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
|
1.
|
Description of Business, Reverse Merger and Liquidity
|
Business
Authentidate Holding Corp.
(“AHC”) and its subsidiaries primarily provides an array of clinical testing services to health care professionals
through its wholly-owned subsidiary, Peachstate Health Management, LLC d/b/a AEON Clinical Laboratories (“AEON”). AHC
also continues to provide its legacy 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 patents and
enhance related administrative and clinical workflows and compliance with regulatory requirements. Web-based services are delivered
as Software as a Service (SaaS) to customers interfacing seamlessly with billing, information and records management systems.
Reverse Merger
On January 27, 2016, 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 and December 15, 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. 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.
Going Concern
The Company’s capital
requirements have been and will continue to be significant and it is expending significant amounts of capital to develop, promote
and market its services. The Company’s available cash and cash equivalents as of September 30, 2017 totaled approximately
$734,000 and the Company’s working capital deficit was approximately $6,791,000. Nevertheless, our available cash and cash
equivalents as of the filing date of this Quarterly Report on Form 10-Q is approximately $278,000 and our estimated monthly cash
requirement is approximately $1,300,000.
As of the filing date of
this Quarterly Report on Form 10-Q, there is outstanding an aggregate principal amount of $2,545,199 of related party senior secured
convertible notes with a maturity date of March 20, 2018, plus the remaining principal amount of $240,000 of a subordinated secured
note, as of September 30, 2017, issued to the Company’s former CFO, which matures June 15, 2018 and is included in accrued
expenses on the condensed consolidated balance sheet. Although no guarantee can be given, management anticipates that it will be
able to extend or otherwise modify the Company’s obligations under the related party notes for an additional period or periods.
Based on these factors, the Company expects its existing resources, revenues generated from operations, and proceeds received from
other transactions being considered (of which there can be no assurance) will be sufficient to satisfy the Company’s working
capital requirements for at least the next twelve months. These factors, among others, raise substantial doubt about the Company’s
ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments
to the recoverability and classification of assets carrying amounts or the amounts and classifications of liabilities that might
result from the outcome of these uncertainties. Accordingly, we need to raise additional capital and are exploring potential transactions
to improve our capital position. Unless we are able to increase revenues substantially or generate additional capital from other
transactions, our current cash resources will only satisfy our working capital needs for a limited period of time. If necessary,
the Company believes that it can reduce operating expenses and/or raise additional debt financing to satisfy its working capital
requirements. No assurances can be given that the Company will be able to support its costs or pay debt obligations through revenues
derived from operations or generate sufficient cash flow to satisfy its obligations.
Authentidate Holding Corp.
Notes to Condensed Consolidated Financial Statements
We are exploring
potential transactions to improve our capital position to ensure we can meet our financing and working capital requirements.
We would expect to raise additional funds through obtaining a credit facility from an institutional lender or undertaking
private debt financings. Raising additional funds by issuing equity or convertible debt securities may cause our stockholders
to experience substantial dilution in their ownership interests and new investors may have rights superior to the rights of
our other stockholders. Raising additional funds through debt financing or preferred stock, if available, may involve
covenants that restrict our business activities and options and such additional securities may have powers, designations,
preferences or rights senior to our currently outstanding securities. We may also enter into financing transactions which
involve the granting of liens on our assets or which grant preferences of payment from our revenue streams, all of which
could adversely impact our ability to rely on our revenue from operations to support our ongoing operating costs.
Alternatively, we may seek to obtain new financing from existing security holders, which may include reducing the exercise or
conversion prices of outstanding securities, or the issuance of additional equity securities. Currently, the Company does not
have any definitive agreements with any third parties for such transactions and there can be no assurance that we will be
successful in raising additional capital or securing financing when needed or on terms satisfactory to the Company. If we are
unable to raise additional capital when required, or on acceptable terms, we will need to reduce costs and operations
substantially or potentially suspend operations, any of which would have a material adverse effect on our business, financial
condition and results of operations. Our future capital requirements will depend on, and could increase substantially as a
result of many factors including (i) our need to utilize cash to support research and development activities and to
make incremental investments in our organization; (ii) our ability to achieve targeted revenue, gross profit margins and cost
management objectives; (iii) the success of our sales and marketing efforts; (iv) our need to repay indebtedness; (v) the
extent and terms of any development, marketing or other arrangements; and (vi) changes in economic, regulatory or
reimbursement rates or claim adjudication processes.
|
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 (“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 interim 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, 2018 or any other
interim period or for any other future year. These unaudited condensed consolidated financial statements should be read in conjunction
with the Company’s audited consolidated financial statements and the notes thereto for the year ended June 30, 2017, included
in the Company’s 2017 Annual Report on Form 10-K filed with the SEC.
Principles of Consolidation
The condensed consolidated
financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany accounts and transactions
have been eliminated in consolidation.
Use of Estimates
The preparation of condensed
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 condensed consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.
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, commitments and contingencies and measurement of derivative liabilities.
Accounts Receivable, Net
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 $887,000 and $923,000 as of September 30, 2017 and June 30, 2017, respectively.
Fair Value Measurements
The Company follows ASC
820-10, “
Fair Value Measurements and Disclosures
”, of the FASB to measure the fair value of its financial statements
and disclosures about fair value of its financial instruments. ASC 820-10 establishes a framework for measuring fair value in accounting
principles generally accepted in the United States of America (U.S. GAAP), and expands disclosures about fair value measurements.
To increase consistency and comparability in fair value measurements and related disclosures, ASC 820-10 establishes a fair value
hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The three levels
of fair value hierarchy defined by ASC 820-10 are described below:
Authentidate Holding Corp.
