10-Q 1 y57348e10-q.txt AUTHENTIDATE HOLDING CORP SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE ----- SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: DECEMBER 31, 2001 ------------------ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF ----- THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------- --------------- Commission File No. 0-20190 AUTHENTIDATE HOLDING CORP. -------------------------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) Delaware 14-1673067 -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S.Employer incorporation or organization) Identification No.) 2165 Technology Dr., Schenectady, NY, 12308 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (518) 346-7799 ----------------------------- -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report. Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- 16,365,424 shares of Common Stock, par value $.001 per share, were outstanding at February 5, 2002. Page 1 of 19 AUTHENTIDATE HOLDING CORP. FORM 10-Q INDEX
PAGE NO. -------- PART I FINANCIAL INFORMATION Item 1 - Financial Statements Consolidated Balance Sheets - December 31, 2001 and June 30, 2001 3 Consolidated Statements of Operations - Six and three months ended December 31, 2001 and December 31, 2000 5 Consolidated Statements of Cash Flows - Six months ended December 31, 2001 and December 31, 2000 6 Notes to Consolidated Financial Statements 7 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 16 PART II OTHER INFORMATION Item 1 - Legal Proceedings 17 Item 4 - Submission of Matters to a Vote of Security Holders 17 Item 5 - Other Information 18 Item 6 Reports on Form 8-K and exhibits 18 Safe Harbor Statement 18 Signatures 19
Page 2 of 19 PART I FINANCIAL INFORMATION AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (unaudited except for the June 30, 2001 balance sheet)
ASSETS December 31, June 30, 2001 2001 ----------- ----------- Current Assets: Cash and cash equivalents $ 3,971,312 $ 9,040,466 Accounts receivable, net of allowance for doubtful accounts of $532,231 at Dec. 31, 2001 and $532,241 at June 30, 2001 2,572,663 3,574,728 Due from related parties 80,467 14,825 Inventories: Finished goods 371,457 279,489 Purchased components & raw material 508,996 520,915 Prepaid expenses and other current assets 150,048 94,006 Note receivable 122,287 ----------- ----------- Total current assets 7,777,230 13,524,429 Property and equipment, net 3,605,315 3,562,372 Other assets: Software development costs, net 1,472,780 1,905,613 Excess of cost over net assets of acquired companies, net 5,156,136 5,276,136 Investment in affiliated companies 1,023,924 1,440,854 Patent costs, net 232,132 86,422 Note receivable 227,713 Due from Authentidate AG 500,000 Other assets 91,238 72,079 ----------- ----------- Total assets $20,086,468 $25,867,905 =========== ===========
See accompanying notes to the consolidated financial statements. Page 3 of 19 AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (unaudited except for the June 30, 2001 balance sheet)
LIABILITIES AND SHAREHOLDERS' EQUITY December 31, June 30, 2001 2001 ----------- ----------- Current liabilities: Accounts payable $ 1,516,334 $ 2,765,606 Accrued expenses and other liabilities 1,274,464 1,200,770 Current portion of long-term debt 29,515 32,926 Current portion of obligations under capital leases 17,716 4,970 Income taxes payable 11,416 633 ----------- ----------- Total current liabilities 2,849,445 4,004,905 Long-term debt, net of current portion 1,304,801 1,317,515 Deferred grant 1,000,000 1,000,000 Obligations under capital leases, net of current portion 33,993 7,653 ----------- ----------- Total liabilities 5,188,239 6,330,073 ----------- ----------- Commitments and contingencies Shareholders' equity: Preferred stock - $.10 par value, 5,000,000 shares authorized: Series A - 100 shares issued and outstanding 10 10 Series B - 38,000 shares issued and outstanding at Dec. 31, 2001 and 48,000 at June 30, 2001 3,800 4,800 Series C - 5,500 shares issued and outstanding 550 550 Common stock - $.001 par value; 40,000,000 shares authorized; shares issued and outstanding: 16,265,426 at December 31, 2001 and 16,114,093 at June 30, 2000 16,265 16,114 Additional paid-in capital 52,376,546 51,634,783 Accumulated deficit (37,009,355) (31,283,665) ----------- ----------- 15,387,816 20,372,592 Other equity (489,587) (834,760) ----------- ----------- Total shareholders' equity 14,898,229 19,537,832 ----------- ----------- Total liabilities and shareholders' equity $20,086,468 $25,867,905 =========== ===========
See accompanying notes to the consolidated financial statements. Page 4 of 19 AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For the 3 months ended For the 6 months ended December 31, December 31, December 31, December 31, 2001 2000 2001 2000 ----------- ----------- ----------- ----------- Net sales $ 4,131,286 $ 4,034,523 $ 7,394,789 $ 8,518,002 Cost of goods sold (note 1) 2,687,474 2,866,331 4,711,235 6,042,633 ----------- ----------- ----------- ----------- Gross profit 1,443,812 1,168,192 2,683,554 2,475,369 Selling, general and administrative expenses 2,755,773 2,487,974 5,469,492 4,834,389 Product development costs 783,733 334,022 1,701,607 963,812 ----------- ----------- ----------- ----------- Operating loss (2,095,694) (1,653,804) (4,487,545) (3,322,832) Other income (expense): Interest expense (27,983) (33,369) (56,167) (61,797) Interest and other income 36,254 121,220 100,872 243,280 Equity in net loss of affiliated companies (183,378) (43,563) (436,931) (43,563) ----------- ----------- ----------- ----------- Loss before income taxes (2,270,801) (1,609,516) (4,879,771) (3,184,912) Income tax expense 6,000 13,500 6,000 14,000 ----------- ----------- ----------- ----------- Net loss before minority interest (2,276,801) (1,623,016) (4,885,771) (3,198,912) Minority interest 53,846 53,846 ----------- ----------- ----------- ----------- Net loss $(2,222,955) $(1,623,016) $(4,831,925) $(3,198,912) =========== =========== =========== =========== Per share amounts basic and diluted: Net loss per common share ($ 0.16) ($ 0.11) ($ 0.35) ($ 0.22) =========== =========== =========== =========== note 1: Cost of sales excludes amortization of software development costs of: $ 252,000 $ 61,000 $ 520,000 $ 231,000
