UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED: September 30, 2015
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-20190
Authentidate Holding Corp.
(Exact name of registrant as specified in its charter)
Delaware | 14-1673067 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
Connell Corporate Center 300 Connell Drive, 1st Floor, Berkeley Heights, New Jersey |
07922 | |
(Address of principal executive offices) | (Zip Code) |
(908) 787-1700
(Registrants telephone number, including area code)
Connell Corporate Center, 300 Connell Drive, 5th Floor, Berkeley Heights, New Jersey
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
Class |
Outstanding November 5, 2015 | |
Common Stock, $0.001 par value per share | 42,755,942 shares |
Authentidate Holding Corp.
Form 10-Q
Page | ||||||
Part I |
Financial Information | |||||
Item 1. |
Financial Statements | |||||
3 | ||||||
Condensed Consolidated Statements of Operations and Comprehensive Operations (Unaudited) |
4 | |||||
5 | ||||||
Notes to Condensed Consolidated Financial Statements (Unaudited) |
6 | |||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations | 17 | ||||
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk | 24 | ||||
Item 4. |
Controls and Procedures | 25 | ||||
Part II |
Other Information | |||||
Item 1. |
Legal Proceedings | 25 | ||||
Item 1A. |
Risk Factors | 25 | ||||
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds | 43 | ||||
Item 3. |
Defaults upon Senior Securities | 44 | ||||
Item 4. |
Mine Safety Disclosures | 44 | ||||
Item 5. |
Other Information | 44 | ||||
Item 6. |
Exhibits | 44 | ||||
46 |
Authentidate Holding Corp. and Subsidiaries
Condensed Consolidated Balance Sheets
September 30, | ||||||||
2015 | June 30, | |||||||
(in thousands, except per share data) |
(Unaudited) | 2015 | ||||||
Assets |
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Current assets |
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Cash and cash equivalents |
$ | 282 | $ | 247 | ||||
Restricted cash |
256 | 256 | ||||||
Accounts receivable, net |
217 | 274 | ||||||
Inventory, net |
598 | 603 | ||||||
Prepaid expenses and other current assets |
437 | 222 | ||||||
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Total current assets |
1,790 | 1,602 | ||||||
Property and equipment, net |
253 | 301 | ||||||
Other assets |
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Licenses, net |
1,811 | 1,904 | ||||||
Other assets, net |
334 | 356 | ||||||
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Total assets |
$ | 4,188 | $ | 4,163 | ||||
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Liabilities and Shareholders Deficit |
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Current liabilities |
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Accounts payable, accrued expenses and other liabilities |
$ | 2,478 | $ | 2,109 | ||||
Notes payable, net of unamortized discount |
3,169 | 2,150 | ||||||
Warrant liability |
373 | 214 | ||||||
Deferred revenue |
68 | 67 | ||||||
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Total current liabilities |
6,088 | 4,540 | ||||||
Long-term deferred revenue |
80 | 88 | ||||||
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Total liabilities |
6,168 | 4,628 | ||||||
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Commitments and contingencies (Note 10) |
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Shareholders deficit |
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Preferred stock, $.10 par value; 5,000 shares authorized, Series B, 28 shares and Series D, 665 shares issued and outstanding on September 30, 2015 and June 30, 2015, respectively |
69 | 69 | ||||||
Common stock, $.001 par value; 190,000 shares authorized, 42,195 and 42,116 shares issued and outstanding on September 30, 2015 and June 30, 2015, respectively |
42 | 42 | ||||||
Additional paid-in capital |
206,559 | 205,909 | ||||||
Accumulated deficit |
(208,650 | ) | (206,485 | ) | ||||
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Total shareholders deficit |
(1,980 | ) | (465 | ) | ||||
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Total liabilities and shareholders deficit |
$ | 4,188 | $ | 4,163 | ||||
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The accompanying notes are an integral part of the condensed consolidated financial statements.
3
Authentidate Holding Corp. and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Operations (Unaudited)
Three Months Ended | ||||||||
September 30, | ||||||||
(in thousands, except per share data) |
2015 | 2014 | ||||||
Revenues |
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Hosted software services |
$ | 382 | $ | 508 | ||||
Telehealth products and services |
16 | 544 | ||||||
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Total revenues |
398 | 1,052 | ||||||
Operating expenses |
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Cost of revenues |
207 | 593 | ||||||
Selling, general and administrative |
1,501 | 2,011 | ||||||
Product development |
162 | 370 | ||||||
Depreciation and amortization |
182 | 189 | ||||||
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Total operating expenses |
2,052 | 3,163 | ||||||
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Operating loss |
(1,654 | ) | (2,111 | ) | ||||
Other expense |
(409 | ) | | |||||
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Net loss |
$ | (2,063 | ) | $ | (2,111 | ) | ||
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Basic and diluted loss per common share |
$ | (0.05 | ) | $ | (0.06 | ) | ||
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Comprehensive operations |
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Net loss |
$ | (2,063 | ) | $ | (2,111 | ) | ||
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Comprehensive loss |
$ | (2,063 | ) | $ | (2,111 | ) | ||
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The accompanying notes are an integral part of the condensed consolidated financial statements.
4
Authentidate Holding Corp. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended | ||||||||
September 30, | ||||||||
(in thousands) |
2015 | 2014 | ||||||
Cash flows from operating activities |
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Net Loss |
$ | (2,063 | ) | $ | (2,111 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities |
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Amortization of debt discount and deferred financing costs |
170 | | ||||||
Change in warrant liability |
159 | | ||||||
Depreciation and amortization |
182 | 189 | ||||||
Share-based compensation |
123 | 139 | ||||||
Warrants issued for services |
12 | 2 | ||||||
Restricted shares and stock options issued for services |
161 | 99 | ||||||
Changes in assets and liabilities |
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Accounts receivable |
57 | (40 | ) | |||||
Inventory |
5 | 39 | ||||||
Prepaid expenses and other current assets |
(215 | ) | (157 | ) | ||||
Accounts payable, accrued expenses and other liabilities |
225 | 102 | ||||||
Deferred revenue |
(7 | ) | 1 | |||||
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Net cash used in operating activities |
(1,191 | ) | (1,737 | ) | ||||
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Cash flows from investing activities |
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Purchases of property and equipment and other assets |
| (29 | ) | |||||
Other intangible assets acquired |
(19 | ) | (55 | ) | ||||
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Net cash used by investing activities |
(19 | ) | (84 | ) | ||||
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Cash flows from financing activities |
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Net proceeds from issuance of preferred and common stock and exercise of warrants |
| 2,124 | ||||||
Proceeds from issuance of short-term promissory notes |
1,245 | | ||||||
Dividends paid |
| (18 | ) | |||||
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Net cash provided by financing activities |
1,245 | 2,106 | ||||||
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Net (decrease) increase in cash and cash equivalents |
35 | 285 | ||||||
Cash and cash equivalents, beginning of period |
247 | 1,084 | ||||||
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Cash and cash equivalents, end of period |
$ | 282 | $ | 1,369 | ||||
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The accompanying notes are an integral part of the condensed consolidated financial statements.
5
Authentidate Holding Corp. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Basis of Presentation and Liquidity
The accompanying unaudited condensed consolidated financial statements have been prepared by the company pursuant to the rules and regulations of the Securities and Exchange Commission and, in the opinion of management, reflect all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented. The condensed consolidated financial statements include the accounts of Authentidate Holding Corp. (AHC) and its subsidiaries (collectively, the company). All significant intercompany transactions and balances have been eliminated in consolidation. The results of operations for the period ended September 30, 2015 are not necessarily indicative of the results to be expected for the full year. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the annual consolidated financial statements and notes thereto included in the companys Form 10-K for the fiscal year ended June 30, 2015 and the corresponding Managements Discussion and Analysis of Financial Condition and Results of Operations.
The company has incurred significant recurring losses and negative cash flows from operations and our product development activities have required substantial capital investment to date. These factors, among others, raise substantial doubt about our ability to continue as a going concern. Our condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Additionally, on March 6, 2015 we announced that the Department of Veterans Affairs (VA) informed the company that it did not intend to exercise the fourth and final option year under our contract for telehealth products and services. The companys contract with the VA was originally awarded in April 2011 and consisted of a base year and four one-year option years which were exercisable at the VAs sole discretion. The current option year under the contract expired on May 15, 2015 and the transition process with the VA was completed by that date. Our VA revenue included both recurring service revenues as well as hardware sales. As a result of the non-renewal of the VA contract we expect to report significantly reduced revenues over the next several quarters and we have taken steps to reduce our operating costs and better align our resources with the growth opportunities we intend to pursue. As a result, we have implemented a number of changes to our business plan with the ultimate goal to increase revenues and generate positive cash flow from operations, including a recalibration of marketing and sales efforts that have already resulted in growth from existing customers and sales to new customers. These changes include cost reductions from reducing our workforce and use of consultants that we made in the third quarter of fiscal 2015 and additional workforce reductions through August 31, 2015. These reductions are expected to reduce operating expenses on an annualized basis. The company has also taken actions to realign our data center operations and has executed an agreement with its landlord to relocate its offices, which are expected to result in additional annualized savings.
Since June 2015, the company has completed debt financing transactions resulting in total proceeds of approximately $1.2 million, however, the company has an immediate need for additional capital and is exploring additional potential transactions to improve our capital position, ensure we are able to meet our working capital requirements and provide funds to pay these debt obligations which are due in the next twelve months. Based on its business plan, the company expects its existing resources, revenues generated from operations, net proceeds from our debt financing transactions, other transactions we are considering and proceeds received from the exercise of outstanding warrants (of which there can be no assurance) or a restructuring of outstanding debt obligations (of which there can be no assurance) to satisfy its working capital requirements for at least the next twelve months. If necessary, management of the company believes that it can raise additional equity or debt financing to satisfy its working capital requirements. However, no assurances can be given that we will be able to support our costs or pay debt obligations through revenues derived from operations or generate sufficient cash flow to satisfy our other obligations. 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 and we will need to raise additional funds to meet our obligations in the future. In addition to our recently announced letter of intent for a business combination transaction, we are continuing to explore additional potential transactions to improve our capital position to ensure we are able to meet our financing and working capital requirements. Currently, the company does not have any definitive agreements with any third parties for such transactions and there can be no assurances that the company will be successful in completing the transaction contemplated by the letter of intent or in raising additional capital or securing financing when needed or on terms satisfactory to the company. Any inability to obtain required financing on sufficiently favorable terms could have a material adverse effect on our business, results of operations and financial condition.
6
Authentidate Holding Corp. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
2. Loss Per Share
The following table sets forth the calculation of basic and diluted loss per share for the periods presented (in thousands, except per share data):
Three Months Ended September 30, |
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2015 | 2014 | |||||||
Net loss |
$ | (2,063 | ) | $ | (2,111 | ) | ||
Preferred stock dividends |
(102 | ) | (101 | ) | ||||
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Net loss applicable to common shareholders |
$ | (2,165 | ) | $ | (2,212 | ) | ||
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Weighted average shares |
42,192 | 39,405 | ||||||
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Basic and diluted loss per common share |
$ | (0.05 | ) | $ | (0.06 | ) | ||
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All common stock equivalents were excluded from the loss per share calculation for all periods presented because the impact is antidilutive. At September 30, 2015, options (5,577,000), restricted stock units (883,000), warrants (34,769,000), convertible debt (3,600,000), Series D preferred stock (6,125,000) and Series B preferred stock (250,000) were outstanding. At September 30, 2014, options (3,813,000), restricted stock units (910,000), warrants (27,676,000), Series D preferred stock (6,125,000) and Series B preferred stock (250,000) were outstanding.
3. Share-Based Compensation
Share-based compensation by category is as follows (in thousands):
Three Months Ended September 30, |
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2015 | 2014 | |||||||
SG&A |
$ | 108 | $ | 124 | ||||
Product development |
10 | 10 | ||||||
Cost of revenues |
5 | 5 | ||||||
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Share-based compensation expense |
$ | 123 | $ | 139 | ||||
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We computed the estimated fair values of all option-based compensation using the Black-Scholes option pricing model and the assumptions set forth in the following table. We based our estimate of the life of these options on historical averages over the past five years and estimates of expected future behavior. The expected volatility was based on the companys historical stock volatility. The assumptions used in the companys Black-Scholes calculations for fiscal 2016 and 2015 are as follows:
Risk Free Interest Rate |
Dividend Yield |
Volatility Factor |
Weighted Average Expected Option Life (Months) |
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Fiscal year 2016 |
1.6 | % | 0 | % | 85 | % | 48 | |||||||||
Fiscal year 2015 |
0.6 | % | 0 | % | 84 | % | 48 |
The Black-Scholes option-pricing model requires the input of highly subjective assumptions. Because the companys employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in managements opinion, the existing models may not provide a reliable single measure of the fair value of share-based compensation for employee stock options. Management will continue to assess the assumptions and methodologies used to calculate estimated fair value of share-based compensation as circumstances change and additional data becomes available over time, which may result in changes to these assumptions and methodologies. Such changes could materially impact the companys fair value determination.
7
Authentidate Holding Corp. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
On August 23, 2011, the stockholders approved the 2011 Omnibus Equity Incentive Plan (the 2011 Plan). The 2011 Plan replaces the 2010 Employee Stock Option Plan and the 2001 Non-Executive Director Stock Option Plan. On May 1, 2014, the stockholders approved an amendment to the 2011 Plan to increase the number of shares of common stock available for issuance under the plan by 3,400,000 shares. As amended, the 2011 Plan provides for the issuance of up to 6,750,000 shares of the companys common stock in connection with stock options, restricted share awards and other stock compensation vehicles.
Stock option activity under the companys stock option plans for employees and non-executive directors for the period ended September 30, 2015 is as follows (in thousands, except per share and average life data):
Employees Information |
Number of Options |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Life (Years) |
Aggregate Intrinsic Value |
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Outstanding June 30, 2015 |
2,131 | $ | 2.27 | |||||||||||||
Granted |
300 | 0.30 | ||||||||||||||
Expired/Forfeited |
(322 | ) | 1.58 | |||||||||||||
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Outstanding September 30, 2015 |
2,109 | $ | 2.09 | 6.16 | $ | 1 | ||||||||||
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Exercisable at September 30, 2015 |
1,160 | $ | 2.80 | 3.58 | $ | | ||||||||||
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Expected to vest at September 30, 2015 |
743 | $ | 1.26 | 7.68 | $ | | ||||||||||
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Non-Executive Director Information |
Number of Options |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Life (Years) |
Aggregate Intrinsic Value |
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Outstanding June 30, 2015 |
2,185 | $ | 0.62 | |||||||||||||
Granted |
1,293 | 0.27 | ||||||||||||||
Expired |
(10 | ) | 6.00 | |||||||||||||
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Outstanding September 30, 2015 |
3,468 | $ | 0.48 | 8.31 | $ | 97 | ||||||||||
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Non-executive director options are granted at market price and vest on the grant date.
As of September 30, 2015, there were approximately 426,000 restricted stock units outstanding that were granted to employees as of January 15, 2013 and January 28, 2014 in connection with the companys compensation modification program. These restricted stock units vest when the company achieves cash flow breakeven, as defined.
As of September 30, 2015, there was approximately $406,000 of total unrecognized compensation expense related to unvested share-based compensation arrangements that is expected to be recognized over a weighted-average period of 17 months.
No options were exercised during the three month periods ended September 30, 2015 and 2014, respectively. The weighted average grant date fair value of options granted during the three month periods ended September 30, 2015 and 2014 was approximately $0.14 and $0.42, respectively. These values were calculated using the Black-Scholes option-pricing model.
The total fair value of options vested was $199,000 and $295,000 for the three month periods ended September 30, 2015 and 2014, respectively.
8
Authentidate Holding Corp. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
In December 2012, the board of directors agreed that all non-employee directors would receive all of their cash director compensation, including amounts payable for committee service, service as a committee chair and per meeting fees, in restricted shares of our common stock or stock options issued at fair value in accordance with the terms of the 2011 Plan for periods ending after December 2012. During the three months ended September 30, 2015, the company issued 78,854 shares of restricted common stock and 496,768 stock options (with a total fair value of approximately $104,000) to certain non-executive directors in connection with this program. In October 2015 the company issued 43,980 shares of restricted common stock (with a fair value of approximately $13,000) to a director under this program for the quarter ended September 30, 2015. During the three months ended September 30, 2015, the board of directors also issued 600,000 stock options (with a total fair value of approximately $57,000) to the interim chief strategy officer for services.