Notes to Condensed Consolidated Financial Statements
|
Level 1
|
Quoted market prices available in active markets for identical
assets or liabilities as of the reporting date.
|
|
Level 2
|
Pricing inputs other than quoted prices in active markets
included in Level 1, which are either directly or indirectly observable as of the reporting date.
|
|
Level 3
|
Pricing inputs that are generally unobservable input and
not corroborated by market data.
|
The fair value hierarchy
gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lower priority
to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within more than one level described
above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
The Company’s warrant liabilities and certain conversion features underlying the convertible debt are categorized as Level
3.
Revenue Recognition
The Company provides laboratory
testing services, web-based hosted software services, telehealth products and post contract customer support services.
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. Billings for laboratory testing services are reimbursed by third-party payors net of
allowances for differences between amounts billed and the cash receipts from such payors.
Revenue from laboratory
testing services are recognized 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 the following criteria are met: (i) the delivered item has value to the customer on a standalone
basis; (ii) there is objective and reliable evidence of the fair value of the undelivered items in the arrangement; (iii) if the
arrangement includes a general right of return relative to the delivered items; (iv) and delivery or performance of the undelivered
item is considered probable and substantially in the Company’s 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.
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 September 30, 2017 and June 30, 2017, the Company had approximately $484,000
and $871,000 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.
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 that require recognition or disclosure in the accompanying consolidated financial statements.
Authentidate Holding Corp.
Notes to Condensed Consolidated Financial Statements
Reclassification
Certain prior year amounts
have been reclassified to conform to the current year presentation.
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. While the Company does not believe that this ASU will have a material impact on the consolidated financial
results of the Company, we understand it will require increased qualitative and quantitative disclosure about the nature, amount,
timing and uncertainty arising from contracts with customers. The Company is still evaluating the impact of this ASU and expects
to adopt this ASU effective July 1, 2018.
In August 2014, the FASB
issued ASU No. 2014-15, “
Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”.
The amendments in this update state that regarding preparing financial statements for each annual and interim reporting period,
an entity’s management should evaluate whether there are conditions or events that raise substantial doubt about the entity’s
ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year
after the date that the financial statements are available to be issued, when applicable). The amendments in this update are effective
for the annual reporting period beginning after December 15, 2016 and for annual periods and interim periods thereafter. Early
application is permitted. The Company has adopted ASU 2014-15 and has made the necessary disclosures in the “Going Concern”
sections of this Quarterly Report on Form 10-Q.
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 has determined that the ASU has no material impact on its consolidated financial statements and related disclosures
since it does not sell inventory on a stand-alone basis at net realizable value.
In January 2016, the FASB
issued ASU 2016-01,
“Financial Instruments (Subtopic 825-10): Recognition and Measurements of Financial Assets and Financial
Liabilities.”
ASU 2016-01 provides guidance on the recognition and measurement of financial assets and financial liabilities.
This ASU requires that all equity investments (except those accounted for under the equity method of accounting or those that result
in consolidation of the investee) be measured at fair value with changes in fair value recognized in net income. However, companies
may elect to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus
or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the
same issuer. In addition, the ASU eliminates the requirement to disclose the method and significant assumptions used to estimate
the fair value for financial instruments measured at amortized cost on the balance sheet. The ASU is effective for the Company
in the first quarter of 2018. The Company has determined that the ASU has no material impact on its consolidated financial statements
and related disclosures since it does not have equity investments.
In February 2016, the FASB
issued ASU No. 2016-02, “
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. The Company is currently evaluating the effect
of adoption of this ASU on July 1, 2019.
In March 2016, the FASB
issued 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 has not had stock compensation exercises since the reverse merger; therefore, the ASU is not applicable until exercises
occur. The Company plans to implement this ASU when such exercises occur.
Authentidate Holding Corp.
Notes to Condensed Consolidated Financial Statements
In August 2016, the FASB
issued ASU No. 2016-15, “
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,”
which clarifies how certain cash receipts and payments are to be presented in the statement of cash flows. The guidance is effective
for the Company on July 1, 2018 and early adoption is permitted. The Company is currently evaluating the effect of adoption of
this ASU on July 1, 2018.
In November 2016, the FASB
issued an ASU 2016-18,
“Restricted Cash”
, which clarifies the presentation and classification of restricted
cash in the statement of cash flows. The ASU requires that amounts generally described as restricted cash and restricted cash equivalents
be presented with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the
statement of cash flows. The ASU is effective for the Company in the first quarter of 2018 with early adoption permitted and must
be applied retrospectively to all periods presented. The Company is evaluating the impact this ASU will have on its consolidated
financial statements and related disclosures with the fiscal year beginning July 1, 2018.
|
3.
|
Restatement and Correction of Error
|
In the fourth quarter of
the year ended June 30, 2017, the Company concluded that its results for the quarter ending September 30, 2016 included errors
resulting in the understatement of inventory and the understatement of certain accruals. The financial statements for the quarter
has been restated. Management considered the impact to current and past financial statements under the SEC’s authoritative
guidance on materiality and determined that the error was material, and a restatement of the prior quarter financial statements
was the most appropriate recognition of the adjustment so as not to mislead readers of the financial statements. The following
sections detail the impact of the error on the previously issued unaudited consolidated financial statements for the prior quarter.
Authentidate Holding Corp.
Notes to Condensed Consolidated Financial Statements
The following adjustments
were made to the September 30, 2016 Restated Statement of Income (Unaudited):
AUTHENTIDATE HOLDING CORP.
