 31, 2016
|
|
|
137,151
|
|
|
|
13.15
|
|
|
|
3.14
|
|
|
|
47,580
|
|
Expected to vest at March 31, 2016
|
|
|
35,311
|
|
|
$
|
10.42
|
|
|
|
6.59
|
|
|
$
|
1,238
|
|
Non-Executive Director Information
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
|
Aggregate
Intrinsic
value
|
|
Outstanding July 1, 2015
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Options acquired in merger
|
|
|
433,882
|
|
|
|
4.46
|
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired/forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding and exercisable March 31, 2016
|
|
|
433,882
|
|
|
$
|
4.46
|
|
|
|
7.97
|
|
|
$
|
481,862
|
|
AUTHENTIDATE HOLDING CORP.
AND SUBSIDIARIES
Notes to Condensed Consolidated
Financial Statements (Unaudited)
Employee options are
granted at the closing price on the day of issuance and typically vest over a three-year period and non-executive director options
are granted at market price and vest on the grant date. $58,000 and $1,476,000 of stock based compensation was recognized for the
three and nine month period ending March 31, 2016, respectively.
As of March 31, 2016,
there was approximately $285,000 of total unrecognized compensation expense related to unvested share-based compensation arrangements
that is expected to be recognized over a weighted-average period of 12 months.
As
of March 31, 2016, there were approximately 35,800 restricted stock units outstanding that were granted to employees in connection
with the Company’s compensation modification program. These restricted stock units vest when the Company achieves cash flow
breakeven for two consecutive quarters, as defined.
|
13.
|
Fair Value Measurements
|
The Company measures
fair value for financial assets and liabilities in accordance with the provisions of the accounting guidance regarding fair value
measurements. The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure
fair value into three broad levels. A brief description of those three levels is as follows:
|
·
|
Level 1: Observable inputs such as quoted prices in
active markets for identical assets or liabilities.
|
|
·
|
Level 2: Inputs other than quoted prices for identical
assets or liabilities that are observable for the asset or liability, either directly or indirectly.
|
|
·
|
Level 3: Significant unobservable inputs.
|
|
|
|
|
|
Fair Value Measurements
Using Fair Value Hierarchy
|
|
March 31, 2016
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Warrant liability
|
|
$
|
1,405,686
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,405,686
|
|
Total
|
|
$
|
1,405,686
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,405,686
|
|
AUTHENTIDATE HOLDING CORP.
AND SUBSIDIARIES
Notes to Condensed Consolidated
Financial Statements (Unaudited)
The following is a
reconciliation of the opening and closing balances for liabilities measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) during the period ended March 31, 2016:
|
|
Fair Value
|
|
March 31, 2016
|
|
|
|
|
Balance at June 30, 2015
|
|
$
|
-
|
|
Warrant liability acquired in reverse merger
|
|
|
1,066,000
|
|
Change in fair value
|
|
|
340,000
|
|
Balance at March 31, 2016
|
|
$
|
1,406,000
|
|
The Company’s
assets and liabilities subject to recurring fair value measurements as of March 31, 2016 are as follows:
The warrant liability
represents the fair value of the warrants issued by the Company that have reset features. The Company is required to revalue the
warrant liability at the end of each reporting period and record a non-cash gain or loss in the statement of operations for the
change in the fair value of the warrant liability in the period in which the change occurs. The fair value of the warrant liability
is estimated using an adjusted Black-Scholes model and the applicable level 1 and level 2 inputs and an unobservable level 3 input
regarding the likelihood of a reset occurring. Since the Company uses a level 3 input, the warrant liability in included in the
level 3 category in the table above. Estimating fair value requires the input of highly subjective assumptions and because changes
in such assumptions can materially affect the fair value estimate, in management’s opinion, the existing models may not provide
a reliable single measure of the fair value of the related assets or liabilities.
For the three and nine
months ended March 31, 2016, the Company recorded non-cash losses of $340,000 in other expense for the change in fair value of
the warrant liability.
Other expense consists
of the following:
|
|
Three Months Ended
March 31,
|
|
|
Nine Months Ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charitable contributions – Related Party – Note 16
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(1,015,750
|
)
|
Interest income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,615
|
|
Interest expense
|
|
|
(93,734
|
)
|
|
|
(4,654
|
)
|
|
|
(93,734
|
)
|
|
|
(10,716
|
)
|
Loss on equity method investment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(71,955
|
)
|
Gain on sale of equipment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
52,381
|
|
Write-off of notes receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(92,000
|
)
|
Change in fair value of warrant liability
|
|
|
(340,000
|
)
|
|
|
-
|
|
|
|
(340,000
|
)
|
|
|
-
|
|
Other income (expense)
|
|
|
(25,710
|
)
|
|
|
-
|
|
|
|
(16,618
|
)
|
|
|
18
|
|
Total other expense, net
|
|
$
|
(459,444
|
)
|
|
$
|
(4,654
|
)
|
|
$
|
(450,352
|
)
|
|
$
|
(1,135,407
|
)
|
|
15.
|
Commitments and Contingencies
|
A vendor served a summons
and complaint against the Company seeking to recover alleged amounts due. The caption of the litigation is Eurotech, Inc. vs. Authentidate
Holding Corp. and the venue is Circuit Court of Howard County, State of Maryland, Case N. 13-C-15105926. Plaintiff has alleged
breach of contract and equitable relief. On June 28, 2016, the case was settled for $325,000.