4. Pending Acquisition
On August 25, 2015 the company announced that it had entered into a non-binding letter of intent with Peachstate Health Management, LLC d/b/a AEON Clinical Laboratories, an expanding clinical laboratory based in Gainesville, GA (AEON) for the acquisition of all of the outstanding membership interests of AEON in exchange for shares of a newly created class of Series E preferred stock of Authentidate (the Series E Shares). The letter of intent contemplates the AEON members will be issued Series E Shares convertible into 19.9% of the outstanding shares of the companys common stock on the date of the closing of the merger transaction, and an additional number of Series E Shares convertible into 5% of the outstanding shares of the companys common stock upon approval of the merger transaction by the shareholders of the company. If AEON achieves certain financial results during the next four years, the AEON members will be issued additional tranches of Series E Shares which, including the previously issued Series E Shares, will be convertible into 85% of the outstanding shares of the companys common stock (on a partially diluted basis as defined). The letter of intent also provides for the issuance of Series E Shares as bonus shares for the achievement of certain incremental financial results for the four fiscal years ending December 31, 2019, convertible into 5% of the outstanding shares of the companys common stock (on a partially diluted basis as defined ). The holders of the Series E Shares will have certain preferential rights, including the right to vote separately as a class to nominate and elect one director for each 10% of the outstanding shares of the companys common stock into which the outstanding Series E Shares shall be convertible. The letter of intent is non-binding and any agreement is subject to the negotiation and execution of a definitive transaction agreement which may vary from the terms set forth in the letter of intent. Accordingly, there can be no assurance that a definitive agreement will be reached by the parties, or that any agreement will result in the completion of the merger transaction.
5. Inventory
In connection with our manufacturing and sales plans for our telehealth service, the company has purchased certain components and contract manufacturing services for the production of the monitoring appliances. These inventory amounts are stated at the lower of cost or market and consist of the following (in thousands):
September 30, 2015 |
June 30, 2015 |
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Purchased components, net |
$ | 261 | $ | 261 | ||||
Finished goods |
337 | 342 | ||||||
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Total inventory |
$ | 598 | $ | 603 | ||||
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9
Authentidate Holding Corp. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
6. Other Intangible Assets
The following table sets forth licenses, net and other intangible assets that are included in other assets as follows (in thousands):
September 30, 2015 | June 30, 2015 | |||||||||||||||||||||||||||
Gross Carrying Amount |
Accumulated Amortization |
Net Book Value |
Gross Carrying Amount |
Accumulated Amortization |
Net Book Value |
Useful Life In Years |
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Patents |
$ | 357 | $ | 282 | $ | 75 | $ | 357 | $ | 276 | $ | 81 | 17 | |||||||||||||||
Trademarks |
226 | 110 | 116 | 214 | 108 | 106 | 20 | |||||||||||||||||||||
Acquired technologies |
95 | 75 | 20 | 95 | 72 | 23 | 2 | |||||||||||||||||||||
Licenses |
4,221 | 2,410 | 1,811 | 4,212 | 2,308 | 1,904 | 3 - 10 | |||||||||||||||||||||
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Total |
$ | 4,899 | $ | 2,877 | $ | 2,022 | $ | 4,878 | $ | 2,764 | $ | 2,114 | ||||||||||||||||
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As of September 30, 2015 and June 30, 2015 goodwill amounted to approximately $50,000 and is included in other assets.
The company amortizes licenses and other intangible assets under the straight line method. Amortization expense was approximately $113,000 and $88,000 for the three months ended September 30, 2015 and 2014, respectively. Amortization expense for the next five fiscal years and thereafter is expected to be as follows (in thousands):
June 30, |
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2016 |
$ | 416 | ||
2017 |
424 | |||
2018 |
332 | |||
2019 |
304 | |||
2020 |
277 | |||
Thereafter |
269 | |||
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$ | 2,022 | |||
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7. Notes Payable
On January 29, 2015, the company received a short-term loan of $200,000 from a strategic lender pursuant to which we issued a secured promissory note to the lender in the aggregate principal amount of $200,000. The note was secured by a first priority lien on certain equipment owned by the company with a net present value equivalent to the face value of the note, was due and payable on March 30, 2015 and accrued interest at the rate of 6% per annum. The note and accrued interest was repaid on the maturity date.
On February 17, 2015, the company entered into a securities purchase agreement with an accredited investor pursuant to which we issued a promissory note in the aggregate principal amount of $100,000 and common stock purchase warrants to purchase up to 80,000 shares of common stock for gross proceeds of $100,000. The note was an unsecured obligation of the company, was not convertible into equity securities of the company and accrued interest at a rate of 8% per annum. The note was due and payable on the six month anniversary of the issue date, subject to the right of the investor to extend the maturity date for up to an additional six months. The net proceeds from this transaction were approximately $92,000. The warrants vested in equal monthly installments over twelve months if the notes were outstanding and, subject to vesting requirements, were exercisable for a period of 54 months commencing on the six month anniversary of the issuance date at an initial exercise price of $1.01 per share. Although the securities purchase agreement that the company entered into with this investor contemplated a second closing for $900,000 of additional proceeds, the second closing did not occur and the company did not receive the additional funds. This note and the vested portion of the warrants were exchanged for notes and warrants issued in the June 8, 2015 transaction discussed below and the warrants issued for this transaction were cancelled.
On February 17, 2015, in a separate transaction, the company issued a short-term promissory note in the aggregate principal amount of $950,000 and warrants to purchase 99,500 shares of common stock to an accredited investor for gross proceeds of $950,000. The holder of the short-term note is an entity controlled by Douglas B. Luce, the brother of J. David Luce, a member of the board of directors of the company. The short-term note is an unsecured obligation of the company, is not convertible into equity
10
Authentidate Holding Corp. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
securities of the company and accrued interest at a rate of 5.76% per annum. The short-term note was due and payable on the first to occur of the one month anniversary of the issue date or the date on which the company received at least $950,000 in proceeds from equity or debt financing. The short-term note contains covenants and events of default customary for similar transactions. The net proceeds from this transaction were approximately $940,000. The warrants are exercisable for a period of 54 months commencing on the six month anniversary of the issuance date and have an initial exercise price of $1.01 per share. On April 3, 2015, the company entered into an amendment agreement with the holder of the $950,000 short-term promissory note in order to amend such note to extend its maturity date from March 19, 2015 to July 2, 2015. In addition, pursuant to the amendment agreement, the company also agreed to grant the holder the right to exchange the principal amount of the short-term note (and unpaid interest thereon) into the securities of the company sold in the next financing, as defined in the amendment agreement. This investor subsequently agreed not to participate in the convertible debt financing for which a closing was held June 8, 2015 and in consideration of such election, the participation right was modified to allow him to exchange such note for comparable securities in an alternative transaction. In consideration of waivers previously granted by the holder of potential events of default under the short-term note and the amendment to extend the maturity date, the company agreed to issue the holder warrants to purchase 3,166,667 shares of common stock of the company. The warrants are exercisable for a period of 54 months commencing six months following the date of issuance and have an exercise price equal to $0.31 per share. Through a series of amendment agreements, the maturity date of this note has been further extended and the interest rate has been increased to 12% per annum in connection with such extensions. The company is engaged in ongoing discussions and negotiations with the holder of this note in order to seek modifications to the terms of the obligation, including extensions of the repayment date. The company anticipates that in order to complete these negotiations, it will be required to grant conversion rights and/or issue additional warrants.
On April 24, 2015, the company issued a promissory note in the aggregate principal amount of $500,000 to Lazarus Investment Partners LLLP, the beneficial owner of approximately 29.3% of the companys common stock, in a private transaction. The note is an unsecured obligation of the company and is not convertible into equity securities of the company. The note was originally due and payable on the first to occur of July 2, 2015 or the date on which the company received at least $900,000 in proceeds from equity or debt financing transactions. Interest on the note was originally 5.76% per annum payable at maturity. The note contains terms and events of default customary for similar transactions. In consideration of the loan, the company and Lazarus entered into a warrant amendment agreement pursuant to which the company agreed to amend certain of the terms of the existing 6,233,636 common stock purchase warrants held by Lazarus to reduce the exercise price of such warrants to $0.25, which was $0.01 above the most recently reported closing consolidated bid price of the companys common stock prior to the execution of the transaction documents, and to extend the expiration date of the warrants to October 25, 2019. The warrants amended were issued in various transactions from 2010 through 2014 at exercise prices ranging between $0.88 and $2.00. The fair value related to the warrant modifications was recorded as a debt discount and amortized over the term of the new agreement. Through a series of amendment agreements, the maturity date of this note has been further extended and the interest rate has been increased to 12% per annum in connection with such extensions. The company is engaged in ongoing discussions and negotiations with the holder of this note in order to seek modifications to the terms of the obligation, including extensions of the repayment date. The company anticipates that in order to complete these negotiations, it will be required to grant conversion rights and/or issue additional warrants.
On June 8, 2015, the company entered into definitive agreements relating to a private placement of up to $3.0 million in principal amount of senior secured convertible notes and common stock purchase warrants. An initial closing for an aggregate principal amount of $900,000 of notes and warrants to purchase 3,626,667 shares of common stock was held on June 8, 2015. Subject to certain limitations, the warrants are exercisable on or after the six month anniversary of the date of issuance at an initial exercise price of $0.30 per share and will expire 54 months from the initial exercise date. In addition, subject to certain limitations, the warrants provide that, beginning six months from issuance, the company shall have the right to cause the holder to exercise the warrants provided that the following conditions are satisfied: (i) the closing bid price of the companys common stock is at least $0.45 for the 20 consecutive trading days prior to the date of the mandatory exercise notice and (ii) all of the warrants issued in the transaction are called by the company for a mandatory exercise. A final closing for up to $2.1 million of debentures and warrants to purchase 8,400,000 shares of common stock has not occurred. As a condition of the initial closing, the holder of an aggregate principal amount of $100,000 of previously issued promissory notes was required to exchange such notes and certain warrants held by it for senior secured notes and warrants issued in this transaction. These notes, subject to certain exceptions, rank senior to existing and future indebtedness of the company and are secured to the extent and as provided in the security agreement entered into between the company and the purchasers. Each note matures on the one-year anniversary of the issuance date thereof and, subject to certain limitations, is convertible at any time at the option of the holder into shares of the companys common stock at an initial conversion price of $0.25 per share. Subject to certain exemptions, if the company issues or sells shares of its common stock, rights to purchase shares of its common stock, or securities convertible into shares of its common stock for a price per share that is less than the conversion price then in effect, the conversion price then in effect will be decreased to equal 85% of such lower price and the exercise price of the warrants will be decreased to a lower price based on the amount by which the conversion price of the notes was reduced due to such
11
Authentidate Holding Corp. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
transaction. The foregoing adjustments to the conversion price will not apply to certain exempt issuances, including issuances pursuant to certain employee benefit plans. In addition, the conversion price is subject to adjustment upon stock splits, reverse stock splits, and similar capital changes. The senior secured notes bear interest at 9% per annum with interest payable upon maturity or on any earlier redemption date. At any time after the issuance date, the company will have the right to redeem all or any portion of the outstanding principal balance of the notes, plus all accrued but unpaid interest at a price equal to 110% of such amount and the holders shall have the right to convert any or all of the amount to be redeemed into common stock prior to redemption. The notes are secured by a first priority lien on the companys assets related to its Inscrybe Referral and Order Management and Inscrybe Hospital Discharge solutions. Subject to certain exceptions, the notes contain customary covenants against incurring additional indebtedness and granting additional liens and contain customary events of default. Upon the occurrence of an event of default under the notes, a holder may require the company to repay all or a portion of its notes in cash, at a price equal to 110% of the principal and accrued and unpaid interest.
The company also agreed to file a registration statement covering the resale of the shares of the companys common stock issuable upon conversion of the notes and exercise of the warrants and to use commercially reasonable efforts to have the registration declared effective in a timely manner. The Company will be subject to certain monetary penalties, as defined in the agreement if the registration statement is not filed, does not become effective on a timely basis, or does not remain available for the resale, as such term is defined in the registration rights agreement.
On August 7, 2015, the company issued a senior secured promissory note in the aggregate principal amount of $320,000 to an accredited investor in a private transaction dated August 7, 2015. The note is due and payable on December 31, 2015 and interest shall accrue on the note at the rate of 10.0% per annum. The note is not convertible into equity securities of the company and it contains terms and events of default customary for similar transactions. The note is secured by a first priority lien on certain of our assets, as described in a security agreement entered into between the company and the purchaser dated as of August 7, 2015. In consideration of the loan, the company and the purchaser entered into a warrant amendment agreement pursuant to which the company agreed to amend certain of the terms of the existing 5,474,829 common stock purchase warrants currently held by the purchaser and an affiliate to reduce the exercise price of such warrants to $0.17 and to extend the expiration date of the warrants to December 13, 2019. The warrants amended were issued in various transactions from 2012 through 2013 at exercise prices ranging between $0.95 and $1.34. The fair value related to the warrant modifications was recorded as a debt discount and is being amortized over the term of the new agreement. The purchaser is an entity affiliated with J. David Luce, a member of our board of directors. The company is using the net proceeds from the transaction for general business and working capital purposes.
On August 26, 2015, the company issued promissory notes in the aggregate principal amount of $400,000 to Lazarus Investment Partners LLLP, the beneficial owner of approximately 29.0% of the companys common stock, and an entity affiliated with J. David Luce, a member of our board of directors, in a private transaction. The notes are unsecured obligations of the company and are not convertible into equity securities of the company. The notes bear interest at 20% per annum, payable in arrears, and are due upon the earlier of (i) August 26, 2016, or (ii) within 30 days of the closing of the contemplated acquisition, merger or similar transaction with Peachstate Health Management, LLC (d/b/a AEON Clinical Laboratories) as described above, or a similar alternative acquisition, merger or similar transaction with an unaffiliated third party, or (iii) the closing of a sale of equity or debt securities of the company, or series of closings, as part of the same transaction, of equity or debt securities within a period of 90 days, in the gross amount of at least $5,000,000 in cash proceeds. The holders have the right, at their option, to convert interest and principal due on the note into any alternative financing that may be undertaken by the company while the notes are outstanding.
In September 2015, the company issued promissory notes in the aggregate principal amount of $525,000 to accredited investors in a private transaction. The notes are unsecured and are not convertible into equity securities of the company. The notes bear interest at 20% per annum, payable in arrears, and are due upon the earlier of (i) September 18, 2016, or (ii) within 30 days of the closing of a sale of equity or debt securities of the company, or series of closings, as part of the same transaction, of equity or debt securities within a period of 90 days, in the gross amount of at least $5,000,000 in cash proceeds. The company also issued the investors warrants to purchase an aggregate of 1,050,000 shares of common stock. The warrants are exercisable commencing twelve months following their issuance for a period of 54 months at an exercise price of $0.30 per share. These closings are part of an offering of up to $1 million of notes and 2 million warrants.
Except for the June 8, 2015 transaction, the company allocated the proceeds from the note transactions to the notes and the related warrants based on the relative fair values of such instruments using the fair value of the notes at a market rate of interest and the fair value of the warrants based on the Black-Scholes option pricing model and the applicable assumptions set forth in Note 3 of Notes to Condensed Consolidated Financial Statements. These allocations resulted in effective interest rates for the $100,000 note of approximately 39% per annum, for the $950,000 note of approximately 65% per annum, for the $500,000 note of approximately 71% per annum, for the $800,000 senior secured note of approximately 36% per annum, for the $320,000 secured note of approximately
12
Authentidate Holding Corp. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
63%, for the $400,000 note of approximately 20% and for the $525,000 notes of approximately 54%, respectively. However, since the subjective nature of the inputs for the option pricing and other models used to calculate fair values can materially affect fair value estimates, in managements opinion, such models may not provide a reliable single measure of the fair value of the warrants and the resulting effective interest rates. In connection with the note transactions the company recorded promissory notes of $3,595,000, debt discount of $913,000, an initial warrant liability of $214,000, non-cash loss on extinguishments discussed below of $557,000 and additional paid-in-capital of $1,256,000 related to the fair value of the warrants.
As a result of the ratchet provision included in the June 8, 2015 transaction, the company recorded a warrant liability and a debt discount based on the fair value of the warrants issued in connection with the new senior secured note. As discussed more fully in Note 13 of Notes to Condensed Consolidated Financial Statements, the company is required to revalue these warrants at the end of each reporting period. In connection with the modifications of the $950,000 and $100,000 short-term notes discussed above, the company issued additional warrants and agreed to modifications that, for accounting purposes, resulted in the extinguishment of the old notes and the creation of new notes. Accordingly, the company recorded non-cash losses on extinguishment of approximately $557,000 as other expense in the fourth quarter ended June 30, 2015. The non-cash amortization of the debt discount of $127,000 and deferred financing costs of $43,000 is included in other expense for the three months ended September 30, 2015. There was no amortization for the three months ended September 30, 2014.