CONSOLIDATED STATEMENT OF INCOME
|
|
As Originally
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
|
|
|
As Restated
|
|
|
|
Three Months
|
|
|
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
|
|
|
Ended
|
|
|
|
Sept 30,
|
|
|
|
|
|
Sept 30,
|
|
|
|
2016
|
|
|
Adj
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees for services
|
|
$
|
5,691,296
|
|
|
$
|
-
|
|
|
$
|
5,691,296
|
|
Hosted software services
|
|
|
346,934
|
|
|
|
-
|
|
|
|
346,934
|
|
Telehealth services
|
|
|
11,845
|
|
|
|
-
|
|
|
|
11,845
|
|
Total net revenues
|
|
|
6,050,075
|
|
|
|
-
|
|
|
|
6,050,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
1,166,996
|
|
|
|
(160,500
|
)
|
|
|
1,006,496
|
|
Write-down of inventory
|
|
|
237,674
|
|
|
|
-
|
|
|
|
237,674
|
|
Selling, general and administrative
|
|
|
3,582,001
|
|
|
|
|
|
|
|
3,582,001
|
|
Depreciation and amortization
|
|
|
408,663
|
|
|
|
-
|
|
|
|
408,663
|
|
Total operating expenses
|
|
|
5,395,334
|
|
|
|
(160,500
|
)
|
|
|
5,234,834
|
|
Operating income
|
|
|
654,741
|
|
|
|
160,500
|
|
|
|
815,241
|
|
Other expense, net
|
|
|
764,812
|
|
|
|
-
|
|
|
|
764,812
|
|
Income before provision for income taxes
|
|
|
(110,071
|
)
|
|
|
160,500
|
|
|
|
50,429
|
|
Income tax benefit
|
|
|
45,404
|
|
|
|
-
|
|
|
|
45,404
|
|
Net income
|
|
$
|
(64,667
|
)
|
|
$
|
160,500
|
|
|
$
|
95,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
(0.03
|
)
|
|
$
|
0.03
|
|
|
$
|
0.00
|
|
Diluted earnings per common share
|
|
$
|
(0.03
|
)
|
|
$
|
0.03
|
|
|
$
|
0.00
|
|
Authentidate Holding Corp.
Notes to Condensed Consolidated Financial Statements
The following adjustments
were made to the September 30, 2016 Restated Statement of Cash Flows (Unaudited):
AUTHENTIDATE HOLDING CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
|
|
As Originally
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
|
|
|
As Restated
|
|
|
|
Three Months
|
|
|
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
|
|
|
Ended
|
|
|
|
Sept 30,
|
|
|
|
|
|
Sept 30,
|
|
|
|
2016
|
|
|
Adj
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
(64,667
|
)
|
|
$
|
160,500
|
|
|
$
|
95,833
|
|
Adjustments to reconcile net income to cash provided by operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Write off of inventory
|
|
|
237,674
|
|
|
|
-
|
|
|
|
237,674
|
|
Loss on debt extinguishment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Change in fair value of derivative liabilities
|
|
|
486,219
|
|
|
|
-
|
|
|
|
486,219
|
|
Deferred taxes
|
|
|
(45,404
|
)
|
|
|
-
|
|
|
|
(45,404
|
)
|
Depreciation and amortization
|
|
|
402,574
|
|
|
|
-
|
|
|
|
402,574
|
|
Share based compensation
|
|
|
89,526
|
|
|
|
-
|
|
|
|
89,526
|
|
Deferred rent
|
|
|
(19,682
|
)
|
|
|
-
|
|
|
|
(19,682
|
)
|
Changes in assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(424,904
|
)
|
|
|
-
|
|
|
|
(424,904
|
)
|
Inventory
|
|
|
15,832
|
|
|
|
(160,500
|
)
|
|
|
(144,668
|
)
|
Prepaid expenses and other current assets
|
|
|
(34,380
|
)
|
|
|
-
|
|
|
|
(34,380
|
)
|
Accounts payable
|
|
|
(190,810
|
)
|
|
|
-
|
|
|
|
(190,810
|
)
|
Accrued expenses
|
|
|
(541,908
|
)
|
|
|
-
|
|
|
|
(541,908
|
)
|
Accrued commissions
|
|
|
(183,659
|
)
|
|
|
-
|
|
|
|
(183,659
|
)
|
Deferred rent
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net cash provided by (used by) operating activities
|
|
|
(273,589
|
)
|
|
|
-
|
|
|
|
(273,589
|
)
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(15,449
|
)
|
|
|
-
|
|
|
|
(15,449
|
)
|
Net cash used in investing activities
|
|
|
(15,449
|
)
|
|
|
-
|
|
|
|
(15,449
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from note payable - related party
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Repayment of notes payable
|
|
|
(525,000
|
)
|
|
|
-
|
|
|
|
(525,000
|
)
|
Net cash used in financing activities
|
|
|
(525,000
|
)
|
|
|
-
|
|
|
|
(525,000
|
)
|
Net decrease in cash and cash equivalents
|
|
|
(814,038
|
)
|
|
|
-
|
|
|
|
(814,038
|
)
|
Cash and cash equivalents beginning of year
|
|
|
1,414,706
|
|
|
|
-
|
|
|
|
1,414,706
|
|
Cash and cash equivalents end of year
|
|
$
|
600,668
|
|
|
$
|
-
|
|
|
$
|
600,668
|
|
Authentidate Holding Corp.
Notes to Condensed Consolidated Financial Statements
Inventory consists of the following:
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2017
|
|
|
|
|
|
|
|
|
Laboratory testing supplies
|
|
$
|
377,610
|
|
|
$
|
347,750
|
|
Total inventory
|
|
$
|
377,610
|
|
|
$
|
347,750
|
|
Purchased components of approximately $31,000
and finished goods of $207,000 were written down in the three months ended September 30, 2016 to net realizable value.
The Company’s effective
tax rate for the quarter ended September 30, 2017 and 2016 was 0.0% and 40.2%, respectively. For the quarter ended September 30,
2017, the Company recorded a full valuation allowance with respect to the increase of its deferred tax assets, primarily due to
losses incurred for the quarter. The valuation allowance was recorded due to negative evidence of the Company’s recent years’
history of losses. For the quarter ended September 30, 2016, the Company calculated income tax expense based upon an annual effect
tax rate forecast. The differences between the effective tax rate and the U.S. federal statutory tax rate of 35% principally resulted
from state and local taxes, graduated federal tax rate reductions, changes in the valuation allowance and non-deductible expenses.