See accompanying notes to the consolidated financial statements. Page 5 of 19 AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited)
For the 6 months ended December 31, December 31, 2001 2000 ----------- ----------- Cash flows from operating activities: Net loss ($ 4,831,925) ($ 3,198,912) Adjustments to reconcile net loss to net cash provided by/(used in) operating activities: Depreciation and amortization 763,403 509,469 Provision for doubtful accounts 66,934 64,090 Non cash stock compensation 345,174 Non cash S,G&A expense 24,168 Equity in net loss of affiliates 416,930 43,563 Changes in operating assets and liabilities: Accounts receivable and other receivables 869,489 905 Inventories (80,049) 670,134 Prepaid expenses and other current assets (56,044) 440,585 Accounts payable and other current liabilities (1,285,578) 1,064,551 Income taxes 10,783 13,900 ----------- ----------- Net cash provided by/(used in) operating activities (3,780,883) (367,547) ----------- ----------- Cash flows from investing activities: Property, plant and equipment expenditures (279,406) (360,798) Software development costs (87,579) (1,037,899) Other intangible assets (51,397) (37,232) Note receivable (350,000) Due from Authentidate AG (500,000) ----------- ----------- Net cash used in investing activities (1,268,382) (1,435,929) ----------- ----------- Cash flows from financing activities: Principle payments on long-term debt (16,125) (14,852) Capital leases, net 39,086 14,518 Payment of registration costs (42,793) (17,105) Exercise of warrants and options 52,207 684,270 Preferred stock dividends (52,264) (62,500) ----------- ----------- Net cash provided by/(used in) financing activities (19,889) 604,331 ----------- ----------- Net increase/(decrease) in cash and cash equivalents (5,069,154) (1,199,145) Cash and cash equivalents, beginning of year 9,040,466 7,965,496 ----------- ----------- Cash and cash equivalents, end of period $ 3,971,312 $ 6,766,351 =========== ===========
See accompanying notes to the consolidated financial statements. Page 6 of 19 AUTHENTIDATE HOLDING CORP. ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. In the opinion of management the accompanying unaudited consolidated financial statements contain all adjustments, consisting of only normal, recurring adjustments, necessary for fair presentation have been included. The consolidated financial statements include the accounts of Authentidate Holding Corp. (AHC) and its subsidiaries DJS Marketing Group, Inc. (DJS), Authentidate, Inc. and Trac Medical Systems, Inc., and are referred to as the Company. 2. In the fiscal year ended June 30, 2001, the Company issued 917,608 shares of AHC common stock to acquire approximately 25% of the outstanding shares not owned by AHC of Authentidate, Inc. and as of December 31, 2001 owns approximately 98% of Authentidate, Inc. The acquisition of the minority interest was accounted for under the purchase method of accounting. 3. During the fiscal year ended June 30, 2000 the Company formed a new subsidiary, Authentidate, Inc., to provide security software services. Authentidate, Inc. has developed a product which allows users to verify the authenticity of digital documents and images by imbedding an unalterable date and time stamp into digital images. Using this software technology a customer can prove content as well as date and time authenticity of any digital document. The Company expects the Authentidate service to be used for various business applications such as sending notarized email and proving authenticity of digital documents such as contracts, human resource records, medical records and numerous other electronic documents. Sales commenced during the current fiscal year. The Company has also organized a joint venture company known as Authentidate Sports, Inc. (Sports f/k/a Authentidate Sports Edition) with Internet Venture Capital LLC, to develop a service using the Authentidate software to focus on the sports collectibles market and offer a service to prove authenticity of sports memorabilia. Sports is in the process of developing their market. The Company formed another subsidiary, Trac Medical Solutions, Inc., to utilize the Authentidate technology in the medical supplies business during the fiscal year ended June 30, 2001. This Company is in the software development stage. The Company also formed a joint venture known as Authentidate International Holdings, AG (AG), with a German partner in Europe to develop and market the Authentidate service in Europe and parts of Asia. This Company is in the market development stage. All of these businesses are related and involved in the authentication software services business. 4. The results of operations for the six and three months ended December 31, 2001 are not necessarily indicative of the results to be expected for the full year. 5. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these consolidated financial statements be read in conjunction with the annual consolidated financial statements and notes thereto included in the Company's Form 10-K for the fiscal year ended June 30, 2001. 6. During the six months ended December 31, 2001; 18,000 common stock options were exercised. Page 7 of 19 7. The following represents the reconciliation of the basic and diluted loss per share amounts for the six and three months ended December 31, 2001 and 2000.