The following table sets forth the notes and unamortized debt discount (in thousands):
September 30, | June 30, | |||||||
2015 | 2015 | |||||||
Notes payable |
||||||||
Secured notes payable |
$ | 1,220 | $ | 900 | ||||
Unsecured notes payable |
2,375 | 1,450 | ||||||
Unamortized debt discount |
(426 | ) | (200 | ) | ||||
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Notes payable |
$ | 3,169 | $ | 2,150 | ||||
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8. Preferred Stock
As of September 30, 2015, there are 28,000 shares of Series B preferred stock outstanding. The Series B preferred stock was originally issued in a private financing in October 1999 and the conversion and redemption features were amended in October 2002 to provide for the rights and obligations described in this note. The company has the right to repurchase the outstanding Series B preferred stock at a redemption price equal to $25.00 per share, plus accrued and unpaid dividends. The holder of such shares has the right to convert shares of preferred stock into an aggregate of 250,000 shares of our common stock at a conversion rate of $2.80 per share. In the event the company elects to redeem these securities, the holder will be able to exercise its conversion right subsequent to the date that we issue a notice of redemption but prior to the deemed redemption date as would be set forth in such notice. At September 30, 2015, the company has accrued dividends in the amount of $17,500 which remain unpaid and are due December 31, 2015.
As of September 30, 2015, there are 665,000 shares of Series D convertible preferred stock outstanding. The Series D preferred stock was issued in June 2013 in connection with the cancelation of an aggregate principal amount of $6,500,000 of senior secured notes and can be converted by the holders into an aggregate of 6,125,024 shares of common stock at an initial conversion rate of $1.08571 per share. The holders of such shares have the right to convert the preferred shares at anytime commencing on the six month anniversary of the issue date; however, the shares received upon conversion may not be offered or sold except pursuant to an effective registration statement or an applicable exemption from the registration requirements of the Securities Act and applicable state securities laws. The company has the right to repurchase the outstanding Series D preferred stock at a redemption price equal to $10.00 per share, plus accrued and unpaid dividends, beginning two years after issuance and to require holders to convert their Series D preferred stock beginning three years after issuance. 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 companys option. At September 30, 2015, the company has accrued dividends in the amount of approximately $83,100 which remain unpaid and are due December 31, 2015.
13
Authentidate Holding Corp. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
9. Shareholders Equity
The changes in shareholders equity for the three months ended September 30, 2015 are summarized as follows (in thousands):
Preferred Stock |
Common Stock |
Additional Paid-in Capital |
Accumulated Deficit |
Total Shareholders Deficit |
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Balance, June 30, 2015 |
$ | 69 | $ | 42 | $ | 205,909 | $ | (206,485 | ) | $ | (465 | ) | ||||||||
Preferred stock dividends |
(102 | ) | (102 | ) | ||||||||||||||||
Share-based compensation expense |
123 | 123 | ||||||||||||||||||
Restricted shares and stock options issued for services |
161 | 161 | ||||||||||||||||||
Warrants issued for services |
12 | 12 | ||||||||||||||||||
Warrants issued with debt |
354 | 354 | ||||||||||||||||||
Net loss |
(2,063 | ) | (2,063 | ) | ||||||||||||||||
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Balance, September 30, 2015 |
$ | 69 | $ | 42 | $ | 206,559 | $ | (208,650 | ) | $ | (1,980 | ) | ||||||||
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During the three months ended September 30, 2015 there were no stock options or warrants exercised.
10. Commitments and Contingencies
During fiscal 2009, the company purchased certain inventory components under arrangements that required payment only after such components where actually used in production. Based on the companys current production plans we have determined that these components will not be used and we offset the inventory balance for undelivered items against the related accounts payable balance during the quarter ended March 31, 2015. Additionally, we intend to return approximately $0.2 million of such items that are included in the inventory and accounts payable balances as of September 30, 2015. The vendor that provided these components is currently disputing this arrangement and is requesting payment for these items. The company believes the amount at issue is approximately $1.2 million and intends to vigorously contest this assertion. Management does not believe that the ultimate resolution of this matter will have a material adverse effect on our consolidated financial position, results of operations or cash flows.
We are also subject to claims and litigation arising in the ordinary course of business. Our management considers that any liability from any reasonably foreseeable disposition of such claims and litigation, individually or in the aggregate, would not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
We are not currently engaged in any other litigation which would be anticipated to have a material adverse effect on our financial condition or results of operations.
We have entered into employment agreements with our chief executive officer, chief financial officer and interim chief strategy officer that specify the executives current compensation, benefits and perquisites, the executives entitlements upon termination of employment, and other employment rights and responsibilities. In connection with the termination of the companys employment relationship with its former chief executive officer and president in February 2015, the company is presently reviewing its severance obligations to him and the vesting and other post-termination provisions of certain of the unexercised stock options and other unvested stock options and unvested restricted stock units held by him as of the effective date of his separation from the company.
We have entered into various agreements by which we may be obligated to indemnify the other party with respect to certain matters. Generally, these indemnification provisions are included in contracts arising in the normal course of business under which we customarily agree to hold the indemnified party harmless against losses arising from a breach of representations related to such matters as intellectual property rights. Payments by us under such indemnification clauses are generally conditioned on the other party making a claim. Such claims are generally subject to challenge by us and to dispute resolution procedures specified in the particular contract. Further, our obligations under these arrangements may be limited in terms of time and/or amount and, in some instances, we may have recourse against third parties for certain payments made by us. It is not possible to predict the maximum potential amount of future payments under these indemnification agreements due to the conditional nature of our obligations and the unique facts of each particular agreement. Historically, we have not made any payments under these agreements that have been material individually or in the aggregate. As of September 30, 2015, we are not aware of any obligations under such indemnification agreements that would require material payments.
14
Authentidate Holding Corp. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
11. Income Taxes
The company continues to recognize its tax benefits which are fully offset by a valuation allowance due to the uncertainty that the deferred tax assets will be realized. We will continue to evaluate the realizability of our net deferred tax assets and may record additional benefits in future earnings if we determine the realization of these assets is more likely than not.
12. Other Expense
Other expense consists of the following (in thousands):
Three Months Ended | ||||||||
September 30, | ||||||||
2015 | 2014 | |||||||
Amortization of debt discount |
$ | (127 | ) | $ | | |||
Amortization of deferred financing costs |
(43 | ) | | |||||
Interest expense |
(80 | ) | | |||||
Change in fair value of warrant liability |
(159 | ) | | |||||
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Total other expense |
$ | (409 | ) | $ | | |||
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The amortization of debt discount and deferred financing costs for fiscal 2016 relates to the notes discussed in Note 7 of Notes to Condensed Consolidated Financial Statements.
13. Fair Value Measurements
The company measures fair value for financial assets and liabilities in accordance with the provisions of the accounting guidance regarding fair value measurements. The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. A brief description of those three levels is as follows:
| Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities. |
| Level 2: Inputs other than quoted prices for identical assets or liabilities that are observable for the asset or liability, either directly or indirectly. |
| Level 3: Significant unobservable inputs. |
The companys assets and liabilities subject to fair value measurements as of September 30, 2015 and June 30, 2015 are as follows (in thousands):
Fair Value Measurements Using Fair Value Hierarchy |
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Fair value | Level 1 | Level 2 | Level 3 | |||||||||||||
September 30, 2015 |
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Warrant liability |
$ | 373 | $ | | $ | | $ | 373 | ||||||||
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Total |
$ | 373 | $ | | $ | | $ | 373 | ||||||||
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June 30, 2015 |
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Warrant liability |
$ | 214 | $ | | $ | | $ | 214 | ||||||||
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Total |
$ | 214 | $ | | $ | | $ | 214 | ||||||||
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The warrant liability represents the fair value of the warrants issued by the company that have reset features. The company is required to revalue the warrant liability at the end of each reporting period and record a non-cash gain or loss in the statement of operations for the change in the fair value of the warrant liability in the period in which the change occurs. The fair value of the warrant liability is estimated using an adjusted Black-Scholes model and the applicable level 1 and level 2 inputs disclosed in Note 3 of Notes to Condensed Consolidated Financial Statements and an unobservable level 3 input regarding the likelihood of a reset occurring. Since the company uses a level 3 input, the warrant liability in included in the level 3 category in the table above. Estimating fair value requires the input of highly subjective assumptions and because changes in such assumptions can materially affect the fair value estimate, in managements opinion, the existing models may not provide a reliable single measure of the fair value of the related assets or liabilities.
15
Authentidate Holding Corp. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the three months ended September 30, 2015, the company recorded a non-cash loss of approximately $159,000 in other expense for the change in fair value of the warrant liability. For the three months ended September 30, 2014, there were no gains or losses resulting from the fair value measurement of assets or liabilities.
14. Accounting Standards Adopted in Fiscal 2016
The company has not adopted any FASB Accounting Standards Updates (ASU) during fiscal 2016.
15. Common Stock Warrants
During the three months ended September 30, 2015, the company issued warrants to purchase shares of its common stock as follows. The company issued 100,000 warrants to a consultant for services with an exercise price of $0.19 per share. These warrants have a five year life and, are exercisable beginning six months after the grant date. Under this consulting arrangement, the company may grant up to an additional 800,000 warrants to this consultant based on the achievement of performance targets. Unless such performance targets are achieved, no additional warrants would be issued under this arrangement. The fair value of these warrants, as determined by the Black Scholes Model, was charged to operations on the grant date. Further, as discussed more fully in Notes 7 of Notes to Condensed Consolidated Financial Statements, the company issued warrants to purchase 1,050,000 shares of the companys common stock in connection with the issuance of promissory notes in September 2015.
A schedule of common stock warrant activity is as follows (in thousands, except per share and average life data):
Number of Shares |
Weighted Average Exercise Price Per Share |
Weighted Average Remaining Contractual Life (Years) |
Aggregate Intrinsic Value |
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Outstanding, June 30, 2015 |
33,669 | $ | 0.84 | |||||||||||||
Issued |
1,150 | 0.29 | ||||||||||||||
Expired |
(50 | ) | 1.40 | |||||||||||||
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Outstanding, September 30, 2015 |
34,769 | 0.67 | 3.49 | $ | 916 | |||||||||||
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Exercisable, September 30, 2015 |
26,425 | $ | 0.97 | 3.12 | $ | 916 | ||||||||||
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16. Other Subsequent Events
In October 2015, the company issued promissory note in the aggregate principal amount of $450,000 to Peachstate Medical Holdings LLC, d/b/a AEON Clinical Laboratories in a private transaction. The note is unsecured and is not convertible into equity securities of the company. The note bears interest at 20% per annum, payable in arrears, and is due upon the earlier of (i) October 28, 2016, or (ii) within 30 days of the closing of a sale of equity or debt securities of the company, or series of closings, as part of the same transaction, of equity or debt securities within a period of 90 days, in the gross amount of at least $5,000,000 in cash proceeds. The company also issued the investor warrants to purchase an aggregate of 1,000,000 shares of common stock. The warrants are exercisable commencing twelve months following their issuance for a period of 54 months at an exercise price of $0.30 per share.
16
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements and Factors That May Affect Future Results
Certain statements in this Form 10-Q, including information set forth under Item 2 Managements 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). We desire to avail ourselves of certain safe harbor provisions of the Act and are therefore including this special note to enable us 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 our stockholders and other publicly available statements issued or released by us involving known and unknown risks, uncertainties and other factors which could cause our actual results, performance (financial or operating) or achievements to differ from the future results, performance (financial or operating) or achievements expressed or implied by such forward-looking statements. Such future results are based upon our managements 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 our software, products and services, competition, pricing, technological changes, implementation of our business plan, and other risks as discussed in our filings with the Securities and Exchange Commission, in particular our Annual Report on Form 10-K for the year ended June 30, 2015 and our subsequently filed reports filed with the Securities and Exchange Commission , all of which risk factors could adversely affect our business and the accuracy of the forward-looking statements contained herein.
Overview
Authentidate Holding Corp. (Authentidate or the company) and its subsidiaries provide secure web-based revenue cycle management applications and telehealth products and services that enable healthcare organizations to increase revenues, improve productivity, reduce costs, coordinate care for patients and enhance related administrative and clinical workflows and compliance with regulatory requirements. Our web-based services are delivered as Software as a Service (SaaS) to our customers interfacing seamlessly with billing and document management systems. These solutions incorporate multiple features and security technologies such as business- rules based electronic forms, intelligent routing, transaction management, electronic signatures, identity credentialing, content authentication, automated audit trails and remote patient management capabilities. Both web and fax-based communications are integrated into automated, secure and trusted workflow solutions.
Our telehealth solutions provide in-home patient vital signs monitoring systems and services to improve care for patients and reduce the cost of care by delivering results to their healthcare providers via the Internet. Our telehealth solutions combine our tablet or Electronic House Call patient vital signs monitoring appliances or our Interactive Voice Response patient vital signs monitoring solution with a web-based management and monitoring software module. Both solutions enable unattended measurements of patients vital signs and related health information and are designed to aid wellness and preventative care, and deliver better care to specific patient segments that require regular monitoring of medical and behavioral health conditions. Healthcare providers can easily view each specific patients vital statistics and make adjustments to the patients care plans securely via the Internet. This service provides a combination of care plan schedule reminders and comprehensive disease management education as well as intelligent routing to alert on-duty caregivers whenever a patients vital signs are outside of the practitioners pre-set ranges. Healthcare providers and health insurers are also expected to benefit by having additional tools to improve patient care and reduce in-person and emergency room patient visits and hospital readmissions.
We operate our business in the US with technology and service offerings that address emerging growth opportunities based on the regulatory and legal requirements specific to each market. Our business is engaged in the development and sale of web-based services largely based on our Inscrybe® platform and related capabilities and our telehealth products and services. In recent years we have focused our efforts on developing and introducing solutions for use in the healthcare information technology industry.
We believe there are a number of on-going factors that will be favorable for the healthcare information technology industry in the near future. These factors include regulatory reforms in the U.S. focused on controlling costs, automating medical records and processes and expanding the availability of healthcare coverage, and healthcare industry trends to significantly reduce costs, shorten the length of hospital stays, reduce hospital readmissions, shift patient care towards wellness and preventative care programs and automate healthcare records and processes. Furthermore, we believe our business will benefit as the recent U.S. Supreme Court decisions upholding the healthcare law are better recognized in the marketplace. Because healthcare information technology solutions play an important role in healthcare by improving safety, efficiency and reducing cost, they are often viewed as more strategic than other capital purchases. In addition, government agencies, as well as politicians and policymakers appear to agree that the growing cost of our healthcare system is unsustainable and the intelligent use of information systems will improve health outcomes and, correspondingly, drive down costs. The broad recognition that healthcare information technology is essential to help control healthcare costs and improve quality contributed to the inclusion of healthcare information technology incentives in the American Recovery and Reinvestment Act (ARRA) and accompanying Health Information Technology for Economic and Clinical Health (HITECH)
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provisions which include more than $35 billion in incentives for healthcare organizations to modernize operations through meaningful use of healthcare information technology. Further, as more consumers are provided with insurance coverage, healthcare providers may face increased volumes that could create capacity constraints, and they may find it challenging to profitably provide care at the planned reimbursement rates under the expanded coverage models. Another aspect of the market for healthcare information technology is the shift away from fee-for-service or volume-based reimbursement towards value-based or outcomes-based reimbursement. Payers, including health insurance companies and federal and state governments, are implementing programs to link reimbursement to quality measurements and outcomes, and this alignment creates significant financial motivation for adoption of healthcare information technology products and services. We believe that there are substantial sums of reimbursement funds that are tied to incentive programs such as value based purchasing, 30-day readmission rules and quality reporting requirements. There are also a growing number of third-party studies that document how telehealth can positively impact the way healthcare is delivered. From chronic care to behavioral health and wellness programs, a wide range of patient populations can benefit from telehealth. We believe that telehealth products are helping physicians and patients to accomplish a number of goals, including, shifting visits away from high-cost settings; reducing the cost of managing patients; reducing unnecessary hospital readmissions; reducing the duration of hospital stays; improving access to care for patients located in remote areas; and improving outcomes. We believe the factors discussed above will create strong incentives for providers to maximize efficiency and create the need for additional investments in healthcare information technology solutions and services. We also believe that the healthcare information technology industry will likely benefit as healthcare providers and governments continue to recognize that these solutions and services contribute to safer, more efficient healthcare.
We have experienced net losses and negative cash flow from operating activities while we have been focused on developing our products and services, refining our business strategies and repositioning our businesses for growth. Although we believe we are well positioned for such growth, we expect to continue to generate net losses and negative cash flow for the foreseeable future as we seek to expand our potential markets and generate increased revenues. As discussed in more detail below, we have completed several financing transactions, and sold non-core assets to fund our working capital needs. See Liquidity and Capital Resources.