At September 30, 2017,
the Company had a net deferred tax asset of approximately $11,848,000. Management has considered the realizability of the deferred
tax assets and has concluded that a valuation allowance of approximately $26,800,000 should be recorded, related to net operating
loss carryforwards that are not anticipated to be realized. Management determined that a valuation allowance was required with
respect to the remaining net deferred tax assets. Realization of these assets is primarily dependent on achieving the forecast
of future taxable income, as well as prudent and feasible tax planning strategies.
Authentidate Holding Corp.
Notes to Condensed Consolidated Financial Statements
|
6.
|
Related
Party Notes Payable
|
|
|
September 30, 2017
|
|
|
|
June 30, 2017
|
|
|
Note
|
|
|
Interest rate
|
|
|
|
Note
|
|
|
Interest rate
|
|
|
Payable
|
|
|
per annum
|
|
|
|
Payable
|
|
|
per annum
|
Secured
|
|
|
|
|
|
|
|
Secured
|
|
|
|
|
|
|
|
|
$
|
1,056,875
|
|
|
5% interest paid annually
|
|
|
|
$
|
1,056,875
|
|
|
5% interest paid annually
|
|
|
|
641,294
|
|
|
5% interest paid annually
|
|
|
|
|
641,294
|
|
|
5% interest paid annually
|
|
|
|
255,417
|
|
|
5% interest paid annually
|
|
|
|
|
255,417
|
|
|
5% interest paid annually
|
|
|
|
591,613
|
|
|
5% interest paid annually
|
|
|
|
|
591,613
|
|
|
5% interest paid annually
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,545,199
|
|
|
|
|
Total
|
|
$
|
2,545,199
|
|
|
|
Secured
At
June 30, 2016, the Company had outstanding a convertible note payable in the aggregate principal amount of $950,000. The note was
convertible into shares of common stock at an initial conversion price of $2.25 per share, subject to adjustment. This note had
a maturity date of December 17, 2016. Based on the initial conversion price, the note was 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 would be decreased to equal 85% of such lower price. This note accrued interest at 9% per annum with interest payable
upon maturity or on any earlier redemption date. As described in greater detail below under the caption “Exchange Transaction”,
on March 20, 2017, this note was exchanged for a new promissory note in the aggregate principal amount of $1,056,875. The new note
matures twelve months following such extension date and interest accrues on the principal amount of the new note at the rate of
5% per annum. The new note is secured by a lien on all the Company’s assets and is convertible at the initial conversion
price of $2.03 per share.
At
June 30, 2016, the Company had outstanding a promissory note in the aggregate principal amount of $320,000. The note was due and
payable on April 15, 2016 and interest accrued on the note at the rate of 10% per annum. The note was secured by a first
priority lien on certain of AHC assets, as described in a security agreement entered between the Company and the purchaser. The
note was convertible into shares of common stock of the Company at an initial conversion price of $4.86 per share. The note was
issued to an affiliate of J. David Luce, a former member of the board of directors. On September 1, 2016, the Company entered into
an amendment agreement which extended the maturity date to December 1, 2016 at an interest rate of 5% per annum. 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 closing bid price of the Company’s
common stock immediately prior to the execution of the amendment agreement. Based on the modified conversion price, the principal
amount of the note was convertible into 106,667 shares of common stock. As described in greater detail below under the caption
“Exchange Transaction”, on March 20, 2017,
this note was combined with the $200,000
unsecured note held by the same entity and was exchanged for a new promissory note in the aggregate principal amount of $641,294.
The new note matures twelve months following such extension date and interest accrues on the principal amount of the new
note at the rate of 5% per annum. The new note is secured by a lien on all of the Company’s assets and is convertible at
the initial conversion price of $2.03 per share.
Unsecured
At June 30, 2016, the Company
had outstanding a promissory note in the aggregate principal amount of $200,000, held by an entity affiliated with J. David Luce,
a former member of the board of directors. The notes accrued interest at the rate of 20% per annum, payable in arrears, and
was 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. On September 1, 2016, the note 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 was convertible into up to 173,333 shares of common stock. In March 2017, this
note was combined with the $320,000 secured note held by the same entity and exchanged for a new promissory note in the aggregate
principal amount of $641,294. The new note matures twelve months following such extension date and interest accrues on the principal
amount of the new note at the rate of 5% per annum. The new note is secured by a lien on all of the Company’s assets and
is convertible at the initial conversion price of $2.03 per share. Additional terms and conditions of the new note are described
in greater below under the caption “Exchange Transaction”.
Authentidate Holding Corp.
Notes to Condensed Consolidated Financial Statements
At June 30, 2016, the Company
had a promissory note in the aggregate principal amount of $450,000 to Optimum Ventures, LLC, a related party of Peachstate Health
Management, LLC, through common ownership. The note was unsecured and was not convertible into equity securities of the Company.
The note accrued interest at the rate of 20% per annum, payable in arrears, and was 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. As described in greater detail below under the caption “Exchange Transaction”, on March 20, 2017,
this note was exchanged for a new promissory note in the aggregate principal amount of $591,613. The new note matures twelve months
following such extension date and interest accrues on the principal amount of the new note at the rate of 5% per annum. The new
note is secured by a lien on all of the Company’s assets and is convertible at the initial conversion price of $2.03 per
share.
Effective
as of January 31, 2017, the Company accepted a short-term loan in the aggregate principal amount of $250,000 from Hanif A. Roshan,
the Company’s Chief Executive Officer and Chairman of the Board. To evidence the loan, the Company issued Mr. Roshan a promissory
note (the “Note”) in the aggregate principal amount of $250,000. The Note was an unsecured obligation of the Company
and was not convertible into equity securities of the Company. The Note was due and payable on the 30-day anniversary of the issue
date and interest accrued on the Note at the rate of 12% per annum. The Note was exchanged for a new secured convertible note
in the exchange transaction described below under the caption “Exchange Transaction”.