December 31, ------------ Six Month Ended Three Months Ended ---------------- ------------------ 2001 2000 2001 2000 ---- ---- ---- ---- Net income/(loss) ($ 4,831,925) ($ 3,198,912) ($ 2,222,955) ($ 1,623,016) Preferred stock dividends (893,764) (62,500) (444,139) (31,250) ------------------------------------------------------------------------- Loss applicable to common shareholders ($ 5,725,689) ($ 3,261,412) ($ 2,667,094) ($ 1,654,266) Weighted average shares 16,233,670 14,787,759 16,261,785 14,825,778 Basic and diluted EPS ($ .35) ($ .22) ($ .16) ($ .11)
The impact of options, warrants and convertible notes was antidilutive to the calculation of basic and dilutive loss per share and were accordingly excluded from the calculation. The preferred stock dividends for the six and three months ended December 31, 2001 includes amortization of the beneficial conversion feature of Series C Preferred Stock approximating $731,500 and $366,250, respectively. 8. The Company's reportable segments are separate divisions and distinct businesses which are managed separately. Included in the All Other column are operations of Authentidate, as well as Trac Medical which was insignificant, which are both in the authentication software services business. DocStar is in the document imaging software business and DJS is in the systems integration business. DocStar sells through a national network of dealers (approximately 100) and anticipates the addition of several new dealers each quarter to expand into markets not currently served. DJS's market is primarily in the Albany, New York region. Authentidate and Trac Med expect to sell their products and services on a national basis using a direct sales model. The Corporate expenses are non-operating expenses which include all public company type activities and apply to all of the Company's operating divisions and therefore should be segregated.
SEGMENT INFORMATION FOR THE SIX MONTHS ENDED: DECEMBER 31, 2001: DocStar DJS All Other Totals ------------------ ------- --- --------- ------ Revenues from external customers $ 3,290,113 $ 4,079,432 $ 25,244 $ 7,394,789 Intersegment revenues 35,449 35,449 Segment profit/(loss) 135,165 62,808 (2,449,804) (2,251,831) DECEMBER 31, 2000: Revenues from external customers $ 3,198,806 $ 5,318,638 $ 558 $ 8,518,002 Intersegment revenues 225,746 225,746 Segment profit/(loss) (31,254) 209,660 (1,932,400) (1,753,994)
RECONCILIATION: December 31, 2001 December. 31, 2000 Total revenues from segments $ 7,430,238 $ 8,743,748 Elimination of intersegment revenues (35,449) (225,746) ----------- ----------- Total consolidated revenues $ 7,394,789 $ 8,518,002 =========== =========== Total pre-tax loss of segments ($ 2,251,831) ($ 1,753,994) Product development expenses (1,701,607) (963,812) Corporate expenses (939,760) (463,227) Elimination of intersegment profits 13,427 (3,879) ----------- ----------- Loss before income taxes ($ 4,879,771) ($ 3,184,912) =========== ===========
Page 8 of 19 9. The components of Other Equity include non-cash compensation expense to be amortized over the next three months ($172,587) and a secured loan to a shareholder/officer ($317,000). 10. There's a three month delay in recording the results of operations from the Company's European joint venture Authentidate AG (AG). So AG's results for the quarter ending September 30, 2001 are included in the December 31, 2001 consolidated financial statements. The delay is due to the fact that AG subcontracts certain accounting functions and because of certain translation issues. The Company owns 39% of AG and records net income or loss on the equity basis and the delay is not material to the Company's consolidated financial statements. 11. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The Company adopted SFAS No. 133 on July 1, 2001. Since the Company has not yet entered into any derivative instruments, the adoption of this standard has not had a material effect on the Company's financial condition, results of operations or cash flows Effective July 1, 2001, the Company adopted SFAS 141 and SFAS 142. SFAS 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting. It also specifies the types of acquired intangible assets that are required to be recognized and reported separate from goodwill. SFAS 142 requires that goodwill and certain intangibles no longer be amortized, but instead tested for impairment at least annually. There was no impairment of goodwill nor was there any change in useful lives of intangible assets upon adoption of SFAS 142. During the first half of fiscal 2002, no goodwill was acquired, impaired or written off. The changes in the carrying amount of goodwill for the quarter ended December 31, 2001, are as follows:
DJS Authentidate Total Balance June 30, 2001 $ 1,173,665 $ 4,102,471 $ 5,276,136 Reclass to patents based on valuation (120,000) (120,000) ----------- ----------- ----------- Balance December 31, 2001 $ 1,173,665 $ 3,982,471 $ 5,156,136
Amortization expense of goodwill totaled $0 and $40,644 for the six months ended December 31, 2001 and 2000, respectively and had no effect on basic or diluted loss per share. The DJS segment has achieved operating results which are consistent with prior periods. The Authentidate segment is a new segment with a limited operating history. Based on forecasts and expectations, the Company does not believe there is an impairment issue at this point in time with regard to Authentidate and will continue to review this issue each quarter. Intangible asset amortization expense for the six months ended December 31, 2001 was $6,804.