During fiscal 2016 we have continued to focus primarily on marketing our telehealth products and services and our referral and order management solution while implementing various measures to decrease our operating costs. We have also focused our efforts on evaluating strategic transactions, including the proposed transaction with Peachstate Health Management, LLC, as described in Note 4 of Notes to Condensed Consolidated Financial Statements. We intend to continue to take steps to refine our core product and service offerings, expand our addressable markets, manage operating costs and position the company for long-term growth. We believe the company is well positioned for growth as the healthcare markets it serves are growing rapidly and expected to continue to grow over the next several years according to third party analyst market assessments. Additionally, our products and services target the 12 month episode of care market, which is the largest and fastest growing market segment for remote patient management services. As discussed above, we also believe our business will benefit as federal government healthcare reforms are implemented and healthcare industry trends take hold. Although we have taken steps to focus our business in these areas, our progress will continue to be impacted by the timing of customer contracts and implementations, our ability to fund our operating costs and the market acceptance of our products and services.
As previously reported, on March 6, 2015 we announced that the Department of Veterans Affairs (VA) informed the company that it did not intend to exercise the fourth and final option year under our contract for telehealth products and services. The companys contract with the VA was originally awarded in April 2011 and consisted of a base year and four one-year option years which were exercisable at the VAs sole discretion. We completed our project with the VA upon the expiration of the option year on May 15, 2015. Our VA revenue included both recurring service revenues as well as hardware sales. As a result of the non-renewal of the VA contract we expect to report significantly reduced revenues over the next several quarters and we have taken steps to reduce our operating costs and better align our resources with the growth opportunities we intend to pursue. As a result, we have implemented a number of changes to our business plan with the ultimate goal to increase revenues and positive cash flow from operations, including a recalibration of marketing and sales efforts that have already resulted in growth from existing customers and sales to new customers. These changes include cost reductions from reducing our workforce and use of consultants that we made in the third quarter of fiscal 2015 and additional workforce reductions through August 31, 2015. These reductions are expected to reduce operating expenses by approximately $4,151,000 on an annualized basis. We have also taken actions to realign our data center operations for an expected annualized cost reduction of $203,000 and have executed an agreement with our landlord to relocate our corporate offices, which is expected to result in annualized savings of $372,000.
We believe that our experience with the VA telehealth project has enabled us to refine our telehealth products and services and position the company for success in the commercial market which we believe provides a significantly larger opportunity for the company as this market develops. We have continued to develop lower cost solutions for the commercial market that we were not able to deploy at the VA and we have already reduced our operating costs in excess of the monthly recurring revenues and equipment margins that we were generating from the VA project. Moving forward, we plan to repurpose our volume-tested, web-based management and monitoring solutions and investments to focus on offering a broader array of cost effective solutions to the healthcare market and increase our sales efforts on commercial market opportunities which we believe offer greater potential for growth.
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In addition, on August 25, 2015, we announced that we had entered into a non-binding letter of intent with Peachstate Health Management, LLC d/b/a AEON Clinical Laboratories, a clinical laboratory based in Gainesville, GA for the acquisition of all of the outstanding membership interests of AEON in exchange for shares of a newly created class of Series E preferred stock of Authentidate. As described in greater detail above, the letter of intent provides that if certain financial results are achieved during the next four years, the AEON members would be issued Series E Shares convertible into 85% of the outstanding shares of our common stock on a partially diluted basis. The letter of intent is non-binding and any agreement is subject to the negotiation and execution of a definitive transaction agreement which may vary from the terms set forth in the letter of intent. Accordingly, there can be no assurance that a definitive agreement will be reached by the parties, or that any agreement will result in the completion of the merger transaction.
Our current revenues consist principally of transaction fees for web-based hosted software services and revenues from hardware sales and rentals, monthly monitoring services and maintenance fees from our telehealth business. Growth in our business is affected by a number of factors, including general economic and business conditions, and is characterized by long sales cycles. The timing of customer contracts, implementations and ramp-up to full utilization can have a significant impact on results and we believe our results over a longer period of time provide better visibility into our performance.
We intend to continue our efforts to market our web-based services and related products in our target markets. We also intend to focus on identifying additional applications and markets where our technology can address customer needs.
Critical Accounting Policies
There have been no changes to our critical accounting policies during the three months ended September 30, 2015. Critical accounting policies and the significant estimates made in accordance with such policies are regularly discussed with our Audit Committee. Those policies are discussed under Critical Accounting Policies in our Managements Discussion and Analysis of Financial Condition and Results of Operations section included in item 7, as well as in our consolidated financial statements and the footnotes thereto contained in our Annual Report on Form 10-K for the fiscal year ended June 30, 2015.
Results of Operations
Three and months ended September 30, 2015 compared to three months ended September 30, 2014
Revenues were $398,000 for the quarter ended September 30, 2015 compared to $1,052,000 for the prior year period. These results reflect a decrease in revenues from both our telehealth products and services and hosted software services due to lower equipment sales and service revenues and transaction volumes, respectively.
Cost of revenues decreased to $207,000 for the quarter ended September 30, 2015 compared to $593,000 for the same period in the prior year, due primarily to lower costs related to telehealth revenues and lower personnel costs for our hosted software services.
Selling general and administrative (SG&A) expenses decreased to $1,501,000 for the quarter ended September 30, 2015 compared to $2,011,000 for the prior year period. The change is due primarily to lower personnel and consulting expenses offset in part by incremental legal and merger related expenses and does not give effect to the impact of our recent cost-cutting measures for data center and facility expenses.
Product development expenses were $162,000 for the quarter ended September 30, 2015 compared to $370,000 for the prior year period reflecting lower personnel and contractor expenses.
Depreciation and amortization expense was $182,000 for the quarter ended September 30, 2015 compared to $189,000 for the prior year period. This change reflects lower expenditures for property and equipment during the current period.
Other expense was $409,000 for the quarter ended September 30, 2015 compared to zero for the prior year period. Other expense for current period reflects the non-cash amortization of debt discount and deferred financing costs on notes payable, the non-cash loss on the change in the fair value of the warrant liability and interest expense on notes payable.
Net loss for the quarter ended September 30, 2015 was $2,063,000, or $0.05 per share, compared to $2,111,000, or $0.06 per share, for the prior year period. The decrease in net loss for the period is due primarily to the decrease in SG&A and product development expenses discussed above.
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Liquidity and Capital Resources
Overview
Our operations and product development activities have required substantial capital investment to date and we have been largely dependent on our ability to sell additional shares of our common stock or other equity and debt securities to obtain financing to fund our operating deficits, product development activities, business acquisitions, capital expenditures and telehealth activities. Since June 2015, we have completed debt financing transactions resulting in total proceeds of approximately $1.7 million. The material terms of these debt transactions are summarized in Notes 7 and 16 of Notes to Condensed Consolidated Financial Statements. We are using the proceeds from these transactions for working capital and general corporate purposes, including supporting the rollout of our telehealth products and services. However, we have an immediate need for additional capital and are exploring additional potential transactions to improve our capital position, ensure we are able to meet our working capital requirements and provide funds to pay these debt obligations which are due in the next twelve months. We have developed and intend to continue to develop new applications to grow our business and address new markets. As discussed in more detail below, our recurring operating losses and capital needs, among other factors, raise substantial doubt about our ability to continue as a going concern. Our consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
In August 2012 we filed with the SEC a registration statement on Form S-3 and a pre-effective amendment to such registration statement under the Securities Act in December 2012. The shelf registration statement was declared effective by the SEC in December 2012 and replaces our prior shelf registration statement. This shelf registration statement allows us to sell, from time to time in one or more public offerings, shares of our common stock, shares of our preferred stock, debt securities or warrants to purchase common stock, preferred stock or debt securities, or any combination of such securities, for proceeds in the aggregate amount of up to $40 million, subject to SEC limitations. There is approximately $29 million available under this registration statement for future transactions, subject to SEC limitations. The terms of such future offerings, if any, and the type of equity or debt securities would be established at the time of the offering. This disclosure shall not constitute an offer to sell or a solicitation of an offer to buy the securities, nor shall there be any sale of these securities in any jurisdiction in which an offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such jurisdiction. Any offer of the securities will be solely by means of the prospectus included in the registration statement and one or more prospectus supplements that will be issued at the time of the offering.
Cash Flows
The company has incurred significant losses and our operations and product development activities have required substantial capital investment to date. Under our current operating plan to grow our business, our ability to improve operating cash flow has been highly dependent on the market acceptance of our offerings. As discussed more fully in the Overview section above, the VA, our largest customer, did not renew our contract beyond May 15, 2015 and we expect to report significantly reduced revenues over the next several quarters. We have taken steps to reduce our operating costs and better align our resources with our growth opportunities; however, and based on our business plan, we expect our existing resources, revenues generated from operations, net proceeds from our debt financing transactions, other transactions we are considering and proceeds received from the exercise of outstanding warrants (of which there can be no assurance) or a restructuring of outstanding debt obligations (of which there can be no assurance) to satisfy our working capital requirements for at least the next twelve months. If necessary, management of the company believes that it can raise additional equity or debt financing to satisfy its working capital requirements. However, no assurances can be given that we will be able to support our costs or pay debt obligations through revenues derived from operations or generate sufficient cash flow to satisfy our other obligations. These factors, among others, raise substantial doubt about our ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments to the recoverability and classification of asset carrying amounts or the amounts and classifications of liabilities that might result from the outcome of these uncertainties. 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. As discussed above, we have an immediate need for additional capital and in addition to our recently announced letter of intent for a business combination transaction we are continuing to explore additional potential transactions to improve our capital position to ensure we are able to meet our financing and working capital requirements. We would expect to raise additional funds through public or private equity offerings, debt financings or strategic alliances or a restructuring of outstanding debt obligations. 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 or may require the granting of liens on our assets or preferences on revenue sources. We may also enter into financing transactions which involve the granting of liens on our assets or which grant preferences of
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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 assurances that the company will be successful in completing the transaction contemplated by the letter of intent, raising additional capital or securing financing when needed or on terms satisfactory to the company. If we are unsuccessful in raising additional capital we will need to reduce costs and operations substantially or potentially suspend operations. Accordingly, any inability to obtain required financing on sufficiently favorable terms could have a material adverse effect on our business, results of operations and financial condition.
At September 30, 2015, cash and cash equivalents amounted to approximately $282,000 and total assets at that date were $4,188,000. Since June 30, 2015 cash and cash equivalents increased approximately $35,000 reflecting the issuance of company securities offset in part by cash used principally to fund operating losses, product development activities, changes in working capital, and capital expenditures during the three months ended September 30, 2015. Our current estimated monthly operational requirements after giving effect to our cost cutting measures, but not to any special or one-time events, is approximately $350,000. Cash used for the period includes investments in licenses and other assets, and the prepayment of certain insurance premiums and maintenance contracts. We expect to continue to use cash to fund operating losses, changes in working capital, product development activities, and capital expenditures for the foreseeable future.
Net cash used in operating activities for the three months ended September 30, 2015 was approximately $1,191,000 compared to $1,737,000 for the prior year period reflecting a decrease in cash used for operations during the current period. Net cash used by investing activities was $19,000 for the three months ended September 30, 2015 compared to $84,000 for the prior year period. This change reflects a decrease in asset and related purchases for the current period. Net cash provided by financing activities for the three months ended September 30, 2015 was approximately $1,245,000 compared to $2,106,000 for the prior year period. The amount for the current period reflects the proceeds from short-term note transactions discussed above. The amount for the prior year reflects the proceeds from the August 2014 registered direct offering less the payment of certain preferred stock dividends.
Our future capital requirements may vary materially from those now planned. The amount of capital that we will need in the future will depend on many factors, including:
| our relationships with suppliers and customers; |
| the market acceptance of our products and services; |
| the levels of promotion and advertising that will be required to launch our new offerings and achieve and maintain a competitive position in the marketplace; |
| price discounts on our products and services to our customers; |
| our pursuit of strategic transactions; including our ability to complete the transaction contemplated by our recently announced letter of intent for a business combination; |
| our need to repay existing indebtedness; |
| our business, product, capital expenditure and research and development plans and product and technology roadmaps; |
| the level of accounts receivable and inventories that we maintain; |
| technological advances; |
| our decision to redeem our outstanding shares of preferred stock; and |
| our competitors response to our offerings. |
Financing Activities
Except as discussed above, we have not engaged in any external financing activities in fiscal 2016 and 2015.
Other Matters
The events and contingencies described below have impacted or may impact our liquidity and capital resources.
In August 2015, we announced that our board was focused on exploring strategic alternatives in order to enhance shareholder value. Subsequently, on August 25, 2015, we announced that we had entered into a non-binding letter of intent with Peachstate Health Management, LLC d/b/a AEON Clinical Laboratories, an expanding clinical laboratory based in Gainesville, GA (AEON) for the acquisition of all of the outstanding membership interests of AEON in exchange for shares of a newly created class of Series E preferred stock of Authentidate. As described in greater detail in Note 4 of Notes to Condensed Consolidated Financial Statements, the letter of intent provides that if certain financial results are achieved during the next four years, the AEON members would be issued Series E Shares convertible into 85% of the outstanding shares of the companys common stock on a partially diluted basis as of the closing date.
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Presently, 28,000 shares of our Series B preferred stock, originally issued in a private financing in October 1999, remain outstanding. As of October 1, 2004, our right to redeem these shares of Series B preferred stock is vested. Accordingly, we have the right to repurchase such shares at a redemption price equal to $25.00 per share, plus accrued and unpaid dividends. The holder, however, has the right to convert these shares of preferred stock into an aggregate of 250,000 shares of our common stock at a conversion rate of $2.80. In the event we elect to redeem these securities, the holder will be able to exercise its conversion right subsequent to the date that we issue a notice of redemption but prior to the deemed redemption date as would be set forth in such notice. As of September 30, 2015, no shares of the Series B preferred stock have been redeemed.
In connection with our private placement of Series D preferred stock in June 2013, we issued 665,000 shares of Series D 5% convertible preferred stock. The Series D preferred stock is convertible into 6,125,024 shares of our common stock at an initial conversion rate of $1.08571 per share. Each share of Series D preferred stock has a stated value of $10.00 per share. The company has the right to repurchase these shares at the stated value per share, plus accrued and unpaid dividends, starting in June 2015 and to require the holders to convert such securities into common stock starting in June 2016. Each holder of our Series D preferred stock has the right to convert such shares into common stock at anytime commencing on the six month anniversary date of the issue date. The Series D preferred stock will pay dividends at the rate of 5% per annum, payable in cash or shares of common stock, at the companys option subject, however, to limitations required by the Nasdaq stock market.
Commitments
Office Lease Commitments
We entered into the lease agreement for our executive offices on July 11, 2005. The lease was for a term of ten years and four months, with a commencement date of October 1, 2005 and covers approximately 19,700 total rentable square feet. The annual rent in the first year was $324,000 increasing to $512,000 in year 2 and increasing at regular intervals until year 10 when the annual rent would be approximately $561,000. Effective February 1, 2010, we amended our lease to reduce the annual rent to approximately $512,000 for the remaining lease term and extended the lease term for one year through January 2017. As part of the lease agreement, we posted a letter of credit securing our lease payments which was reduced to approximately $256,000. On September 23, 2015, we amended our lease to relocate our executive offices to approximately 5,200 total rentable square feet in the same building. The lease amendment is dated as of September 15, 2015 and will be effective upon the completion of renovations to the premises or, if earlier, the date that the company occupies the space. The amended lease has a term of six years following the occupancy date and annual rentals ranging from approximately $135,000 in the first year to $148,000 in the final year. The lease also provides us with a one-time option to renew the lease for a term of five years at the then-current market rate and, provided we pay an early termination fee, allows us an early termination option on each of the 18-month, 27-month and 36-month anniversary dates of the effective date of the amendment. As part of the lease agreement, we will reduce our letter of credit securing our lease payments to approximately $135,000.
Contractual Commitments
A summary of the contractual commitments associated with our lease obligations as of September 30, 2015 is as follows (in thousands):
Total | Less than 1 year |
1-3 years | 4-5 years | More than 5 years |
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Leases |
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Operating |
$ | 891 | $ | 166 | $ | 420 | $ | 293 | $ | 12 | ||||||||||
Capital |
40 | 16 | 24 | | | |||||||||||||||
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Total lease obligations |
$ | 931 | $ | 182 | $ | 444 | $ | 293 | $ | 12 | ||||||||||
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In connection with the termination of the companys employment relationship with its former chief executive officer and president in February 2015, the company is presently reviewing its severance obligations to him and the vesting and other post-termination provisions of certain of the unexercised stock options and other unvested stock options and unvested restricted stock units held by him as of the effective date of his separation from the company.