Exchange Transaction
On March 20, 2017, the
Company entered into a note exchange agreement with the holders of an aggregate principal amount of $2,170,000 of outstanding promissory
notes (the “Original Notes”), which were due and payable, pursuant to which the Company agreed to issue the holders
of such notes, in consideration of the cancellation of the Original Notes, new promissory notes in the aggregate principal amount
of $2,545,199, which is equal to the sum of the aggregate principal amount of the Original Notes plus the accrued but unpaid interest
on the Original Notes (the “New Notes”). The New Notes are convertible into shares of the Company’s common stock
at an initial conversion price of $2.03 per share. Based on the initial conversion prices, the New Notes will be convertible into
up to 1,253,792 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. The
conversion price is also subject to adjustment upon stock splits, reverse stock splits, and similar capital changes. These conversion
options resulted in a derivative liability valued at $328,422. All the New Notes have a maturity date of one year from the closing
date. The New Notes were issued in consideration of the exchange of (i) an aggregate principal amount of $950,000 of Original Notes
convertible at a price of $2.25 per share, (ii) an aggregate principal amount of $520,000 of Original Notes convertible at a price
of $3.00 per share, and (iii) an aggregate principal amount of $700,000 of unconvertible Original Notes.
During the year ended June
30, 2017, in connection with the exchange of the Original Notes for the New Notes,
the Company also
agreed with the holder of all outstanding shares of Series B Convertible Preferred Stock (the “Series B Preferred Stock”)
to exchange all of its outstanding shares of Series B Preferred Stock for shares of a new series of convertible preferred stock
designated as Series E Convertible Preferred Stock (the “Series E Preferred Stock”). Accordingly, on March 20, 2017,
the Company also entered into a separate exchange agreement with the holder of the shares of Series B Preferred Stock, to exchange
such shares for a total of 25,000 shares of Series E Preferred Stock. Each share of Series E Preferred Stock will have a stated
value of $30.00 per share. Pursuant to this exchange agreement, the holder of the shares of Series B Preferred Stock agreed to
waive all unpaid dividends that had accrued on the shares of Series B Preferred Stock. The shares of Series E Preferred Stock are
initially convertible by the holder into an aggregate of 187,500 shares of common stock at the initial conversion rate of $4.00
per share. The conversion price of the new preferred stock is subject to adjustment solely in the event of stock dividends, combinations,
splits, recapitalizations, and similar corporate events. The right of holders of Series E Preferred Stock to convert these securities
into common stock is subject to a 4.99% beneficial ownership limitation, which beneficial ownership limitation may be increased
by a holder to a greater percentage not more than 9.99% after providing notice to the Company.
The New Notes bear interest
at the rate of 5% per annum with interest payable upon maturity, the conversion of the New Notes or on any earlier redemption date.
Beginning one month after the Company’s common stock is listed for trading on a national securities exchange, and Company
will have the right to redeem all or any portion of the outstanding principal balance of the New Notes, plus all accrued but unpaid
interest at a price equal to 110% of such amount. The holders of the New Notes shall have the right to convert any or the entire
amount to be redeemed into common stock prior to redemption. Subject to certain exceptions, the New Notes contain customary covenants
against incurring additional indebtedness and granting additional liens and contain customary event default. Upon the occurrence
of an event of default under the New Notes, the holders may require the Company to repay all or a portion of the note in cash,
at a price equal to 110% of the principal, plus accrued and unpaid interest.
Authentidate Holding Corp.
Notes to Condensed Consolidated Financial Statements
Loss
on Extinguishment of Debt
In
accordance with ASC 470-50, “
Debt – Modifications and Extinguishments
”, the Company’s note exchange
agreement was tested to determine whether a debt modification or debt extinguishment had occurred. Based on management’s
review, debt extinguishment accounting applied. A loss on extinguishment of $258,037 resulted from the exchange, and was recorded
in fiscal year 2017. No expense was incurred in the quarter ended September 30, 2017. The loss consists of the resulting derivative
liability of $328,422 from embedded conversion options in the New Notes and the additional value of $50,000 of the Series E Preferred
Stock compared to the Series B Preferred Stock, offset by the waiving of the unpaid Preferred Series B dividends of $120,385.
Preferred Stock
As of September 30, 2017,
there were 25,000 shares of Series E Convertible Preferred Stock outstanding. The shares of Series E Preferred Stock are initially
convertible into an aggregate of 187,500 shares of common stock at the initial conversion rate of $4.00 per share. The conversion
price of the Series E Preferred Stock will be subject to adjustment solely in the event of stock dividends, combinations, splits,
recapitalizations, and similar corporate events and does not provide for general price-based anti-dilution adjustments. Each share
of Series E Preferred Stock has a stated value of $30.00 per share and has the following rights and preferences: (i) each
holder of the Series E Preferred Stock has the right, at any time, to convert the shares of Series E Preferred Stock into shares
of common stock, (ii) the Series E Preferred Stock is redeemable at the Company’s option commencing one year after
the original issuance date, provided that the Company’s common stock is listed on a national securities exchange at such
time, and (iii) the Series E Preferred Stock will pay dividends at the rate of 5% per annum in cash. The shares of Series
E Preferred Stock were issued in a transaction with the holder of the Company’s previously outstanding shares of Series
B Preferred Stock to exchange the shares of Series B Preferred Stock for the shares of Series E Preferred Stock. Pursuant to the
exchange agreement for the preferred stock, the holder of the shares of Series B Preferred Stock agreed to waive all unpaid dividends
that had accrued on the shares of Series B Preferred Stock. At September 30, 2017, the Company has accrued dividends of approximately
$20,000 on the Series E Preferred Stock which remain unpaid.
As of September 30, 2017,
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 619,154 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, although 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 September 30, 2017, the Company has accrued dividends
in the amount of approximately $711,000 on the Series D Preferred Stock, which remain unpaid.
The Company’s preferred
stock takes precedence over Common Stock but ranks below debt in the event of liquidation. In addition, the Series D Convertible
Preferred Stock ranks above the Series E Convertible Preferred Stock.