June 30, 2001 December 31, 2001 ------------------------------------ ------------------------------------- Gross Carrying Accumulated Gross Carrying Accumulated Amount Amortization Amount Amortization Patents $95,885 $ (9,463) $246,458 $(14,326) Trademarks 77,945 (10,313) 99,044 (12,254)
Page 9 of 19 No significant residual value is estimated for these intangible assets. Patent and trademark amortization expense is expected to be immaterial the remainder of fiscal 2002 as well as 2003, 2004, 2005 and 2006. 12. During the six months ended December 31, 2001 the Company incurred a net loss of $4,831,925. Cash used in operating activities totaled $3,780,883 for the six months ended December 31, 2001 compared to $1,391,651 used in operating activities for the year ended June 30, 2001. The Company's cash balance decreased from $9,040,466 to $3,971,312 from June 30, 2001 to December 31, 2001. To date the Company has been largely dependent on its ability to sell additional shares of its common stock to obtain financing to fund its operating deficits. Under its current operating plan to introduce the new Authentidate technology, the Company's ability to improve operating cash flow is highly dependent on the market acceptance of its products and the Company's ability to reduce overhead costs. Authentidate and it's related businesses, Trac Med, AG and Sports are currently cash flow negative and along with Corporate operations were responsible for the negative cash flow from operations for the six months ended December 31, 2001. If the Company is unable to attain projected sales levels for Authentidate and related products, or is unable to implement cost reduction strategies, it may be necessary to raise additional capital to fund operations and meet its obligations. There is no assurance that such funding will be available, if needed. 13. As described in our report on Form 10-K for the fiscal year ended June 30, 2001, we are involved in the following pending and threatened legal proceedings. We are the defendant in a third party complaint filed by Shore Venture Group, LLC in the Federal district court for the Eastern District of Pennsylvania. The third party complaint was filed on May 7, 2001. Shore Venture is the defendant to an action commenced by Berwyn Capital. The third party complaint alleges a claim of breach of contract and seeks indemnification. We moved to dismiss the third party complaint and the motion was recently denied by the Court. We are currently involved in settlement negotiations with Shore. Management believes that the claim will not have a material adverse impact on our financial condition, results of operations or cash flow. We have also been advised of a claim by Shore Venture Group concerning additional shares of Common Stock of our subsidiary, Authentidate, Inc. This claim is not before the Court in the third party litigation previously discussed. We are conducting settlement negotiations with Shore Venture and believe that a settlement will be reached and will not have a material adverse impact on our financial condition, results of operations or cash flow. The settlement negotiations are being held at this juncture in an effort to avoid resorting to litigation on this issue. We are engaged in no other litigation the effect of which would be anticipated to have a material adverse impact on our financial condition or results of operations. 14. No statement of comprehensive income has been included in the accompanying financial statements since the Company does not have any material amounts of comprehensive income to report. 15. New Accounting Standards Not Yet Adopted: In August 2001, the FASB issued SFAS No.143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires the fair value of a liability for an asset retirement obligation to be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The Company believes the adoption of this Statement will not have a material impact on its financial statements In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for the Long-Lived Assets to be Disposed of, and Page 10 of 19 the accounting and reporting provisions of APB No. 30. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposals of long-lived assets and is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The Company is currently reviewing this statement to determine its effect on the Company's financial statements. 16. On December 14, 2001, AHC announced that it entered into a letter of intent with the majority shareholders of Authentidate International, AG (AG), to purchase all the outstanding shares of common stock of AG not held by AHC. If the transaction is consummated, AG would become a wholly-owned subsidiary of AHC. The transaction contemplates that AHC will repurchase all of the outstanding shares of AG in exchange for a maximum of 1,500,000 shares of AHC common stock and warrants to purchase 100,000 shares of AHC common stock. The transaction is subject to various terms and conditions, including the completion of due diligence and the execution of a definitive agreement. Accordingly, there can be no assurance that the transaction will be consummated. The following information is extracted from the AG's unaudited financial information for the three months ended September 30, 2001: Current assets $ 616,957 Long-term assets (primarily fixed assets) 83,506 --------- Total assets $ 700,463 ========= Current liabilities $ 99,339 Long-term liabilities 72,957 Stockholders equity 528,167 --------- Total liabilities and stockholders equity $ 700,463 ========= Net sales $ 178,300 Net loss (280,751)
The collectibility of the $500,000 advance to AG will be dependent upon AG's ability to achieve profitability. There can be no assurances that AG will achieve profitability. On January 9, 2002, AHC announced that it has entered into a letter of intent to acquire the assets of Zylab International, Inc., a privately owned company based in Germantown, Maryland for shares of AHC common stock. The letter of intent contemplates that the purchase price will range between a minimum of 725,000 and a maximum of 1,000,000 shares of AHC common stock. The precise number of shares to be issued as the purchase price will be determined prior to closing. Pursuant to the letter of intent, AHC has loaned an aggregate principle amount of $500,000 as of February 5, 2002 (of which $350,000 was loaned as of December 31, 2001), which loan is collateralized by all of the assets of Zylab, including its intellectual property. The loan may be converted into 25% of the outstanding shares of Zylab at the option of the Company at any time. The acquisition is subject to various terms and conditions, including the completion of the due diligence investigation by AHC, the negotiation of a definitive agreement and the approval of the respective boards and Zylab's shareholders. Accordingly, there can be no assurance that the transaction will be consummated. The following information is extracted from the Zylab unaudited financial information for the five months ended November 30, 2001: Current assets $335,300 Long-term assets (primarily fixed assets) 68,900 -------- Total assets $404,200 ========