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Off-Balance Sheet Arrangements
We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating parts of our business that are not consolidated into our financial statements. We do not have any arrangements or relationships with entities that are not consolidated into our financial statements that are reasonably likely to materially affect our liquidity or the availability of our capital resources. We have entered into various agreements by which we may be obligated to indemnify the other party with respect to certain matters. Generally, these indemnification provisions are included in contracts arising in the normal course of business under which we customarily agree to hold the indemnified party harmless against losses arising from a breach of representations related to such matters as intellectual property rights. Payments by us under such indemnification clauses are generally conditioned on the other party making a claim. Such claims are generally subject to challenge by us and to dispute resolution procedures specified in the particular contract. Further, our obligations under these arrangements may be limited in terms of time and/or amount and, in some instances, we may have recourse against third parties for certain payments made by us. It is not possible to predict the maximum potential amount of future payments under these indemnification agreements due to the conditional nature of our obligations and the unique facts of each particular agreement. Historically, we have not made any payments under these agreements that have been material individually or in the aggregate. As of September 30, 2015, we were not aware of any obligations under such indemnification agreements that would require material payments.
Effects of Inflation and Changing Prices
The impact of general inflation on our operations has not been significant to date and we believe inflation will continue to have an insignificant impact on us.
Present Accounting Standards Not Yet Adopted
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU is intended to clarify the principles for recognizing revenue by removing inconsistencies and weaknesses in revenue requirements; providing a more robust framework for addressing revenue issues; improving comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets; and providing more useful information to users of financial statements through improved revenue disclosure requirements. The new standard is required to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. The provisions of this ASU were effective for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2016. Early application is not permitted. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date to fiscal periods beginning after December 15, 2017. Early adoption is permitted for fiscal periods beginning after December 15, 2016. The standard permits the use of either the retrospective or cumulative effect transition method. We are currently evaluating the impact of this standard on our consolidated financial statements.
In June 2014, the FASB issued ASU No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. This ASU requires a reporting entity to treat a performance target that affects vesting and that could be achieved after the requisite service period as a performance condition, and apply existing guidance under the Stock Compensation Topic of the ASC as it relates to awards with performance conditions that affect vesting to account for such awards. The provisions of this ASU are effective for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2015. We are currently evaluating the impact of this standard on our consolidated financial statements.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial StatementsGoing Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern. This ASU is intended to define managements responsibility to evaluate whether there is substantial doubt about an entitys ability to continue as a going concern and to provide related footnote disclosures. Specifically, ASU 2014-15 provides a definition of the term substantial doubt and requires an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). It also requires certain disclosures when substantial doubt is alleviated as a result of consideration of managements plans and requires an express statement and other disclosures when substantial doubt is not alleviated. The new standard will be effective for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2016, with early adoption permitted. We are currently evaluating the impact of this standard on our consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, InterestImputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. This ASU is intended to simplify the presentation of debt issuance costs and conform to the guidance in International Financial Reporting Standards, which requires that transaction costs be deducted from the carrying value of the financial liability and not recorded as separate assets. Additionally, the requirement to recognize debt issuance costs as deferred charges
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conflicts with the guidance in FASB Concepts Statement No. 6, Elements of Financial Statements, which states that debt issuance costs are similar to debt discounts and in effect reduce the proceeds of borrowing, thereby increasing the effective interest rate. FASB Concepts Statement No. 6 further states that debt issuance costs cannot be an asset because they provide no future economic benefit. The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. For public business entities, the amendments in this ASU are effective for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2015. In August 2015, the FASB issued ASU No. 2015-15, InterestImputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit ArrangementsAmendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting. This ASU adds SEC paragraphs pursuant to the SEC Staff Announcement at the June 18, 2015, Emerging Issues Task Force meeting about the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements to this topic. Given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. We are currently evaluating the impact of this standard on our consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-05, Customers Accounting for Fees Paid in a Cloud Computing Arrangement, which provides explicit guidance to help companies evaluate the accounting for fees paid by a customer in a cloud computing arrangement. The new guidance clarifies that if a cloud computing arrangement includes a software license, the customer should account for the license consistent with its accounting for other software licenses. If the arrangement does not include a software license, the customer should account for the arrangement as a service contract. ASU 2015-05 is effective for public business entities for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2015. An entity can elect to adopt the amendments either prospectively for all arrangements entered into or materially modified after the effective date, or retrospectively. Early adoption is permitted for all entities. We are currently evaluating the impact of this standard on our consolidated financial statements.
In May 2015, the FASB issued ASU 2015-08, Business CombinationsPushdown AccountingAmendment to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115. This ASU was issued to amend various SEC paragraphs pursuant to the issuance of Staff Accounting Bulletin No. 115. This update is not expected to have a significant impact on our consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. The amendments in this ASU require an entity to measure in scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. The amendments do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. A reporting entity should apply the amendments prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. We are currently evaluating the impact of this standard on our consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
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.
Interest Rate Risk
At any time, fluctuations in interest rates could affect interest earnings on our cash and marketable securities. We believe that the effect, if any, of reasonably possible near term changes in interest rates on our financial position, results of operations, and cash flows would not be material. Currently, we do not hedge these interest rate exposures. The primary objective of our investment activities is to preserve capital. We have not used derivative financial instruments in our investment portfolio.
At September 30, 2015, our unrestricted cash totaled approximately $282,000 and was in non-interest bearing checking accounts used to pay operating expenses.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our chief executive officer and chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act) as of the end of the period covered by this report, have concluded that, based on the evaluation of these controls and procedures, our disclosure controls and procedures were effective at the reasonable assurance level to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SECs rules and forms and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.
Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. Our management, however, believes our disclosure controls and procedures are in fact effective to provide reasonable assurance that the objectives of the control system are met.
Changes in Internal Control over Financial Reporting
There was no change in our system of internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the quarter ended September 30, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
We are subject to claims and litigation arising in the ordinary course of business. Our management considers that any liability from any reasonably foreseeable disposition of such claims and litigation, individually or in the aggregate, would not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
As provided for under the Private Securities Litigation Reform Act of 1995, we wish to caution shareholders and investors that the following important factors, among others discussed throughout this Quarterly Report on Form 10-Q and a restated description of the risk factors associated with our business is set forth below. This description includes any material changes to and supersedes the description of the risk factors associated with our business previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended June 30, 2015 and in our reports subsequently filed with the SEC. You should carefully consider the risks described below, together with all of the following risk factors and the other information included in this report, in considering our business herein as well as the information included in our other reports filed with the SEC. These risks have affected, and in some cases could affect, our actual results of operations and cause our results to differ materially from those anticipated in forward looking statements made herein. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations, financial condition and/or operating results. If any of the matters or events described in the following risks actually occurs, our business, financial condition or results of operations could be harmed. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment due to any of these risks.
Risks Related to Our Financial Condition
Failure to increase our revenue and keep our expenses consistent with revenues could prevent us from achieving and maintaining profitability in the near term as we seek to generate new business revenues to offset the loss of our largest customer.
We incurred net losses of approximately $9,700,000, $7,143,000 and $11,349,000 for the fiscal years ended June 30, 2015, 2014 and 2013, respectively and had an accumulated deficit of approximately $206,485,000 at June 30, 2015. We also had a net loss of $2,063,000 for the three months ended September 30, 2015 and had an accumulated deficit of approximately $208,650,000 at September 30, 2015. We have expended, and will continue to be required to expend, substantial funds to pursue product development
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projects, enhance our marketing and sales efforts and to otherwise operate our business. Therefore, we will need to generate higher revenues to achieve and maintain profitability and cannot assure you that we will be profitable in any future period. Further, our ability to generate the level of revenues we require to achieve profitability was adversely impacted by the decision of the Department of Veterans Affairs not to exercise the remaining renewal period of our contract. The loss of this customer has increased and accelerated our need to diversify our business by adding new customers. Our prospects should be considered in light of the difficulties frequently encountered in connection with the establishment of a new business line, which characterizes our business, such as the difficulty in creating a viable market, the significant related development and marketing costs and the overall competitive environment in which we operate. Accordingly, there can be no assurance that we will be able to achieve profitable operations in future operating periods. Our business results are likely to remain uncertain as we are unable to reliably predict revenues from our current customers. Revenue levels achieved from our customers, the mix of products and solutions that we offer, our ability to introduce new products as planned and our ability to reduce and manage our operating expenses will affect our financial results. Consequently, we may not be profitable in any future period. Unless we can generate additional revenues from sales or rentals of products and services to existing customers or obtain new customers, we will continue to generate substantial operating losses and may need to curtail our business and incur additional restructuring or exit costs, which may be material. These factors, among others, raise substantial doubt about our ability to continue as a going concern. Our consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Our capital requirements have been significant and until our revenues can sufficiently support our operating costs, we expect to raise additional capital to finance our operations and repay outstanding debt obligations.
Our capital requirements have been and will continue to be significant. We have been substantially dependent upon private placements and registered offerings of our securities and on short-term and long-term debt transactions to fund such requirements. We are expending significant amounts of capital to develop, promote and market our software, services and products. Due to these expenditures, we have incurred significant losses to date. We used approximately $4,951,000, $4,726,000 and $5,214,000 in cash for operating activities for the fiscal years ended June 30, 2015, 2014 and 2013, respectively and $1,191,000 for the three months ended September 30, 2015. Our available cash and cash equivalents as of September 30, 2015 totaled approximately $282,000. Our current estimated monthly operational requirements after giving effect to our cost cutting measures, but not to any special or one-time events is approximately $350,000. Since June 2015, we have completed a number of debt financing transactions resulting in total proceeds of approximately $1.7 million, and have approximately $1.45 million in notes that are due in November 2015. The company is engaged in ongoing discussions and negotiations with the holders of these notes in order to seek modifications to the terms of these obligations, including extensions of the repayment date. We have an immediate need for additional capital and are continuing to explore additional potential transactions to improve our capital position. We expect our existing resources, revenues generated from operations, net proceeds from our debt financing transactions, other transactions we are considering and proceeds received from the exercise of outstanding warrants or restructuring of debt (of which there can be no assurance) to satisfy our working capital requirements for at least the next twelve months; however, no assurances can be given, that we will be able to attain sales levels and support our costs through revenues derived from operations or generate sufficient cash flow to satisfy our other obligations. These factors, among others, raise substantial doubt about our 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. 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. In addition to our recently announced letter of intent for a business combination transaction, we are continuing to explore additional potential transactions to improve our capital position to ensure we are able to meet our financing and working capital requirements. We would expect to raise additional funds through public or private equity offerings, debt financings or strategic alliances. 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, however, that we will be successful in completing the transaction contemplated by the letter of intent, 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:
| our need to utilize cash to support research and development activities and to make incremental investments in our organization; |
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| our ability to achieve targeted revenue, gross profit margins and cost management objectives; |
| our ability to reach break-even or profitability; |
| the success of our sales and marketing efforts; |
| our need to repay indebtedness; |
| the extent and terms of any development, marketing or other arrangements; and |
| changes in economic, regulatory or competitive conditions, including the continuing economic weakness and federal budgetary uncertainty. |
We depend on a limited number of customers for a substantial portion of our revenues, and the loss of the VA as a customer and the loss, or a significant reduction in purchases by, one or more of our other important customers will adversely affect our operating results.
We receive a significant amount of our revenues from a limited number of customers. Over recent years, the Department of Veterans Affairs (VA) had been our largest customer, generating approximately 45% of our total consolidated revenues for the fiscal year ended June 30, 2015. On March 6, 2015, the company announced that the VA informed the company that it was not exercising the fourth and final option year under the contract for telehealth services. Our VA revenue included both recurring services revenue as well as hardware sales. Due to this, the company expects to report significantly reduced revenues over the next several quarters and the loss of this business will materially adversely affect our business, results of operations and financial condition until we are able to replace the revenues that had been generated through our VA contract. We will need to attract new clients and attempt to diversify our customer base from a limited number of potential customers. In general, most of our customer orders for our telehealth business have been and are expected to continue to be made on a purchase order basis, which does not generally require any long-term commitments nor any minimum purchase requirements. Therefore, these customers may alter their past purchasing behavior with little or no notice to us for various reasons. If our customers alter their past (or expected) purchasing behavior, or if we encounter any problems collecting amounts due from them, our financial condition and results of operations could be negatively impacted.
Our revenues may be affected by changes in technology spending levels.
In the past, unfavorable or uncertain macroeconomic conditions and reduced global technology spending rates have adversely affected the markets in which we operate. Current economic conditions and ongoing uncertainty about the economic recovery could reduce the demand for our products and services and negatively impact revenues and operating profit. We are unable to predict changes in general macroeconomic conditions and when global spending rates will be affected. Furthermore, even if spending rates increase, we cannot be certain that the market for our products and services will be positively impacted. If there are future reductions in spending rates, or if spending rates do not increase, our revenues, operating results and financial condition may be adversely affected.
Healthcare policy changes, including recent laws to reform the U.S. healthcare system, may have a material adverse effect on us.
Healthcare costs have risen significantly over the past decade. There have been, and continue to be, proposals by legislators, regulators, and third-party payors to keep these costs down. Certain proposals, if passed, could impose limitations on the prices we will be able to charge for our products, or the amounts of reimbursement available for our products from governmental agencies or third-party payors. These limitations could have a material adverse effect on our financial position and results of operations.
On March 23, 2010, the Patient Protection and Affordable Care Act was signed into law and on March 30, 2010, the Health Care and Education Reconciliation Act of 2010 was signed into law. Together, the two measures make the most sweeping and fundamental changes to the U.S. healthcare system since the creation of Medicare and Medicaid. The Health Care Reform laws include a large number of health-related provisions to take effect over the next four years, including expanding Medicaid eligibility, requiring most individuals to have health insurance, establishing new regulations on health plans, establishing health insurance exchanges, requiring manufacturers to report payments or other transfers of value made to physicians and teaching hospitals, and modifying certain payment systems to encourage more cost-effective care and a reduction of inefficiencies and waste, including through new tools to address fraud and abuse. In 2013, a 2.3% excise tax on the sale by manufacturers, producers and importers of certain medical devices that are not exempted from such tax was imposed under these health care reform laws. Further, as administrative rules implementing healthcare reform under the legislation are not yet finalized or have been modified, the impact of the healthcare reform legislation on our business is unknown, and there can be no assurances that healthcare reform legislation will not adversely impact either our operational results or the manner in which we operate our business. Healthcare industry participants may respond by reducing their investments or postponing investment decisions, including investments in our solutions and services.
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In addition, various healthcare reform proposals have also emerged at the state level. We cannot predict the exact effect newly enacted laws or any future legislation or regulation will have on us. However, the implementation of new legislation and regulation may lower reimbursements for our products, reduce medical procedure volumes and adversely affect our business, possibly materially. In addition, the enacted excise tax may materially and adversely affect our operating expenses and results of operations.
We depend on growth in the software as a service market, and lack of growth or contraction in this market could materially adversely affect our sales and financial condition.
Our hosted software and web-based solutions compete with other software as a service solutions. Demand for our solutions and software offerings is driven by several factors, including an increased focus on protecting business-critical applications, government and industry regulations requiring data protection and integrity, and the growth in the market for software as a service. Segments of the computer and software industry have in the past experienced significant economic downturns and decreases in demand as a result of changing market factors. A change in the market factors that are driving demand for offerings of software as a service could adversely affect our sales, profitability and financial condition.
We depend on third parties for the supply and manufacture of our telehealth products, which may result in delays and quality-control issues could adversely impact our business.
We do not own or lease any manufacturing facilities. Accordingly, in order to market our telehealth solution we purchase finished products and components from unaffiliated suppliers and use a contract manufacturer to produce our Electronic House Call device. In addition, we may use unaffiliated third parties to provide products and distribution services for this solution. If the agreements with these third parties are terminated or if they are unable to perform their obligations under such agreements, it could take several months to establish and qualify alternative suppliers and manufacturing and distribution partners for our products and we may not be able to fulfill our customers orders in a timely manner. At the present time we believe that if existing third party relationships terminate, alternative providers are available on commercially reasonable terms. However, there can be no assurance that the future production capacity of our current manufacturer will be sufficient to satisfy our requirements or that alternative providers of components or manufacturing or distribution services will be available on commercially reasonable terms, or at all. The failure to identify suitable alternative suppliers, manufacturers or distributors could adversely impact our customer relationships and our financial condition. In addition, due to our use of third-party manufacturers and distributors, we do not have control over the timing of product shipments. Delays in shipment could result in the deferral or cancellation of purchases of our products, which would harm our results of operations in any particular quarter. Revenue for a period may be lower than predicted if large orders forecasted for that period are delayed or are not realized, which could impact cash flow or result in a decline in our stock price.