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 ended September 30, 2017, our ordinary share equivalents
consisted of stock options, restricted stock units, convertible debt, preferred stock and warrants.
Authentidate Holding Corp.
Notes to Condensed Consolidated Financial Statements
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Basic earnings (loss) per share
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,126,523
|
)
|
|
$
|
95,833
|
|
Preferred stock dividends
|
|
|
(84,550
|
)
|
|
|
(100,624
|
)
|
Net income (loss) available to common shareholders after preferred stock dividends
|
|
$
|
(1,211,073
|
)
|
|
$
|
(4,791
|
)
|
Weighted average shares used in the computation of basic earnings per share
|
|
|
7,249,370
|
|
|
|
5,772,258
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share - basic
|
|
$
|
(0.17
|
)
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
Dilutive earnings (loss) per share
|
|
|
|
|
|
|
|
|
Income (loss) available to common shareholders
|
|
$
|
(1,211,073
|
)
|
|
$
|
(4,791
|
)
|
Weighted average shares used in the computation of diluted earnings per share
|
|
|
7,249,370
|
|
|
|
5,772,258
|
|
Dilutive effect of options, warrants, convertible debt and convertible preferred stock
|
|
|
-
|
|
|
|
-
|
|
Shares used in the computation of diluted earnings (loss) per share
|
|
|
7,249,370
|
|
|
|
5,772,258
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share - diluted
|
|
$
|
(0.17
|
)
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
Anti-Dilutive Options Excluded
|
|
|
1,253,793
|
|
|
|
5,354,203
|
|
Common Stock Warrants
A schedule of common stock
warrant activity for the three months ended September 30, 2017 is as follows:
Warrant Activity
|
|
Number of Shares
|
|
|
Weighted Average
Exercise Price per
Share
|
|
|
Weighted Average
Remaining
Contractual Life
(Years)
|
|
|
Aggregate Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding June 30, 2017
|
|
|
4,150,535
|
|
|
$
|
4.67
|
|
|
|
3.87
|
|
|
$
|
42,582
|
|
Issued
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
|
|
Outstanding September 30, 2017
|
|
|
4,150,535
|
|
|
$
|
4.67
|
|
|
|
3.13
|
|
|
$
|
-
|
|
Exercisable, September 30, 2017
|
|
|
4,094,979
|
|
|
$
|
4.56
|
|
|
|
3.16
|
|
|
$
|
-
|
|
Authentidate Holding Corp.
Notes to Condensed Consolidated Financial Statements
|
8.
|
Share-Based
Compensation
|
Stock option activity under
the Company’s stock option plans for employees and non-executive directors for the three months ended September 30, 2017
is as follows:
Employee Option Activity
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Average
Remaining
Contractual
Life (Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding June 30, 2017
|
|
|
226,902
|
|
|
|
9.04
|
|
|
|
6.34
|
|
|
$
|
-
|
|
Granted
|
|
|
50,000
|
|
|
|
2.00
|
|
|
|
9.95
|
|
|
|
-
|
|
Expired/Forfeited
|
|
|
(5,556
|
)
|
|
|
24.48
|
|
|
|
-
|
|
|
|
|
|
Outstanding September 30, 2017
|
|
|
271,346
|
|
|
|
9.58
|
|
|
|
7.00
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable September 30, 2017
|
|
|
149,917
|
|
|
|
11.94
|
|
|
|
4.99
|
|
|
$
|
-
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
Non-Executive Option Activity
|
|
Options
|
|
|
Price
|
|
|
Life (Years)
|
|
|
Value
|
|
Outstanding June 30, 2017
|
|
|
602,311
|
|
|
|
3.57
|
|
|
|
6.11
|
|
|
$
|
-
|
|
Granted
|
|
|
45,555
|
|
|
|
1.59
|
|
|
|
9.97
|
|
|
|
-
|
|
Expired/forfeited
|
|
|
(35,901
|
)
|
|
|
4.01
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding and exercisable September 30, 2017
|
|
|
611,965
|
|
|
|
3.40
|
|
|
|
7.58
|
|
|
$
|
-
|
|
Restricted stock unit activity
under the Company’s restricted stock unit plans for employees and non-executive directors for the three months ended September
30, 2017 is as follows:
Employees Information
|
|
Number of
RSUs
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
|
|
|
|
|
|
Outstanding June 30, 2017
|
|
|
411,429
|
|
|
$
|
1.75
|
|
Granted
|
|
|
25,000
|
|
|
|
2.00
|
|
Expired/Forfeited
|
|
|
-
|
|
|
|
-
|
|
Outstanding September 30, 2017
|
|
|
436,429
|
|
|
|
1.76
|
|
Authentidate Holding Corp.
Notes to Condensed Consolidated Financial Statements
|
9.
|
Fair
Value Measurements and Other Financial Instruments
|
The carrying amounts of
the Company’s financial assets and liabilities, such as cash, accounts receivable, inventory, prepaid expenses, and other
current assets, accounts payable and accrued expenses approximate their fair values because of the short maturity of these instruments.
In connection with the
issuance of a convertible promissory note as discussed in Note 6, the Company evaluated the note agreement to determine if the
agreement contained any embedded components that would qualify the agreement as a derivative. The Company identified certain put
features embedded in the convertible note agreement that potentially could result in a settlement in the event of a fundamental
transaction, requiring the Company to classify the conversion feature as a derivative liability.
The Company’s Level
3 financial liabilities consist of the derivative conversion features of underlying convertible debt and warrants issued in 2011
to 2015. The Company valued the conversion features using the Black Scholes model prior to the three months ended September 30,
2016 and the Monte Carlo model for all periods thereafter. These models incorporate transaction details such as the Company’s
stock price, contractual terms maturity, risk free rates and volatility as of the date of issuance and each balance sheet date.
The decrease in the value of the conversion feature of the convertible debt and warrants issued was primarily due to the decrease
in the stock price during 2017 compared with prior years.