Page 11 of 19 Zylab-continued Current liabilities $ 1,114,400 Long-term liabilities 17,500 Stockholders deficit (727,700) ----------- Total liabilities and stockholders deficit $ 404,200 =========== Net sales $ 650,400 Net loss (21,500)
The collectibility of the $500,000 notes receivable from Zylab will be dependent upon Zylab's ability to achieve profitability and/or raise additional funds through an equity or debt financing. There can be no assurances that Zylab will achieve profitability or raise additional funds. 17. Included in sales the Company realized service sales of $798,760 and cost of service sales of $367,297 for the six months ended December 31, 2001. MANAGEMENT'S DISCUSSION AND ANALYSIS OF ITEM 2. FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company is involved in the sales and marketing of document imaging products (DocStar), systems integration services and products (DJS) and security software services (Authentidate and Trac Medical Solutions). Revenues during the current fiscal year have been derived primarily from DocStar and DJS. Our DocStar document imaging system enables users to scan paper documents and retrieve those documents electronically. Our computer integration services are carried out by DJS. As a systems integrator, DJS configures various computer hardware and software to meet the needs of business/organization customers. The Authentidate security software service is designed to accept and store a digital code used to prove authenticity of content, date and time via the Internet of any electronic document or image. Trac Medical uses the Authentidate service in the medical supply industry to assist in the processing of certificates of medical necessity. The following analysis of the financial condition and results of operations of the Company should be read in conjunction with the Company's consolidated financial statements and notes contained elsewhere in this Form 10-Q. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Company's discussion and analysis of its financial condition and results of operations are based on its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to new product launches, bad debts, inventory obsolescence, recoverability of equity investments, intangible assets, software capitalization and deferred tax assets and contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results for which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates under different assumptions. The Company believes the following critical accounting policies require more significant judgments and estimates used in the preparation of its consolidated financial statements. The Company maintains allowances for doubtful accounts for estimated Page 12 of 19 losses resulting from the inability of its customers to make required payments. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The Company loaned $500,000 to an unrelated company, Zylab International, Inc., (detailed in footnote 16) which has a working capital and shareholders' deficit. The collectibility of the loan will be dependent upon Zylab's ability to achieve profitability and/or raise additional funds through an equity or debt financing. There can be no assurances that Zylab will achieve profitability or raise additional funds. The Company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of the inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write downs may be required. The Company holds minority interests in companies having operations or technology in areas within its strategic focus, none of which are publicly traded. The Company monitors the financial condition and results of such companies; however, future adverse changes in market conditions or poor operating results of the underlying investments could result in losses or an inability to recover the carrying value, thereby possibly requiring an impairment charge in the future. The Company has capitalized software development costs related to a newly launched product (Authentidate) for which the recoverability of such capitalized costs is highly dependent on the future success of the marketing and sales of such product. If the product is not well received by the market place and the future revenue generated from such product launch is less than anticipated, the carrying value of the software development costs may be impaired and require an impairment charge in the future. RESULTS OF OPERATIONS THE SIX AND THREE MONTHS ENDED DECEMBER 31, 2001 COMPARED TO THE SIX AND THREE MONTHS ENDED DECEMBER 31, 2000. The Company realized a consolidated net loss of $4,831,925 ($.35 per share) and $2,222,955 ($.16 per share) for the six and three months ended December 31, 2001, respectively. This compares to a consolidated net loss of $3,198,912 ($.22 per share) and $1,623,016 ($.11 per share) for the six and three months ended December 31, 2000, respectively. As reported under Footnote 8 (Segment Information), the losses increased as a result of losses incurred primarily by the Company's Authentidate subsidiary. Authentidate, Inc. has incurred significant sales, marketing, development and general administrative expenses this year in an effort to generate sales. The Company's DocStar Division realized a segment profit for the six months ended December 31, 2001 in the amount of $135,165 which compares to a segment loss of $31,254 for the same period last year. The improvement is due to an increase in gross profit margins and also an increase in sales. The DJS subsidiary realized a segment profit of $62,808 compared to the prior year of $209,660. The Company had consolidated net sales of $7,394,789 and $4,131,286 for the six and three months ended December 31, 2001, respectively. This compares with consolidated net sales of $8,518,002 and $4,034,523 for the six and three months ended December 31, 2000, respectively. The major reason for the decrease was due to a reduction in sales in DJS (a decrease of $1,239,206) which realized fewer direct hardware sales but saw an increase