Our business may be adversely affected by legal proceedings.
We have been in the past, and may become in the future, involved in legal proceedings. You should carefully review and consider the various disclosures we make in our reports filed with the SEC regarding legal matters that may affect our business.
The expense of defending such litigation may be substantial and the time required to defend the actions could divert managements attention from the day-to-day operations of our business, which could adversely affect our business, results of operations and cash flows. We cannot predict with certainty the outcome of any legal proceedings in which we become involved and it is difficult to estimate the possible costs to us stemming from any such matters. In addition, an unfavorable outcome in such litigation could have a material adverse effect on our business, results of operations, financial position and cash flows.
Our success is dependent on the performance of our management and the cooperation, performance and retention of our executive officers and key employees.
Our business and operations are substantially dependent on the performance of our senior management team and executive officers. If our management team is unable to perform it may adversely impact our results of operations and financial condition. We do not maintain key person life insurance on any of our executive officers. The loss of one or several key employees could seriously harm our business. Any reorganization or reduction in the size of our employee base could harm our ability to attract and retain other valuable employees critical to the success of our business.
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If we lose key personnel or fail to integrate replacement personnel successfully, our ability to manage our business could be impaired.
Our future success depends upon the continued service of our key management, technical, sales, finance, and other critical personnel. Other than with respect to employment agreements that we entered into with our executive officers, our key personnel do not have employment agreements and we cannot assure you that we will be able to retain them. Key personnel have left our company in the past and there likely will be additional departures of key personnel from time to time in the future. Further, following the non-renewal of our telehealth contract with the VA, in order to reduce our operating costs, we have implemented several reductions in staff and the use of external resources and to date have eliminated a number of positions throughout the company, or more than 50% of our workforce. The loss of any key employee could result in significant disruptions to our operations, including adversely affecting the timeliness of product releases, the successful implementation and completion of company initiatives, the effectiveness of our disclosure controls and procedures and our internal control over financial reporting, and the results of our operations. In addition, hiring, training, and successfully integrating replacement sales and other personnel could be time consuming, may cause additional disruptions to our operations, and may be unsuccessful, which could negatively impact future revenues.
Developing and implementing new or updated software and services and other product offerings may take longer and cost more than expected.
We rely on a combination of internal development, strategic relationships, licensing and acquisitions to develop our products and services. The cost of developing new software, services and other product offerings, such as Inscrybe Healthcare and related modules, and our telehealth offerings is inherently difficult to estimate. Our development and implementation of proposed software, services or other product offerings may take longer than originally expected, require greater investment of cash resources than initially expected, require more testing than originally anticipated and require the acquisition of additional personnel and other resources. Accordingly, we expect to face substantial uncertainties with respect to the performance and market acceptance of new software and services and other product offerings. If we are unable to develop new or updated software, services or other product offerings on a timely basis and implement them without significant disruptions to the existing systems and processes of our customers, we may lose potential revenues and harm our relationships with current or potential customers.
The success of any of our product acquisition and licensing activities is subject to uncertainty and any completed acquisitions or licenses may reduce our earnings, be difficult to integrate, not perform as expected or require us to obtain additional financing.
We regularly evaluate selective acquisitions and look to continue to enhance our product line by acquiring rights to additional products and services. Such acquisitions may be carried out through the purchase of assets, joint ventures and licenses or by acquiring other companies. However, we cannot assure you that we will be able to complete acquisitions or in-licensing arrangements that meet our target criteria on satisfactory terms, if at all. Successfully integrating a product or service acquisition or in-licensing arrangement can be a lengthy and complex process. The diversion of our managements attention and any delays or difficulties encountered in connection with any of our acquisitions or arrangements could result in the disruption of our ongoing business or inconsistencies in standards, controls, procedures and policies that could negatively affect our ability to maintain relationships with customers, suppliers, employees and others with whom we have business dealings. In addition, other companies, including those with substantially greater resources than ours, may compete with us for the acquisition of product or in-licensing candidates and approved products, resulting in the possibility that we devote resources to potential acquisitions or arrangements that are never completed. If we do engage in any such acquisition or arrangement, we will incur a variety of costs, and we may never realize the anticipated benefits of the acquisition or arrangement in light of those costs. If we fail to realize the expected benefits from acquisitions or arrangements we may consummate in the future, whether as a result of unidentified risks, integration difficulties, regulatory setbacks or other events, our business, results of operations and financial condition could be adversely affected.
In addition, our product acquisition and licensing activities may require us to obtain additional debt or equity financing, resulting in increased debt obligations or dilution of ownership to our existing stockholders, as applicable. Therefore, we may not be able to finance acquisitions on terms satisfactory to us, if at all.
New or updated software, services and product offerings will not become profitable unless they achieve sufficient levels of market acceptance, which may require significant efforts and costs.
There can be no assurance that customers and potential customers will accept from us new or updated software, services and other products. The future results of our business will depend, in significant part, on the success of our software, services or other product offerings. Current and potential customers may choose to use similar products and services offered by our competitors or may not purchase new or updated software, services or products, especially when they are initially offered and if they require changes in equipment or workflow. For software, services and products we are developing or may develop in the future, there can be no assurance that we will attract sufficient customers or that such offerings will generate sufficient revenues to cover their associated development, marketing and maintenance costs. Furthermore, there can be no assurance that any pricing strategy that we implement for any new software and services or other product offerings will be economically viable or acceptable to the target markets. Failure to
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achieve broad penetration in target markets with respect to new or updated software, services and product offerings could have a material adverse effect on our business prospects. Further, achieving market acceptance for new or updated software, services and product offerings is likely to require substantial marketing efforts and expenditure of significant funds to create awareness and demand by potential customers.
We do not have patents on all the technology we use, which could harm our competitive position.
Presently, we have one issued U.S. patent and one pending patent application. We also have been granted a license to one issued U.S. patent by Authentidate International AG, two issued U.S. patents by our former joint venture partner and their affiliate and one issued U.S. patent by a third party. We also entered into a license and settlement agreement with Robert Bosch Healthcare Systems, Inc. providing for the resolution and dismissal, with prejudice, of the purported patent infringement lawsuit filed by Bosch against Express MD in January 2012 and a license to the various asserted patents. Some of the technology embodied in some of our current products cannot be patented. We have registered the trademarks Authentidate, Inscrybe, InscrybeMD, AuthentiProof and Inscrybe Office in the U.S., the trademark Authentidate in the European Community and Canada, AuthentiProof in Canada, Mexico and the European Community, Inscrybe in the European Community and Canada, Inscrybe Office, and a number of other trademarks as Madrid Protocol international registrations. We continue to take steps to protect our intellectual property rights including filing additional trademark and patent applications where appropriate. We rely on confidentiality agreements with our key employees to the extent we deem it to be necessary. We further intend to file patent applications for any new products we may develop, to the extent that we believe that any technology included in such products is patentable. There can be no assurance that any patents in fact, will be issued or that any such patents that do issue will be effective to protect our products and services from duplication by other manufacturers or developers or to prevent our competitors from offering similar products and services. Other companies operating within our business segments may independently develop substantially equivalent proprietary information or otherwise obtain access to our know-how, much of which is maintained as trade secrets and there can be no assurance that we will be able to afford the expense of any litigation which may be necessary to enforce our rights under any patent.
In addition, with respect to our telehealth offerings, in connection with the termination of the joint venture, our former joint venture partner and an affiliate licensed to us certain intellectual property assets to enable us to continue to commercialize and develop the ExpressMD Solutions remote patient monitoring products and services. Accordingly, our right to utilize any such intellectual property is subject to the terms of this agreement. Further, and similar to the intellectual property owned by us, there can be no assurance that the intellectual property licensed to us will be effective to protect our products and services from duplication by other manufacturers or developers or to prevent our competitors from offering similar products and services.
We have investigated patents held by third parties of which we are aware and we believe that our products and services, including our telehealth offerings, do not infringe on the claims of these patents. However, we cannot provide any assurances that our products and services do not infringe upon any third party patents or violate the proprietary rights of others, including the patents we have investigated, and it is possible that such infringement or violation has occurred or may occur. As previously reported, we recently settled a claim with Robert Bosch Healthcare Systems, Inc. regarding a purported patent infringement lawsuit filed by Bosch against Express MD in January 2012. While the company does not believe that it was or is infringing any of the asserted patents, in order to mitigate its risk and avoid further costs and distractions of litigation, it entered into the license and settlement agreement.
In the event that products we sell or services we provide are deemed to infringe upon the patents or proprietary rights of others, we could be required to modify our products and/or services or obtain a license for the manufacture, use and/or sale of such products and services. There can be no assurance that, in such an event, we would be able to do so in a timely manner, upon acceptable terms and conditions, or at all, and the failure to do any of the foregoing could have a material adverse effect upon our business. Moreover, there can be no assurance that we will have the financial or other resources necessary to defend against a patent infringement or proprietary rights violation action. In addition, if our products, services or proposed products or services are deemed to infringe upon the patents or proprietary rights of others, we could, under certain circumstances, become liable for damages or subject to an injunction, which could also have a material adverse effect on our business.
Because we currently derive our revenues from a few telehealth products and services, hosted software and web-based service offerings, any decline in demand for these offerings could severely harm our ability to generate revenues.
We currently derive our revenues from a limited number of telehealth products and services, hosted software and web-based service offerings. In addition, our focus on building our business is concentrated on markets for telehealth solutions, hosted software and web-based services where content integrity, workflow automation, electronic signatures, time and date stamping and web-based services are important to customers. As a result, we are particularly vulnerable to fluctuations in demand for these offerings, whether as a result of competition, product obsolescence, technological change, customer spending, or other factors. If our revenues derived from our offerings were to decline significantly, our business and operating results would be adversely affected. As occurred following the end of our business relationship with the VA, if our relationships with significant customers were disrupted we could lose a significant percentage of our anticipated revenues which could have material adverse effect on our business.
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Some of our hosted software and web-based service offerings have long and unpredictable sales cycles, which may impact our quarterly operating results.
Transactions for some of our hosted software and web-based service offerings may require customers to undertake customized installations to integrate the solutions into their legacy systems and require them to modify existing business practices. The period from our initial contact with a potential customer until the execution of an agreement is difficult to predict and can be in excess of six to twelve months. The sales cycles for these transactions can be long and unpredictable due to a number of uncertainties such as:
| customers budgetary constraints; |
| the need to educate potential customers about our software and service offerings; |
| the timing of customers budget cycles; |
| delays caused by customers internal review processes; |
| customers willingness to invest resources and modify their network infrastructures to make use of our offerings; and |
| for sales to government customers, governmental regulatory approval and purchasing requirements. |
We are unable to control or influence many of these factors. Further, we have experienced delays in the pace of adoption and use by our customers of our transaction-based offerings, such as Inscrybe Healthcare, which has adversely affected our earnings. We may experience similar delays with our other products and services and products and services currently under development. During the sales cycle and the implementation period, we may expend substantial time, effort and money preparing contract proposals, negotiating contracts and implementing solutions without receiving any related revenue. In addition, many of our expenses are relatively fixed in the short term, including personnel costs and technology and infrastructure costs. Accordingly, our inability to generate sufficient revenues from these offerings has a direct impact on our results of operations.
The failure to properly manage our growth could cause our business to lose money.
We are using our sales and marketing efforts in order to develop and pursue existing and potential market opportunities. This growth is expected to place a significant demand on management and operational resources. In order to manage growth effectively, we must implement and improve our operational systems and controls on a timely basis. If we fail to implement these systems and controls, our business, financial condition, results of operations and cash flows may be materially and adversely affected.
Healthcare industry consolidation could impose pressure on our price, reduce our potential client base and reduce demand for our offerings.
Many hospitals and health care centers have consolidated to create larger healthcare enterprises with greater market power. If this consolidation trend continues, it could reduce the size of our potential customer base and give the resulting enterprises greater bargaining power, which may lead to erosion of the prices for our products and services. In addition, this consolidation could also erode our revenue base.
Our hosted software and web-based services and web site may be subject to intentional disruption.
Although we believe we have sufficient controls in place to prevent intentional disruptions, such as software viruses specifically designed to impede the performance of our software and web-based services, we may be affected by such efforts in the future. Further, despite the implementation of security measures, this infrastructure or other systems that we interface with, including the Internet and related systems, may be vulnerable to physical break-ins, hackers, improper employee or contractor access, programming errors, attacks by third parties or similar disruptive problems, resulting in the potential misappropriation of our proprietary information or interruptions of our services. Any compromise of our security, whether as a result of our own systems or systems that they interface with, could substantially disrupt our operations, harm our reputation and reduce demand for our services.
Performance problems with our systems, security breaches and other disruptions could cause us to lose business or incur liabilities.
Our customer satisfaction and our business could be harmed if we experience transmission delays or failures or loss of data in the systems we use to provide services to our customers, including transaction-related services. Further, in the ordinary course of our business, we collect and store sensitive data, including our proprietary information and that of our customers in our data center and on our networks. These systems are complex and, despite testing and quality control and security measures, we cannot be certain that problems will not occur or that they will be detected and corrected promptly if they do occur, and our information technology systems
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may be vulnerable to attacks by hackers or breached due to error or malfeasance. In providing these services, we rely on internal systems as well as communications and hosting services provided by third parties, such as the Internet. To operate without interruption, both we and the service providers we use must guard against:
| damage from fire, power loss and other natural disasters; |
| communications failures; |
| software and hardware errors, failures or crashes; |
| security breaches, computer viruses and similar disruptive problems; and |
| other potential interruptions. |
We have experienced periodic system interruptions in the past, and we cannot guarantee that they will not occur again. In the event of a catastrophic event at our data center or any third party facility we use, we may experience an extended period of system unavailability, which could negatively impact our business. Further, any compromise of our electronic systems, including the unauthorized access, use or disclosure of sensitive information, the disruption or breach of our networks or security measures, the loss of stored data, could have a material adverse impact on our business, expose us to reputational damage, result in legal claims and cause us to incur material liabilities. Such events would also be likely to require us to incur significant costs to improve cyber security, including through organizational changes, deploying additional personnel and protection technologies, further training of employees, and engaging third party experts and consultants. In addition, any real or perceived compromise of our security or disclosure of sensitive information may result in lost revenues by, deterring clients from using or purchasing our products and services in the future or by clients electing to use competing suppliers. Although we maintain insurance for our business, we cannot guarantee that our insurance will be adequate to compensate us for all losses that may occur or that this coverage will continue to be available on acceptable terms or in sufficient amounts.
In addition, some of our web-based services may, at times, be required to accommodate higher than expected volumes of traffic. At those times, we may experience slower response times or system failures. Any sustained or repeated interruptions or disruptions in these systems or slowdown in their response times could damage our relationships with customers. Further, the Internet has experienced, and is likely to continue to experience, significant growth in the number of users and the amount of traffic. If the Internet continues to experience increased usage, the Internet infrastructure may be unable to support the demands placed on it which could harm its reliability and performance. Any significant interruptions in our services or increases in response time could result in a loss of potential or existing users of services and, if sustained or repeated, could reduce the attractiveness of our services.
We are subject to product liability risks associated with the production, marketing and sale of products used in the healthcare industry.
The production, marketing and sale of devices used in the healthcare industry have inherent risks of liability in the event of product failure or claim of harm caused by product operation. Furthermore, even meritless claims of product liability may be costly to defend against. The commercialization of the telehealth device exposes us to such claims. These types of product liability claims may result in decreased demand for this product, injury to our reputation, related litigation costs, and substantial monetary awards to plaintiffs. We attempt to limit by contract our liability, however, the limitations of liability set forth in the contracts may not be enforceable in certain jurisdictions or may not otherwise protect us from liability for damages. We may also be subject to claims that are not covered by contract, such as a claim directly by a patient. Although we currently maintain product liability insurance, we may not have sufficient insurance coverage, and we may not be able to obtain sufficient coverage at a reasonable cost. Our inability to obtain product liability insurance at an acceptable cost or to otherwise protect against potential product liability claims could inhibit the commercialization of any products that we develop. If we are sued for any injury caused by our products or processes, then our liability could exceed our product liability insurance coverage and our total assets.
We need to comply with ongoing regulatory requirements applicable to our telehealth product and our results of operations may be adversely impacted by any failure to comply with these requirements. Further, modifications to our current telehealth products may require new marketing clearances or approvals or require us to cease marketing or recall the modified products until such clearances or approvals are obtained.