AUTHENTIDATE HOLDING CORP.
AND SUBSIDIARIES
Notes to Condensed Consolidated
Financial Statements (Unaudited)
We are also subject
to claims and litigation arising in the ordinary course of business. Our management considers that any liability from any reasonably
foreseeable disposition of such claims and litigation, individually or in the aggregate, would not have a material adverse effect
on our consolidated financial position, results of operations or cash flows.
A legal complaint was
filed by a former independent contractor who was involved in sales and marketing of the Company’s products and services.
In the complaint, the plaintiff alleged certain commissions had not been paid in full and were due under a collective agreement.
The Company believes that the contractor was overpaid and has asserted a counter claim for reimbursement of such overpayments.
The Company and its legal counsel intend to vigorously defend the claim and pursue the counterclaim and is not made any assertion
to the eventual outcome. The Company believes the resolution of this matter will not have a material effect on its financial position,
result of operations or liquidity. As of March 31, 2016 there has been no resolution to this case.
The Company filed a
complaint in the state of Georgia against a former salesperson and an independent competitor for solicitation of a certain
customer list. The complaint alleges that the defendant used Company property including the customer list in an improper
and illegal manner. The complaint is pending. The Company believes the resolution of this matter will not have a material effect
on its financial statements.
In connection with
the termination of the Company’s employment relationship with certain executives, the Company is presently reviewing its
severance obligations to them and the vesting and other post-termination provisions. The Company believes that it has accrued all
related severance costs as of March 31, 2016 related to the past terminations. Although there is some discussion between past executives
regarding severance, the Company believes the resolution of these matters will not have a material effect on its financial statements.
We have entered into
various agreements by which we may be obligated to indemnify the other party with respect to certain matters. Generally, these
indemnification provisions are included in contracts arising in the normal course of business under which we customarily agree
to hold the indemnified party harmless against losses arising from a breach of representations related to such matters as intellectual
property rights. Payments by us under such indemnification clauses are generally conditioned on the other party making a claim.
Such claims are generally subject to challenge by us and to dispute resolution procedures specified in the particular contract.
Further, our obligations under these arrangements may be limited in terms of time and/or amount and, in some instances, we may
have recourse against third parties for certain payments made by us. It is not possible to predict the maximum potential amount
of future payments under these indemnification agreements due to the conditional nature of our obligations and the unique facts
of each particular agreement. Historically, we have not made any payments under these agreements that have been material individually
or in the aggregate. As of March 31, 2016, we are not aware of any obligations under such indemnification agreements that would
require material payments.
|
16.
|
Related Party Transactions
|
The Company leases
their office building and warehouse from a board member and shareholder of the Company. The lease commenced in April 2014 and was
amended in January 2016. Related party rent expense amounted to approximately $132,000 and $288,000 for the three and nine months
ended March 31, 2016, respectively, and was $78,000 and $234,000 for the three and nine months ended March 31, 2015, respectively.
The Company holds certain
notes payables with shareholders and affiliates of board members of the Company, as described in Note 8.
During the nine months
ended March 31, 2015, the Company made charitable deduction to a related party foundation in the amount of approximately $1,016,000.
The foundation is managed by the former members of AEON. No contributions were made to the foundation by the Company during the
nine months ended March 31, 2016.
AUTHENTIDATE
HOLDING CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
The Company is operated
as two segments: laboratory testing services (legacy AEON’s services), and web-based software and related products and offerings
(legacy AHC products). Laboratory testing services includes the testing of an individual’s blood, urine or saliva for the
presence of drugs or chemicals and the patient’s DNA profile.
Web-based software and
related products and offerings provide secure web-based revenue cycle management applications and telehealth products and services
that enable healthcare organizations to increase revenues, improve productivity, reduce costs, coordinate care for patients and
enhance related administrative and clinical workflows and compliance with regulatory requirements. Our web-based services are delivered
as Software as a Service (SaaS) to our customers interfacing seamlessly with billing, information and document management systems.
Currently,
management runs each segment separately and measures profitability and operational performance based on the financial records
independently
maintained by two separate systems.