The Company utilized the
following assumptions in valuing the derivative conversion features:
Exercise Price
|
$2.07
|
Risk free interest rate
|
1.56%-2.00%
|
Expected volatility
|
50%
|
Remaining Term
|
2.69-5.82 years
|
Fair Value of Financial Assets and Liabilities
Measured on a Recurring Basis
The fair value of AHC financial
instruments, using the fair value hierarchy under U.S. GAAP detailed in “Fair Value Measurements” in Note 2, “Summary
of Significant Accounting Policies and Recently Issued Accounting Standards,” of the Notes to the Condensed Consolidated
Financial Statements are included in the table below.
The Company uses Level
3 of the fair value hierarchy to measure the fair value of the derivative liabilities and revalues its derivative liabilities at
every reporting period and recognizes gains and losses in the statement of operations that are attributable to the change in the
fair value of the derivative liabilities.
The following tables provide
a summary of the changes in fair value, including net transfers in and/or out, of all financial assets / (liabilities) measured
at the fair value on a recurring basis using significant unobservable inputs during the quarter ended September 30, 2017.
Authentidate Holding Corp.
Notes to Condensed Consolidated Financial Statements
|
|
|
|
|
Convertible
|
|
|
|
|
|
|
Warrants
|
|
|
Notes
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Balance - June 30, 2017
|
|
$
|
435,036
|
|
|
$
|
116,004
|
|
|
$
|
551,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of derivative liabilities
|
|
|
(29,718
|
)
|
|
|
(43,573
|
)
|
|
|
(73,291
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - September 30, 2017
|
|
$
|
405,318
|
|
|
$
|
72,431
|
|
|
$
|
477,749
|
|
|
|
Fair
|
|
|
|
|
|
|
|
|
|
|
|
|
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017 derivative liabilities
|
|
$
|
551,040
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
551,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017 derivative liabilities
|
|
$
|
477,749
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
477,749
|
|
Derivative Instruments
For the quarter ended September
30, 2017, the Company recorded non-cash income of approximately $73,000 in other income (expenses) for the changes in fair value
of the derivative liabilities.
|
10.
|
Commitments
and Contingencies
|
A complaint was filed by
a former independent contractor in the State of Louisiana who was involved in the sales and marketing of the Company’s products
and services. The caption of the case is Medlogic, LLC and Malena F. Badon Vs. Peachstate Health Management, LLC., Pyarali Roy,
and Universal. Plaintiff alleges certain commissions had not been paid in full. The Company believes the contractor was overpaid
and has asserted a counter claim and has asserted and has asserted a counter claim for reimbursement of such overpayments. The
Company intends to vigorously defend the claim and pursue the counter claim. The parties have completed initial discovery and the
matter remains pending. The Company believes the resolution of this matter will not have a material effect on its financial statements.
Regarding the termination
of the Company’s employment relationship with certain executives, including the former Chief Executive Officer (“CEO”)
and Chief Financial Officer (“CFO”) of AHC, the Company has been reviewing its severance obligations to them and the
vesting of other post-termination provisions. The Company believes that it has accrued all related severance costs as of September
30, 2017 related to the past terminations.
The former CEO of AHC commenced
arbitration proceedings against AHC before the American Arbitration Association (“AAA”). A demand for arbitration was
filed with the AAA on or about June 22, 2016 by the former CEO, O’Connell Benjamin, requesting payment of severance compensation
of $341,620 and other benefits, including the vesting of certain stock option awards, pursuant to an employment agreement. The
parties have opted to pursue mediation in their attempt to resolve the matter, and a mediation session was held on October 30,
2017. The Company believes that it has valid defenses to Mr. Benjamin’s claims and intends to defend this matter accordingly.
On August 24, 2017, the
Company commenced suit against Mr. Richard G. Hersperger, a former company director and officer, to recover 38,321 shares of common
stock and to obtain declaratory relief terminating all further obligations to Mr. Hersperger. The case was filed in the Superior
Court of Hall Country, State of Georgia under the caption
Authentidate Holding Corp. and Peachstate Health Management, LLC d/b/a
Aeon Clinical Laboratories v. Richard G. Hersperger,
Case No. 2017-CV-1686-B. The complaint also seeks damages based on common
law fraud and breach of fiduciary duty. Relating to his resignation from the Company’s board of directors, Mr. Hersperger
threatened to commence litigation against us and certain of our directors. In the event Mr. Hersperger does commence any legal
proceedings, the Company believes that it will have numerous valid defenses to any claims and will vigorously contest any such
claims.
Authentidate Holding Corp.
Notes to Condensed Consolidated Financial Statements
The Company is a defendant
in an action captioned
Cogmedix, Inc. v. Authentidate Holding Corp.
in the Superior Court of Worcester County, Commonwealth
of Massachusetts, Case No. 1685CV01318B. Suit was filed on September 6, 2016 alleging the principal amount of $227,061 remains
outstanding on a purchase order dated December 6, 2013. Management believes that this matter will not have a material adverse effect
on financial position, results of operations, or cash flows. Nevertheless, this matter is the subject of further negotiations.
On May 3, 2017, the Company
received notice from the Office for Civil Rights (“OCR”) of the U.S. Department of Health and Human Services (“HHS”)
informing the Company that the OCR is conducting a review of the Company’s compliance with applicable Federal Standards for
Privacy of Individually Identifiable Health Information and/or Security Standards for the Protection of Electronic Protected Health
Information. The OCR is the division of HHS charged with enforcing the Health Insurance Portability and Accountability Act of 1996,
as amended (“HIPAA”), and the privacy, security and data breach rules which implement HIPAA (“HIPAA Rules”).
The OCR reviewed the Company’s premises and conducted interviews on May 23, 2017. The OCR may, among other things, require
a corrective action, issue penalties, or reach a monetary settlement. The Company continues to work on a resolution with the OCR.