Our telehealth product is a medical device that is subject to extensive regulation in the United States. Unless an exemption applies, each medical device that we wish to market in the United States must receive either 510(k) clearance or premarket approval from the U.S. Food and Drug Administration, or the FDA, before the product can be sold. Either process can be lengthy and expensive. The FDAs 510(k) clearance procedure, also known as premarket notification, is the process we have used for our current telehealth product. The regulatory clearance for our telehealth product provides for its use for its intended purposes. In addition, we are subject to inspection and marketing surveillance by the FDA to determine our compliance with all regulatory requirements and the manufacturing, labeling, packaging, adverse event reporting, storage, advertising, promotion, distribution and
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record-keeping for approved products are subject to extensive regulation. If the FDA determines that our promotional materials or activities constitute promotion of an unapproved use or we otherwise fail to comply with other FDA regulations, we may be subject to regulatory enforcement actions, including a public warning letter, injunction, civil fines, suspensions, loss of regulatory clearance, product recalls or product seizures. In the more egregious cases, criminal prosecution, civil penalties, or disgorgement of profits are possible. The subsequent discovery of previously unknown problems may also result in restrictions on the marketing of our products, and could include voluntary or mandatory recall or withdrawal of products from the market. Further, we cannot predict the likelihood, nature or extent of adverse government regulation that may arise from future legislation or administrative action. In addition, the FDA has increased its focus on regulating computer software intended for use in a healthcare setting, including applications meant to run on a mobile platform or on a browser tailored for use on a mobile platform. If our software solutions or applications are deemed to be actively regulated medical devices by the FDA, we could be subject to more extensive requirements governing pre- and post-marketing activities. As described above, complying with these regulations could be time consuming and expensive, and may require FDA clearance or pre-market approval. If we are not able to maintain regulatory compliance with any of our products, we may be subject to regulatory enforcement actions as described above and may not be permitted to market our products, which would have a material adverse impact on our results of operations, cash flows and financial condition.
Further, any modification to an FDA-cleared medical device that could significantly affect its safety or effectiveness, or that would constitute a major change or modification in its intended use, requires a new FDA 510(k) clearance or, possibly, a premarket approval. The FDA requires every manufacturer to make its own determination as to whether a modification requires a new 510(k) clearance or premarket approval, but the FDA may review and disagree with any decision reached by the manufacturer. In the future, we may make modifications to our telehealth products and, in appropriate circumstances, determine that new clearance or approval is unnecessary. Regulatory authorities may disagree with our decisions not to seek new clearance or approval and may require us to obtain clearance or approval for modifications to our products. If that were to occur for a previously cleared or approved product, we may be required to cease marketing or recall the modified device until we obtain the necessary clearance or approval. Under these circumstances, we may also be subject to significant regulatory fines or other penalties.
In February 2014, the FDA conducted a routine inspection of our business premises related to our telehealth products and upon the completion of their inspection issued us inspectional observations on FDA Form 483. We have provided the FDA with written responses to the Form 483 that describes the actions we have taken to address their observations and we believe that we have responded to the observations noted by the FDA. In February 2015, the FDA issued an Establishment Inspection Report (EIR) and considered the inspection closed. We would expect another inspection in 2016 based on the typical biennial inspections cycle from the FDA. Beyond incurring compliance-related expenses, we are presently unable to predict what impact, if any, these matters or ensuing proceedings, if any, will have on our financial condition, results of operations or cash flows.
Our ability to generate revenues from our telehealth products is subject to our ability to obtain acceptable prices or an adequate level of reimbursement from payors of healthcare costs.
Our ability to commercialize our telehealth product successfully will depend in part on the extent to which appropriate coverage and reimbursement levels for the cost of this product are obtained by us or by our direct customers from governmental authorities, private health insurers and other organizations. The ability of customers to obtain appropriate reimbursement for their products and services from private and governmental payors is critical to the success of medical technology device companies as the availability of reimbursement affects which products customers purchase and the prices they are willing to pay. The cost containment measures that healthcare payors and providers are instituting and the effect of any healthcare reform could materially and adversely affect our ability to generate revenues from this product and our profitability. In addition, given ongoing federal and state government initiatives directed at lowering the total cost of healthcare, the United States Congress and state legislatures will likely continue to focus on healthcare reform and the reform of the Medicare and Medicaid payment systems. While we cannot predict whether any proposed cost-containment measures will be adopted, the announcement or adoption of these proposals could reduce the price that we receive for our telehealth product in the future. We cannot predict the outcomes of any of legislative or regulatory efforts at reducing costs of providing healthcare and regulatory changes in this regard may have a material adverse effect on our business.
The healthcare industry is highly regulated at the local, state and federal level.
In addition to regulatory requirements concerning the commercialization of medical devices, we are subject to a significant and wide-ranging number of regulations both within the United States and elsewhere, such as regulations in the areas of healthcare fraud and the security and privacy of patient data. Existing and new laws and regulations affecting the health care industry could create unexpected liabilities for us, cause us to incur additional costs, and restrict our operations. Many health care laws are complex, and their application to specific services and relationships may not be clear and these laws and regulations may be applied to us in ways that we do not anticipate, particularly as we develop and release new and more sophisticated products and services. Our failure to accurately anticipate the application of these laws and regulations, or our other failure to comply with them, could create liability for us, result in adverse publicity, and negatively affect our business. Some of the risks we face from health care regulation are described below:
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Healthcare Fraud. Federal and state governments continue to enhance regulation of and increase their scrutiny over practices involving healthcare fraud affecting healthcare providers whose services are reimbursed by Medicare, Medicaid and other government healthcare programs. Our healthcare provider clients are subject to laws and regulations on fraud and abuse which, among other things, prohibit the direct or indirect payment or receipt of any remuneration for patient referrals, or arranging for or recommending referrals or other business paid for in whole or in part by these federal or state healthcare programs. Federal enforcement personnel have substantial funding, powers and remedies to pursue suspected or perceived fraud and abuse. The effect of this government regulation on our clients is difficult to predict. Many of the regulations applicable to our clients and that may be applicable to us, including those relating to marketing incentives offered in connection with medical device sales, are vague or indefinite and have not been interpreted by the courts. They may be interpreted or applied by a prosecutorial, regulatory or judicial authority in a manner that could broaden their applicability to us or require our clients to make changes in their operations or the way in which they deal with us. If such laws and regulations are determined to be applicable to us and if we fail to comply with any applicable laws and regulations, we could be subject to civil and criminal penalties, sanctions or other liability, including exclusion from government health programs, which could have a material adverse effect on our business, results of operations and financial condition.
Security and Privacy of Patient Information. Federal, state and local laws regulate the confidentiality of patient records and the circumstances under which those records may be released. These regulations govern both the disclosure and use of confidential patient medical record information and require the users of such information to implement specified security measures. United States regulations currently in place governing electronic health data transmissions continue to evolve and are often unclear and difficult to apply. Similarly, laws in non-U.S. jurisdictions may have similar or even stricter requirements related to the treatment of patient information. In the United States, HIPAA regulations require national standards for some types of electronic health information transactions and the data elements used in those transactions, security standards to ensure the integrity and confidentiality of health information and standards to protect the privacy of individually identifiable health information. Covered entities under the Health Insurance Portability and Accountability Act of 1996 (HIPAA), which include healthcare organizations such as our clients, and our claims transmission services, are required to comply with the privacy standards, the transaction regulations and the security regulations. Moreover, the Health Information Technology for Economic and Clinical Health Act (HITECH) provisions of the American Recovery and Reinvestment Act of 2009 (ARRA) and associated regulatory requirements, extend many of the HIPAA obligations, formerly imposed only upon covered entities, to business associates as well. As a business associate of our clients who are covered entities, we were in most instances already contractually required to ensure compliance with the HIPAA regulations as they pertain to handling of covered client data. However, the extension of these HIPAA obligations to business associates by law has created additional liability risks related to the privacy and security of individually identifiable health information. Evolving HIPAA and HITECH related laws or regulations and regulations in non-U.S. jurisdictions could restrict the ability of our clients to obtain, use or disseminate patient information. This could adversely affect demand for our solutions if they are not re-designed in a timely manner in order to meet the requirements of any new interpretations or regulations that seek to protect the privacy and security of patient data or enable our clients to execute new or modified healthcare transactions. We may need to expend additional capital, software development and other resources to modify our solutions and devices to address these evolving data security and privacy issues. Furthermore, our failure to maintain confidentiality of sensitive personal information in accordance with the applicable regulatory requirements could damage our reputation and expose us to breach of contract claims (although we contractually limit liability, when possible and where permitted), fines and penalties.
Electronic Health Records Laws and Associated Interoperability Standards. A number of federal and state laws govern the use and content of electronic health record systems. For example, ARRA requires meaningful use of certified electronic health record technology by health care providers in order to receive incentive payments. Regulations have been issued that identify standards and implementation specifications and establish the certification standards for qualifying electronic health record technology. Nevertheless, these standards and specifications are subject to interpretation by the entities designated to certify such technology. While we have not sought to obtain certification of our software solutions for meaningful use under the criteria adopted by the U.S. Department of Health and Human Services regarding electronic health records, our software solutions operate in the framework of facilitating the electronic exchange of health care information by our customers and our solutions must be designed in a manner that facilitates our customers compliance with these laws. Further, there is increasing demand among customers, industry groups and government authorities that healthcare software and systems provided by various vendors be compatible with each other. Market forces or governmental/regulatory authorities could create software interoperability standards that would apply to our solutions, health care devices or solutions, and if our software solutions, health care devices or services are not consistent with those standards, we could be forced to incur substantial additional development costs to conform. We may incur increased development costs and delays in delivering solutions if we need to upgrade our software solutions to either obtain compliance with these varying and evolving standards or to facilitate such compliance by our customers. In addition, any standards applicable to our products and solutions may lengthen our sales and implementation cycle. To the extent that any such standards are narrowly construed or delayed in publication, or that we are delayed in achieving any certification that is necessary or desirable, our sales could be impaired and we may have to invest significantly in changes to our software solutions or devices. Because this is a topic of increasing state and federal regulation, we expect additional and continuing modification of the current legal and regulatory environment. We cannot predict the content or effect of possible future regulation on our business activities.
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In addition, in accordance with requirements under HIPAA, the U.S. Department of Health and Human Services (HHS) is implementing a new version of the standards for HIPAA-covered electronic transactions, including claims, remittance advices, and requests and responses for eligibility. These standards are called ANSI-5010. Additionally, HIPAA required all entities that are covered by HIPAA to upgrade to the tenth revision of the International Statistical Classification of Diseases and Related Health Problems promulgated by the World Health Organization, also known as ICD-10, for use in reporting medical diagnoses and inpatient procedures.
If we are unable to generate sufficient demand for our current telehealth products and services, we may not be able to recover our inventory and other investments.
In connection with our manufacturing and sales plans for our current telehealth products, we purchased certain components and contract manufacturing services for the production of our Electronic House Call monitoring appliance. Our ability to recover our investment in building inventories of our current telehealth products is subject to risks. If we are unable to generate sufficient demand for our products, or incur regulatory penalties relating to our telehealth products, we may not be able to recover the cost of our investments in our telehealth business and our financial condition and results of operations could be negatively impacted. As described in greater detail in Note 10 of Notes to Condensed Consolidated Financial Statements, we have determined that certain components that were held in inventory will not be used in production and we offset the inventory balance for undelivered items against the related accounts payable balance during the quarter ended March 31, 2015. Although to the companys knowledge, no formal legal proceedings have been commenced regarding this matter, we are currently disputing the payment arrangements regarding these items with the relevant vendor. The company believes the amount at issue is approximately $1.2 million and intends to vigorously contest demands by the vendor for payment. Management does not believe that the ultimate resolution of this matter will have a material adverse effect on our consolidated financial position, results of operations or cash flows.
If our manufacturer and suppliers for our telehealth products fail to comply with the FDAs Quality System Regulation, or QSR, and other applicable post market requirements, our operations could be disrupted, our product sales and profitability could suffer, and we may be subject to a wide variety of FDA enforcement actions.
After a device is placed on the market, numerous regulatory requirements also apply to our manufacturer and suppliers. The manufacturing processes of some of our vendors must comply with the FDAs Quality System Regulation, or QSR, which governs the methods used in, and the facilities and controls used for, the design, testing, manufacture, control, quality assurance, installation, servicing, labeling, packaging, storage and shipping of medical devices. The FDA enforces the QSR through unannounced inspections. If one of our suppliers fails a QSR inspection, or if a corrective action plan adopted by a supplier is not sufficient, the FDA may bring an enforcement action, and our operations could be disrupted and the manufacturing of our products delayed. We are also subject to the FDAs general prohibition against promoting our products for unapproved or off-label uses, the FDAs adverse event reporting requirements and the FDAs reporting requirements for field correction or product removals. The FDA has recently placed increased emphasis on its scrutiny of compliance with the QSR and these other post market requirements. If we or our manufacturer or suppliers violate the FDAs requirements or fail to take adequate corrective action in response to any significant compliance issue raised by the FDA, the FDA can take various enforcement actions which could cause our product sales and profitability to suffer.
Our hosted software and web-based services and other product offerings may not be accepted by the market, which would seriously harm our business.
Demand and market acceptance for our currently available hosted software and web-based services and other product offerings remain subject to a high level of uncertainty. Achieving widespread acceptance of these or future offerings will continue to require substantial marketing efforts and the expenditure of significant funds to create and maintain brand recognition and customer demand for such offerings. Demand for our software, services and other product offerings depends on, among other things:
| the perceived ability of our offerings to address real customer problems; |
| the perceived quality, price, ease-of-use and interoperability of our offerings as compared to our competitors offerings; |
| the markets perception of the ease or difficulty in deploying our software or services, especially in complex network environments; |
| the continued evolution of electronic commerce as a viable means of conducting business; |
| market acceptance and use of new technologies and standards; |
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| the ability of network infrastructures to support an increasing number of users and services; |
| the pace of technological change and our ability to keep up with these changes; and |
| general economic conditions, which influence how much money our customers and potential customers are willing to allocate to their information technology budgets. |
There can be no assurance that adequate marketing arrangements will be made and continued for our products and services and there can be no assurance that any of these offerings will ever achieve or maintain widespread market acceptance or that such offerings will be profitable.
If we cannot continuously enhance our hosted software and web-based service offerings in response to rapid changes in the market, our business will be harmed.
The software-based services industry and computer industry are characterized by extensive research and development efforts which result in the frequent introduction of new products and services which render existing products and services obsolete. Our ability to compete successfully in the future will depend in large part on our ability to maintain a technically competent research and development staff and our ability to adapt to technological changes in the industry and enhance and improve our hosted software and web-based service offerings and successfully develop and market new offerings that meet the changing needs of our customers. Although we are dedicated to continued improvement of our offerings with a view towards satisfying market needs with the most advanced capabilities, there can be no assurance that we will be able to continue to do so on a regular basis and remain competitive with products offered by other manufacturers. At the present time, we do not have a targeted level of expenditures for research and development. We will evaluate all opportunities but believe the majority of our research and development will be devoted to enhancements of our existing offerings.
If our hosted software and web-based service offerings and telehealth solutions are not competitive, our business will suffer.
We are engaged in the highly competitive businesses of developing hosted software and web-based workflow management services and telehealth solutions. These markets are continually evolving and, in some cases, subject to rapid technological change. Many of our competitors have greater financial, technical, product development, marketing and other resources than we do. These organizations may be better known than we are and have more customers than we do. We cannot provide assurance that we will be able to compete successfully against these organizations. We believe that the principal competitive factors affecting our markets include performance, ease of use, quality/reliability of our offerings, scalability, features and functionality, price and customer service and support. There can be no assurance that we will be able to successfully incorporate these factors into our software and web-based services or telehealth solutions and compete against current or future competitors or that competitive pressure we face will not harm our business. If we are unable to develop and market products to compete with the products of competitors, our business will be materially and adversely affected.
Our business, including Inscrybe Healthcare and our telehealth products and services are relatively new business lines and although the level of competition for these offerings is uncertain at this point in time, the field of software-based solutions in which we compete, particularly with respect to healthcare information technology solutions, is highly competitive. There can be no assurances, however, that any of our offerings will achieve market acceptance.
We also expect that competition will increase as a result of industry consolidations and the formation of new companies with new, innovative offerings. Current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their software and service offerings to address the needs of our prospective customers. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. Increased competition is likely to result in price reductions, reduced operating margins and loss of market share, any of which could harm our business.
Our hosted software and web-based services are complex and are operated in a wide variety of computer configurations, which could result in errors or product failures.