Selected
financial information related to the Company’s segments is presented below (in thousands):
|
|
Three
Months Ended
|
|
|
|
March
31, 2016
|
|
|
March
31, 2015
|
|
|
|
Laboratory
testing services
|
|
|
Web-based
software
|
|
|
Total
|
|
|
Laboratory
testing services
|
|
|
Web-based
software
|
|
|
Total
|
|
Net assets
|
|
$
|
8,191
|
|
|
$
|
35,503
|
|
|
$
|
43,694
|
|
|
$
|
5,399
|
|
|
$
|
-
|
|
|
$
|
5,399
|
|
Net revenue
|
|
$
|
7,357
|
|
|
$
|
259
|
|
|
$
|
7,616
|
|
|
$
|
4,802
|
|
|
$
|
-
|
|
|
$
|
4,802
|
|
Cost of revenues
|
|
|
2,133
|
|
|
|
134
|
|
|
|
2,267
|
|
|
|
1,112
|
|
|
|
-
|
|
|
|
1,112
|
|
Other operating expenses
|
|
|
3,488
|
|
|
|
610
|
|
|
|
4,098
|
|
|
|
1,655
|
|
|
|
-
|
|
|
|
1,655
|
|
Depreciation and amortization
|
|
|
304
|
|
|
|
96
|
|
|
|
400
|
|
|
|
333
|
|
|
|
-
|
|
|
|
333
|
|
Other expenses
|
|
|
-
|
|
|
|
(459
|
)
|
|
|
(459
|
)
|
|
|
5
|
|
|
|
-
|
|
|
|
5
|
|
Income tax expense
|
|
|
436
|
|
|
|
1
|
|
|
|
437
|
|
|
|
6
|
|
|
|
-
|
|
|
|
6
|
|
Net income (loss)
|
|
$
|
996
|
|
|
$
|
(1,040
|
)
|
|
$
|
(45
|
)
|
|
$
|
1,691
|
|
|
$
|
-
|
|
|
$
|
1,691
|
|
|
|
Nine
Months Ended
|
|
|
|
March
31, 2016
|
|
|
March
31, 2015
|
|
|
|
Laboratory
Testing services
|
|
|
Web-based
software
|
|
|
Total
|
|
|
Laboratory
testing services
|
|
|
Web-based
software
|
|
|
Total
|
|
Net assets
|
|
$
|
8,191
|
|
|
$
|
35,503
|
|
|
$
|
43,694
|
|
|
$
|
5,399
|
|
|
$
|
-
|
|
|
$
|
5,399
|
|
Net revenue
|
|
$
|
29,954
|
|
|
$
|
259
|
|
|
$
|
30,214
|
|
|
$
|
17,826
|
|
|
$
|
-
|
|
|
$
|
17,826
|
|
Cost of revenues
|
|
|
5,199
|
|
|
|
134
|
|
|
|
5,333
|
|
|
|
3,356
|
|
|
|
-
|
|
|
|
3,356
|
|
Other operating expenses
|
|
|
13,483
|
|
|
|
610
|
|
|
|
14,093
|
|
|
|
5,644
|
|
|
|
-
|
|
|
|
5,644
|
|
Depreciation and amortization
|
|
|
780
|
|
|
|
96
|
|
|
|
876
|
|
|
|
536
|
|
|
|
-
|
|
|
|
535
|
|
Other expenses (income)
|
|
|
(9
|
)
|
|
|
459
|
|
|
|
450
|
|
|
|
1,135
|
|
|
|
-
|
|
|
|
1,135
|
|
Income tax expense
|
|
|
428
|
|
|
|
1
|
|
|
|
429
|
|
|
|
18
|
|
|
|
-
|
|
|
|
18
|
|
Net income (loss)
|
|
$
|
10,073
|
|
|
$
|
(1,040
|
)
|
|
$
|
9,033
|
|
|
$
|
7,138
|
|
|
$
|
-
|
|
|
$
|
7,138
|
|
On July 11, 2016,
at the Special Meeting of Stockholders (the “Special Meeting”) of the Company, the Company’s shareholders approved,
among other things, (i) the issuance of shares of Common Stock in connection with earn-out payments that may become payable in
the future to former members of AEON, (ii) an amendment to the Company’s certificate of incorporation, as amended, to change
its name to “Aeon Global Health Corp.” and (iii) an amendment to the Authentidate Holding Corp. 2011 Omnibus Equity
Incentive Plan to increase the number of shares of the Company’s common stock authorized for issuance thereunder by 1,000,000
shares.
As a result of the
approval of the issuance of shares of common stock in connection with earn-out payments that may become payable in the future to
former members of AEON, by the stockholders of the Company at the Special Meeting, the Company issued to the former members of
AEON an aggregate of 240,711 shares of common stock.
AUTHENTIDATE
HOLDING CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
The Company anticipates
that it will effectuate the name change to “Aeon Global Health” shortly after the filing of this report.
On August 7, 2016,
the employment of Richard Hersperger, Chief Executive Officer of the Company, terminated. In connection therewith, the Company
and Mr. Hersperger anticipate entering into a separation agreement. Mr. Hersperger will remain a member of the board
of directors of the Company.
Hanif (“Sonny”)
Roshan, the Company’s current Chairman, assumed the position of Chief Executive Officer on August 7, 2016.