in indirect sales where DJS earns a fee from the Page 13 of 19 computer hardware manufacturer or distributor. The increase in indirect sales however did not generate enough gross profit to offset the decrease in direct sales for the six months ended December 31, 2001 as gross profit decreased by $208,185 on a consolidated basis. DJS has seen a general decrease this fiscal year in demand for computer hardware across its market area due to recessionary pressures in it's market area. However, DJS has been able to remain profitable as a result of strong integration services revenue. DocStar sales increased by $91,307. DocStar launched a new version of it's software called Version 3.0 during the second quarter of the current fiscal year. As a result of this product launch sales increased by $392,143 in the second quarter compared to the first quarter and segment profit increased $215,251 in the second quarter compared to the first quarter. Authentidate did not have significant sales during the six months ended December 31, 2001. Consolidated gross profit for the six and three months ended December 31, 2001 was $2,683,554 and $1,443,812, respectively compared to $2,475,369 and $1,168,192 for the same periods last year. The increases on a year to year basis and also on a quarter to quarter basis is due to DocStar and its new 3.0 software product line. The consolidated gross profit margin was 36.3% and 34.9% for the six and three months ended December 31, 2001, respectively. The consolidated gross profit margin was 29.1% and 29% for the six and three months ended December 31, 2000, respectively. Both DocStar and DJS realized an improvement of profit margins this year compared to last year. DocStar's gross profit margin was 54.1% and DJS's gross profit margin was 24.9% for the six months ended December 31, 2001 compared to 41.3% and 22.2% for DocStar and DJS, respectively for the six months ended December 31, 2000. DocStar improved due to the release of Version 3.0 and DJS sales also improved as a result of an increase in integration services revenue of $170,159 compared to the six months ended December 31, 2000. Gross profit margin is defined as gross profit as a percentage of sales. Selling, general and administrative expenses (S,G&A) consist of all other Company expenses except product development costs and interest. S,G&A expenses amounted to $5,469,492 and $2,755,773 for the six and three months ended December 31, 2001 compared to $4,834,389 and $2,487,974 for the same periods last year. The increase is mainly due to DocStar which incurred additional sales and marketing expenses (an increase of $302,851 for the six months ended December 31, 2001 compared to the prior year) and also Corporate expenses which increased by $363,884 for the six months ended December 31, 2001 compared to the prior year. Corporate expenses include all public company type expenses and included a non-cash compensation expense of $345,174 related to the conversion of Authentidate, Inc. common stock for Authentidate Holding Corp. common stock in March 2001. The unamortized, unearned compensation of $172,587 will be fully amortized during the current fiscal year. As a percentage of sales, S,G&A costs were 74% and 67.2% for the six and three months ended December 31, 2001, respectively, compared to 56.8% and 61.7% for the same periods a year ago. This statistic is really not meaningful because 30%-36% of S,G&A costs are being incurred by Authentidate and sales are not yet significant. Interest expense was $56,167 and $27,983 for the six and three months ended December 31, 2001, respectively, compared to $61,797 and $33,369 for the same periods last year. Product development expenses, excluding capitalized costs and including amortization of capitalized costs, relate to software development for Authentidate, Page 14 of 19 primarily. These costs totaled $1,701,607 and $783,733 for the six and three months ended December 31, 2001, respectively, compared to $963,812 and $334,022 for the same periods last year. The increase is due to product development of the Authentidate software product. The Company has a policy of capitalizing qualified software development costs after technical feasibility has been established and amortizing those costs over three years as product development expense. The amortization expense of software development costs amounted to $520,412 for the six months ended December 31, 2001. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of funds to date have been the issuance of equity and the incurrence of third party debt. The principal balance of all long-term debt at December 31, 2001 totaled $1,334,316 all of which relates to a mortgage loan on the Company's principle office located in Schenectady, NY. Property, plant and equipment expenditures totaled $279,406 and capitalized software development expenditures totaled $87,579 for the six months ended December 31, 2001, respectively. There are no significant purchase commitments outstanding. In June 1999, the Company completed construction of a new office and production facility in Schenectady, New York for approximately $2,300,000 which was financed with a $1,000,000 grant from the Empire State Development Corporation (an agency of New York state) and a mortgage loan from a local financial institution. The grant stipulates that the Company is obligated to achieve certain annual employment levels between January 2002 and January 2006 or some or all of the grant will have to be repaid. The Company has not achieved the agreed upon employment levels to date but expects to achieve such levels by 2006. No assurances can be given that such employment levels will be achieved by 2006 so the grant has been classified as a long term liability on the balance sheet. In the event some or all of the grant will be required to be repaid the Company will either seek refinancing from a financial institution, sell the building or pay the grant off out of cash reserves. The Company's cash balance at December 31, 2001 was $3,971,312 and total assets were $20,086,468. Management believes existing cash and short-term investments should be sufficient to meet the Company's operating requirements for the next twelve months provided Authentidate starts to generate material sales. In the event the Authentidate subsidiary does not increase its sales materially then the Company will either need to obtain outside financing or reduce expenses or a combination of both. During the six months ended December 31, 2001 the Company incurred a net loss of $4,831,925. Cash used in operating activities