The Company does not expect a material adverse determination on its consolidated financial position, results of operations and
cash flows.
The Company is the plaintiff
in a case captioned
Peachstate Health Management, LLC d/b/a Aeon Clinical Laboratories v. Radius Foundation, Inc. and William
Bramlett, Ph.D.,
filed on June 13, 2017 in the State Court of Hall County, State of Georgia. On October 10, 2017, Plaintiff
filed a motion for default judgment requesting an order of judgment in the principal amount of $116,650. The Court has since requested
additional information from the Company relating to details of the parties’ business relationship which the Company is in
the process to providing in order to secure an Order for Default Judgment.
The Company is the plaintiff
in a case captioned Peachstate Health Management, LLC d/b/a Aeon Clinical Laboratories v. Trimana, LLC d/b/a Via Medical Center
filed on April 29, 2016 in the State Court of Hall County, State of Georgia. Service of the Summons and Complaint was perfected
upon the Defendant on October 11, 2017, and an Answer is due to be filed by the Defendant on or before November 10, 2017. The Company’s
Complaint seeks $104,442 along with interest and attorney fees.
The Company is also subject
to claims and litigation arising in the ordinary course of business. 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 the consolidated financial position, results of operations or cash flows.
The Company has entered
into various agreements by which it 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 the Company under such indemnification clauses are generally conditioned on the other party making
a claim. Such claims are generally subject to challenge by the Company and to dispute resolution procedures specified in the particular
contract. Further, obligations under these arrangements may be limited in terms of time and/or amount and, the Company may have
recourse against third parties for certain payments made by the Company. It is not possible to predict the maximum potential amount
of future payments under these indemnification agreements due to their conditional nature and the unique facts of each particular
agreement. Historically, the Company has not made any payments under these agreements that have been material individually or in
the aggregate. As of September 30, 2017, the Company is not aware of any obligations under such indemnification agreements that
would require material payments.
|
11.
|
Related Party Transactions
|
Except as disclosed herein,
the Company has not entered into any material transactions or series of similar transactions with any director, executive officer
or any security holder owning 5% or more of common stock since July 1, 2016.
AEON leases its facilities
from Centennial Properties of Georgia, LLC under a lease agreement commencing April 2014, as amended January 20, 2016. The lease
provides for a term of 12 years expiring March 2032. The lease payments range from $46,500 to a maximum of $60,000. In connection
with the lease agreement, as security for its rent and other obligations under the lease, AEON has provided to the landlord a first
priority lien and security interest in substantially all its assets. The landlord under the lease is Centennial Properties of Georgia,
LLC a Georgia limited liability company. Centennial is owned by Sonny Roshan, Shawn Desai, Pyarali Roy and Sohail Ali, all of whom
were AEON members and received common stock in Authentidate as a result of the Acquisition. Mr. Roshan serves as the Chairman and
CEO of Authentidate. Mr. Desai is the Chief Technology Officer of AEON. Mr. Roy is the Chief Strategy Officer of AEON. Related
party rent expense for the three months ending September 30, 2017 and 2016 was $144,000 and $139,500, respectively.
Authentidate Holding Corp.
Notes to Condensed Consolidated Financial Statements
The Company holds certain
related party notes payable with shareholders and affiliates of board members of the Company, as detailed in Note 6. Interest expense
relating to these notes amounted to approximately $32,000 and $87,000 for the three months ended September 30, 2017 and 2016, respectively.
Effective as of January
31, 2017, the Company accepted a short-term loan in the aggregate principal amount of $250,000 from Hanif A. Roshan, the Company’s
Chief Executive Officer and Chairman of the Board. To evidence the loan, the Company issued Mr. Roshan a promissory note (the “Note”)
in the aggregate principal amount of $250,000. The Note was an unsecured obligation of the Company, and was note convertible into
equity securities of the Company. The Note was due and payable on the 30-day anniversary of the issue date and interest accrued
on the Note at the rate of 12% annum. The Note was exchanged for a new secured convertible note in the exchange transaction described
above in Note 6 under the caption “Exchange Transaction”.
AHC entered into a lease
agreement with Hanif A. (“Sonny”) Roshan (the “landlord”) for a residential premises at 5455 Golf View
Drive, Braselton, Georgia 30517 for a term of one year beginning on January 1, 2017 and ending on December 31, 2017 for a fixed
rent in monthly installments of $7,500 due and payable by the first day of each month. The lease is renewable with a 3% increase
in rent for each renewal. The tenant is responsible for utilities and insurance with the landlord responsible for maintenance and
taxes on the premises. Rent expense for this premises was $22,500 for the quarter ended September 30, 2017.
The Company is operated
as two segments: laboratory testing services (AEON), and web-based software (AHC). 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 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. Management currently 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:
|
|
Authentidate
|
|
|
AEON
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Three Months ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
247,670
|
|
|
$
|
3,110,383
|
|
|
$
|
3,358,052
|
|
Cost of revenues
|
|
|
55,127
|
|
|
|
1,073,449.18
|
|
|
|
1,128,576
|
|
Operating expenses
|
|
|
873,385
|
|
|
|
3,618,988
|
|
|
|
4,492,373
|
|
Operating loss
|
|
|
(625,715
|
)
|
|
|
(508,606
|
)
|
|
|
(1,134,321
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
358,779
|
|
|
$
|
5,691,296
|
|
|
$
|
6,050,075
|
|
Cost of revenues
|
|
|
63,784
|
|
|
|
942,712
|
|
|
|
1,006,496
|
|
Operating expenses
|
|
|
597,282
|
|
|
|
4,637,552
|
|
|
|
5,234,834
|
|
Operating income (loss)
|
|
|
(302,286
|
)
|
|
|
1,117,527
|
|
|
|
815,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
12,156,978
|
|
|
$
|
3,695,243
|
|
|
$
|
15,852,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
11,772,874
|
|
|
$
|
4,958,804
|
|
|
$
|
16,731,678
|
|