totaled $3,780,883 for the six months ended December 31, 2001 compared to $1,391,651 used in operating activities for the year ended June 30, 2001. The Company's cash balance decreased from $9,040,466 to $3,971,312 from June 30, 2001 to December 31, 2001. To date the Company has been largely dependent on its ability to sell additional shares of its common stock to obtain financing to fund its operating deficits. Under its current operating plan to introduce the new Authentidate technology, the Company's ability to improve operating cash flow is highly dependent on the market acceptance of its products and the Company's ability to reduce overhead costs. Authentidate and it's related businesses, Trac Med, AG and Sports are currently cash flow negative and along with Corporate operations were responsible for the negative cash flow from operations for the six months ended December 31, 2001. If the Company is unable to Page 15 of 19 attain projected sales levels for Authentidate and related products, or is unable to implement cost reduction strategies, it may be necessary to raise additional capital to fund operations and meet its obligations. There is no assurance that such funding will be available, if needed. The Company has engaged an investment banking firm to assist the Company in arranging private financing as well as providing general advisory services to the Company. If the Company is successful in raising additional capital it intends to use the capital to further develop the Authentidate technology and to fund the sales and marketing efforts of this product and related products such as Trac Medical, Sports and Authentidate AG as well as general working capital purposes. The agreement is not a commitment to provide financing and there can be no assurances that the Company will be successful in securing any equity or debt investments in the future. Below is a chart disclosing future minimum operating lease payments and aggregate principle maturities of long-term debt as of December 31, 2001, for the next five years.
Long-term debt Operating leases -------------- ---------------- For fiscal year ending June 30, 2002 $ 16,801 $ 159,497 2003 35,747 305,446 2004 38,810 317,873 2005 42,136 319,342 2006 45,747 229,474 Thereafter 1,155,075 0
PRESENT ACCOUNTING STANDARDS NOT YET ADOPTED In August 2001, the FASB issued SFAS No.143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires the fair value of a liability for an asset retirement obligation to be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The Company believes the adoption of this Statement will not have a material impact on its financial statements. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for the Long-Lived Assets to be Disposed of, and the accounting and reporting provisions of APB No. 30. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposals of long-lived assets and is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The Company is currently reviewing this statement to determine its effect on the Company's financial statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We do not believe that any of our financial instruments have significant risk associated with market sensitivity. We are not exposed to significant financial market risks from changes in foreign currency exchange rates and are only minimally impacted by changes in interest rates. However, in the future, we may enter into transactions denominated in non-U.S. currencies or increase the level of our borrowings, which could increase our exposure to these market risks. We have not used, and currently do not contemplate using, any derivative financial instruments. Page 16 of 19 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS: As described in our report on Form 10-K for the fiscal year ended June 30, 2001, we are involved in the following pending and threatened legal proceedings. We are the defendant in a third party complaint filed by Shore Venture Group, LLC in the Federal District Court for the Eastern District of Pennsylvania. The third party complaint was filed on May 7, 2001. Shore Venture is the defendant to an action commenced by Berwyn Capital. The third party complaint alleges a claim of breach of contract and seeks indemnification. We moved to dismiss the third party complaint and the motion was recently denied by the court. We are currently involved in settlement negotiations with Shore Venture. Management believes that the claim will not have a material adverse impact on our financial condition, results of operations or cash flow. We have also been advised of a claim by Shore Venture Group concerning additional shares of Common Stock of our subsidiary, Authentidate, Inc. This claim is not before the court in the third-party litigation previously discussed. We are conducting settlement negotiations with Shore Venture and believe that a settlement will not have a material adverse impact on our financial condition, results of operations or cash flow. No formal action has been commenced in connection with this claim and the settlement negotiations are being held at this juncture in an effort to avoid resorting to litigation on this issue. We are engaged in no other litigation the effect of which would be anticipated to have a material adverse impact on our financial condition or results of operations. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: Authentidate held its Annual Meeting of shareholders on January 24, 2002. As of the record date of December 3, 2001, there were 16,265,426 shares outstanding and eligible to vote at the Annual Meeting. At the Annual Meeting, shareholders approved the following actions: 1. Election of Directors: Shareholders were requested to vote on the election of the following seven directors, each of whom were elected by the shareholders:
Nominee Votes Cast in Votes Percentage Favor Against in Favor John T. Botti 13,468,330 298,493 98% Ira C. Whitman 13,331,650 435,173 97% Steven Kriegsman 13,265,452 501,371 96% Charles C. Johnston 13,478,302 288,521 98% J. Edward Sheridan 12,294,300 472,523 97% Robert Van Naarden 13,451,810 315,013 98%
2. Adoption of 2001 Non-Executive Director Stock Option Plan: Shareholders were requested to approve the adoption of the 2001 Non-Executive Director Stock Option Plan to provide for the grant to non-employee directors of (a) 20,000 options to purchase AHC common stock upon joining the Board and (b) 10,000 options to purchase AHC common stock each September 1 thereafter, pro rata, based on the time the director has served in such capacity during the previous year.
Votes Cast in Favor Votes Against Votes Abstaining Non-Votes 2,534,522 603,870 58,447 10,569,984
Page 17 of 19 ITEM 5 OTHER INFORMATION: On December 14, 2001, AHC announced that it entered into a letter of intent with the majority shareholders of Authentidate International, AG (AG), to purchase all the outstanding shares of common stock of AG not held by AHC. If the transaction is consummated, AG would become a wholly-owned subsidiary of AHC. The transaction contemplates that AHC will repurchase all of the outstanding shares of AG in exchange for a maximum of 1,500,000 shares of AHC common stock and warrants to purchase 100,000 shares of AHC common stock. Pursuant to the letter of intent, AHC provided a $500,000 loan to AG. The transaction is subject to various terms and conditions, including the completion of due diligence and the execution of a definitive agreement. Accordingly, there can be no assurance that the transaction will be consummated. On January 9, 2002, AHC announced that it has entered into a letter of intent to acquire the assets of Zylab International, Inc., a privately owned company based in Germantown, Maryland for shares of AHC common stock. The letter of intent contemplates that the purchase price will range between a minimum of 725,000 and a maximum of 1,000,000 shares of AHC common stock. The precise number of shares to be issued as the purchase price will be determined prior to closing. Pursuant to the letter of intent, AHC has loaned an aggregate principle amount of $500,000 as of February 5, 2002 (of which $350,000 was loaned as of December 31, 2001), which loan is collateralized by all of the assets of Zylab, including its intellectual property. The acquisition is subject to various terms and conditions, including the completion of the due diligence investigation by AHC, the negotiation of a definitive agreement and the approval of the respective boards and Zylab's shareholders. Accordingly, there can be no assurance that the transaction will be consummated. ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K: (a) Exhibits 4.1 Form of Note dated as of December 24, 2001 between AHC and Zylab 10.1 Pledge and Security Agreement dated January 5, 2001 between AHC and John T. Botti 10.2 Pledge and Security Agreement dated December 24, 2001 between AHC and Zylab (b) Reports on Form 8-K (1) Date of Report - November 27, 2001 Item(s) Reported - Item 5 - Other events. Disclosure of engagement of banking firm to arrange private financing. SAFE HARBOR STATEMENT Certain statements in this Form 10-Q, including information set forth under Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the Act). The Company desires to avail itself of certain "safe harbor" provisions of the Act and is therefore including this special note to enable the Company to do so. Forward-looking statements in this Form 10-Q or hereafter included in other publicly available documents filed with the Securities and Exchange Commission, reports to the Company's stockholders and other publicly available statements issued or released by the Company involve known and unknown risks, uncertainties and other factors which could cause the Company's actual results, performance (financial or Page 18 of 19 operating) or achievements to differ from the future results, performance (financial or operating) or achievements expressed or implied by such forward-looking statements. Such future results are based upon management's best estimates based upon current conditions and the most recent results of operations. These risks include, but are not limited to risks associated with the market acceptance of the DocStar, Authentidate and related product lines, competition, pricing, technological changes, technological implementation of the Authentidate business plan and other risks as discussed in the Company's filings with the Securities and Exchange Commission, in particular its Annual Report on Form 10-K for the year ended June 30, 2001, the Registration Statement on Form S-3 declared effective on July 30, 1996, the Registration Statement on Form SB-2 declared effective February 14, 2000 and the Registration Statement on Form S-3 declared effective January 5, 2001 all of which risk factors could adversely affect the Company's business and the accuracy of the forward-looking statements contained herein. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AUTHENTIDATE HOLDING CORP. February 8, 2002 /s/ John T. Botti ---------------- --------------------------------------- DATE JOHN T. BOTTI PRESIDENT & CHIEF EXECUTIVE OFFICER /s/ Dennis H. Bunt --------------------------------------- DENNIS H. BUNT CHIEF FINANCIAL OFFICER Page 19 of 19