Our hosted software and web-based services are complex and may contain undetected errors, failures or bugs that may arise when they are first introduced or when new versions are released. These offerings may be used in large-scale computing environments with different operating systems, system management software and equipment and networking configurations, which may cause errors or failures in our offerings or may expose undetected errors, failures or bugs in such offerings. Our customers computer environments are often characterized by a wide variety of configurations that make pre-release testing for programming or compatibility errors difficult and time-consuming. Despite testing by us and by others, errors, failures or bugs may not be found in new products or releases after commencement of commercial use. Errors, failures or bugs in our offerings could result in negative publicity, returns,
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loss of or delay in market acceptance of our hosted software or web-based services or claims by customers or others. Alleviating these problems could require significant expenditures of our capital and resources and could cause interruptions, delays or cessation of our licenses which could cause us to lose existing or potential customers and would adversely affect our financial conditions, results of operations and cash flows. Most of our license agreements with customers contain provisions designed to limit our exposure to potential product liability claims. It is possible, however, that these provisions may not prove effective in limiting our liability.
We have a significant amount of net operating loss carry forwards which we may not be able to utilize in certain circumstances.
At June 30, 2015, we had net operating loss, or NOL, carry forwards for federal income tax purposes of approximately $162,000,000 available to offset future taxable income. Under Section 382 of the Internal Revenue Code, following an ownership change, special limitations apply to the use by a loss corporation of its (i) NOL carry forwards arising before the ownership change and (ii) net unrealized built-in losses (if such losses existed immediately before the ownership change and exceed a statutory threshold amount) recognized during the five years following the ownership change ((i) and (ii) are referred to collectively as the Applicable Tax Attributes). After an ownership change, the amount of the loss corporations taxable income for each post-change taxable year that may be offset by the Applicable Tax Attributes is limited to the product of the long-term tax-exempt rate (published by the IRS for the month of the ownership change) multiplied by the value of the loss corporations stock (the Section 382 Limitation). To the extent that the loss corporations Section 382 Limitation in a given taxable year exceeds its taxable income for the year, that excess increases the Section 382 Limitation in future taxable years.
Risks Related to Our Common Stock and Other Securities
Our stock price is volatile and could decline.
The price of our common stock has been, and is likely to continue to be, volatile. Our stock price during the fiscal year ended June 30, 2015 traded as low as $0.16 per share and as high as $1.20 per share and during the three months ended September 30, 2015, our common stock traded within a range of $0.09 to $0.55. We cannot assure you that your initial investment in our common stock will not fluctuate significantly. The market price of our common stock may fluctuate significantly in response to a number of factors, some of which are beyond our control, including:
| quarterly variations in our operating results; |
| announcements we make regarding significant contracts, acquisitions, dispositions, strategic partnerships, or joint ventures; |
| additions or departures of key personnel; |
| the introduction of competitive offerings by existing or new competitors; |
| uncertainty about and customer confidence in the current economic conditions and outlook; |
| reduced demand for any given product on web-based service offering; and |
| sales of our common stock. |
In addition, the stock market in general, including companies whose stock is listed on The NASDAQ Capital Market, have experienced extreme price and volume fluctuations that have often been disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance.
The failure to maintain compliance with The Nasdaq Capital Market listing standards could result in delisting and adversely affect the market price and liquidity of our common stock.
Our common stock is currently traded on The Nasdaq Capital Market under the symbol ADAT. If we fail to meet any of the continued listing standards of The Nasdaq Capital Market, our common stock will be delisted from The Nasdaq Capital Market. These continued listing standards include specifically enumerated criteria, such as a $1.00 minimum closing bid price and a minimum stockholders equity requirement, which requires listed companies to maintain stockholders equity of at least $2.5 million.
On January 28, 2015, we received a staff deficiency letter from The Nasdaq Stock Market notifying us that for the prior 30 consecutive business days, the closing bid price per share of our common stock was below the $1.00 minimum bid price requirement for continued listing on The Nasdaq Capital Market, as required by Listing Rule 5550(a)(2) (the Bid Price Rule). Nasdaq provided us with 180 calendar days, or until July 27, 2015, to regain compliance with the Bid Price Rule. To regain compliance with the Bid Price Rule, the closing bid price of our common stock must meet or exceed $1.00 per share for a minimum of ten consecutive business days during the 180 day grace period.
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Subsequently, on May 28, 2015, we received a second staff deficiency letter from The Nasdaq Stock Market notifying us that we did not comply with Nasdaq Listing Rule 5550(b)(1), the minimum stockholders equity requirement for continued listing on the Nasdaq Capital Market, which requires listed companies to maintain stockholders equity of at least $2.5 million. Nasdaq provided us with 45 calendar days, to submit a plan to regain compliance with the minimum stockholders equity standard. Pursuant to an extension granted by the staff, we submitted our compliance plan on July 21, 2015.
On July 29, 2015, we received a determination letter from the staff of The Nasdaq Stock Market stating that the company has not regained compliance with The Nasdaq Capital Market minimum bid price of $1.00 requirement for continued listing set forth in Nasdaq Listing Rule 5550(a)(2). The Nasdaq determination letter also stated that the company is not eligible for an additional 180-day extension to regain compliance with the minimum bid price rule because the company does not meet the minimum stockholders equity initial listing requirement for the Nasdaq Capital Market. The determination letter also stated that the Company did not maintain a minimum $2.5 million in stockholders equity for continued listing and did not meet the alternatives of market value of listed securities or net income as required under Listing Rule 5550(b) and that such deficiency serves as an additional basis for delisting. Pursuant to the determination letter, we requested a hearing to appeal this determination on August 5, 2015, and were granted a hearing on September 10, 2015. At the hearing we presented our plan to regain compliance with both the minimum bid price requirement of Listing Rule 5550(a)(2) and the minimum shareholders equity requirement of Listing Rule 5550(b)(1).
On September 16, 2015, we received written notice that the Nasdaq Hearings Panel (the Panel) granted our request to remain listed on The NASDAQ Stock Market, LLC, subject to the condition that, on or before January 25, 2016, we shall announce and inform the Panel that the companys proposed business combination has closed and that NASDAQs Listing Qualifications Staff (the Staff) has approved the combined entitys application for initial listing on NASDAQ. In its written notice, the Panel stated that during the granted exception period the company must promptly notify the Panel of any significant developments, particularly any event, condition or circumstance that may impact its ability to meet the terms of the exception granted by the Panel and that the Panel reserves the right to reconsider the granted exception in such an instance. The company is diligently working to timely satisfy the terms of the Panels decision; however, there can be no assurance that the company will be able to do so. In the event that the company is unable to meet the exception requirement, the Panel will issue a final determination to delist the companys shares and suspend trading of the companys shares on The Nasdaq Capital Market.
If our common stock were to be delisted from The Nasdaq Capital Market, trading of our common stock most likely will be conducted in the over-the-counter market on an electronic bulletin board established for unlisted securities such as the OTC Bulletin Board. Such trading will reduce the market liquidity of our common stock. As a result, an investor would find it more difficult to dispose of, or obtain accurate quotations for the price of, our common stock and the price of our common stock could suffer a significant decline. Delisting may also impair our ability to raise capital. If our common stock is delisted from The Nasdaq Capital Market and the trading price remains below $5.00 per share, trading in our common stock might also become subject to the requirements of certain rules promulgated under the Exchange Act, which require additional disclosure by broker-dealers in connection with any trade involving a stock defined as a penny stock (generally, any equity security not listed on a national securities exchange or quoted on Nasdaq that has a market price of less than $5.00 per share, subject to certain exceptions). Many brokerage firms are reluctant to recommend low-priced stocks to their clients. Moreover, various regulations and policies restrict the ability of shareholders to borrow against or margin low-priced stocks, and declines in the stock price below certain levels may trigger unexpected margin calls. Additionally, because brokers commissions on low-priced stocks generally represent a higher percentage of the stock price than commissions on higher priced stocks, the current price of the common stock can result in an individual shareholder paying transaction costs that represent a higher percentage of total share value than would be the case if our share price were higher. This factor may also limit the willingness of institutions to purchase our common stock. Finally, the additional burdens imposed upon broker-dealers by these requirements could discourage broker-dealers from facilitating trades in our common stock, which could severely limit the market liquidity of the stock and the ability of investors to trade our common stock.
Since we have not paid dividends on our common stock, you may not receive income from this investment.
We have not paid any dividends on our common stock since our inception and do not contemplate or anticipate paying any dividends on our common stock in the foreseeable future. Earnings, if any, will be used to finance the development and expansion of our business. Accordingly, you may have to sell some or all of your common stock in order to generate cash from your investment. You may not receive a gain on your investment when you sell our common stock and may lose the entire amount of your investment.
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Trading in our stock over the last twelve months has been limited, so investors may not be able to sell as much stock as they want at prevailing prices.
The average daily trading volume in our common stock for the three months ended September 30, 2015 was approximately 278,000 shares. If limited trading in our stock continues, it may be difficult for investors to sell their shares in the public market at any given time at prevailing prices. Moreover, the market price for shares of our common stock may be made more volatile because of the relatively low volume of trading in our common stock. When trading volume is low, significant price movement can be caused by the trading in a relatively small number of shares. Volatility in our common stock could cause stockholders to incur substantial losses.
Additional financings could result in dilution to existing stockholders and otherwise adversely impact the rights of our common stockholders.
As stated above, we require additional financings in order to obtain additional capital with which to operate our business. Any such financings will dilute the percentage ownership interests of our stockholders and may adversely affect our earnings and net book value per share. In addition, we may not be able to secure any such additional financing on terms acceptable to us, if at all. We have the authority to issue additional shares of common stock and preferred stock, as well as additional classes or series of warrants or debt obligations which may be convertible into any one or more classes or series of ownership interests. We are authorized to issue 190 million shares of common stock and 5 million shares of preferred stock. Subject to compliance with the requirements of the NASDAQ Stock Market, such securities may be issued without the approval or other consent of our stockholders.
We filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission in August 2012, which was declared effective by the Commission in December 2012. There is approximately $29 million available for future issuances under this registration statement, subject to SEC limitations. This disclosure shall not constitute an offer to sell or a solicitation of an offer to buy the securities, nor shall there by any sale of these securities in any jurisdiction in which an offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such jurisdiction. Any offer of the securities will be solely by means of the prospectus included in the registration statement and one or more prospectus supplements that will be issued at the time of the offering.
In the event that any future financing should be in the form of, be convertible into or exchangeable for, equity securities, and upon the conversion or exercise of such securities, investors may experience additional dilution. Moreover, we may issue undesignated shares of preferred stock, the terms of which may be fixed by our board of directors and which terms may be preferential to the interests of our common stockholders. We have issued preferred stock in the past, and our board of directors has the authority, without stockholder approval, to create and issue one or more additional series of such preferred stock and to determine the voting, dividend and other rights of holders of such preferred stock. Any debt financing, if available, may involve restrictive covenants that impact our ability to conduct our business. The issuance of any of such series of preferred stock or debt securities may have an adverse effect on the holders of common stock.
The number of shares of our common stock outstanding has increased substantially as a result of our recent financings, and the exercise or conversion of the warrants and shares of preferred stock issued in these transactions could result in further dilution to holders of our common stock and adversely impact the market price of our common stock.
During and subsequent to our fiscal year ended June 30, 2015 and the first quarter of fiscal year 2016, we completed several transactions that have resulted in our issuance of a substantial number of shares of common stock and securities convertible into, or exercisable for, additional shares of common stock. The issuance of these securities has resulted in substantial dilution to stockholders who held our common stock prior to such transactions and will result in additional dilution in the future if shares of convertible preferred stock are converted into common stock and common stock purchase warrants are exercised. The conversion of preferred shares and the exercise of warrants could also adversely affect the market price of our common stock if the holders of these securities immediately sell some or all of the shares of common stock issued upon conversion or exercise or there is a perception in the market that the holders of a large number of shares intend to sell their shares.
In February 2015, the company entered into a securities purchase agreement with an accredited investor pursuant to which we issued a promissory note in the aggregate principal amount of $100,000 and common stock purchase warrants to purchase up to 80,000 shares of common stock for gross proceeds of $100,000. The warrants vest in equal monthly installments over twelve months if the notes are outstanding and, subject to vesting requirements, are exercisable for a period of 54 months commencing on the six month anniversary of the issuance date at an initial exercise price of $1.01 per share. Although the securities purchase agreement we entered into with this investor contemplated a second closing for $900,000, the second closing did not occur and we did not receive the additional funds. The vested warrants related to this transaction were exchanged for warrants issued in connection with the June 8, 2015 transaction discussed below.
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On February 17, 2015, in a separate transaction, the company issued a short-term promissory note in the aggregate principal amount of $950,000 and warrants to purchase 99,500 shares of common stock to an accredited investor for gross proceeds of $950,000. The warrants are exercisable for a period of 54 months commencing on the six month anniversary of the issuance date and have an initial exercise price of $1.01 per share. On April 3, 2015, the company entered into an amendment agreement with this investor to extend the maturity date of this note from March 19, 2015 to July 2, 2015 and to grant the holder the right to exchange the principal amount of the short-term note (and unpaid interest thereon) into the securities of the company sold in the next financing, as defined in the amendment agreement. This investor subsequently agreed not to participate in the convertible debt financing for which a closing was held June 8, 2015 and in consideration of such election, the participation right was modified to allow him to exchange such note for comparable securities in an alternative transaction. In consideration of waivers previously granted by the holder of potential events of default under the short-term note and the amendment to extend the maturity date, the company agreed to issue the holder warrants to purchase 3,166,667 shares of common stock of the company. The warrants are exercisable for a period of 54 months commencing six months following the date of issuance and have an exercise price equal to $0.31 per share. The holder of the short-term note is an entity controlled by Douglas B. Luce, the brother of J. David Luce, a member of the board of directors of the company. Through a series of amendments, the maturity date of this note was further extended on multiple occasions to on or about November 13, 2015. The company is engaged in ongoing discussions and negotiations with the holder of this note in order to seek modifications to the terms of the obligation, including extensions of the repayment date. The company anticipates that in order to complete these negotiations, it will be required to grant conversion rights and/or issue additional warrants.
On April 24, 2015, the company issued a short-term promissory note in the aggregate principal amount of $500,000 to Lazarus Investment Partners LLLP, the beneficial owner of approximately 29.4% of our common stock immediately prior to the note transaction, for gross proceeds of $500,000. In consideration for this loan, the company agreed to reduce the exercise price on approximately 6,233,600 warrants held by Lazarus to $0.25, based on the most recent closing bid price of the common stock prior to the note transaction, and to extend the expiration date of the warrants to October 25, 2019. Through a series of amendments, the maturity date of this note was further extended on multiple occasions to on or about November 13, 2015. The company is engaged in ongoing discussions and negotiations with the holder of this note in order to seek modifications to the terms of the obligation, including extensions of the repayment date. The company anticipates that in order to complete these negotiations, it will be required to grant conversion rights and/or issue additional warrants.
On June 8, 2015, the company issued an aggregate principal amount of $900,000 of senior secured convertible debentures and common stock purchase warrants to purchase 3,626,667 shares of common stock. Subject to certain limitations, the debentures are convertible at any time at the option of the holder into shares of our common stock at an initial conversion price of $0.25 per share. Each debenture matures on the one-year anniversary of the issuance date. The warrants are exercisable for a period of 54 months commencing on the six month anniversary of the issuance date at an initial exercise price of $0.30 per share. Although the securities purchase agreement we entered into with this investor contemplated a second closing for up to $2.1 million, the second closing did not occur.
On August 7, 2015, the company issued a senior secured note in the aggregate principal amount of $320,000 to MKA 79, LLC, an entity affiliated with J. David Luce, a member of the companys board of directors. In consideration of the loan, the company agreed to reduce the exercise price on approximately 5,474,829 warrants held by MKA 79 and an affiliate to $0.17, based on the most recent closing bid price of the common stock prior to the note transaction, and to extend the expiration date of the warrants to December 13, 2019.
In September 2015, the company has issued promissory notes in the aggregate principal amount of $525,000 to accredited investors in a private transaction. The notes are unsecured and are not convertible into equity securities of the company. The notes bears interest at 20% per annum, payable in arrears, and are due upon the earlier of (i) September 18, 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. The company also issued the investors warrants to purchase an aggregated of 1,050,000 shares of common stock. The warrants are exercisable commencing twelve months following their issuance for a period of 54 months at an exercise price of $0.30 per share. These closings are part of an offering of up to $1 million of notes and 2 million warrants.
In October 2015, the company issued promissory note in the aggregate principal amount of $450,000 to Peachstate Medical Holdings LLC, d/b/a AEON Clinical Laboratories. The note is unsecured and is not convertible into equity securities of the company. The note bears interest at 20% per annum, payable in arrears, and is due upon the earlier of (i) October 28, 2016, or (ii) within 30 days of the closing of a sale of equity or debt securities of the company, or series of closings, as part of the same transaction, of equity or debt securities within a period of 90 days, in the gross amount of at least $5,000,000 in cash proceeds. The company also issued the investor warrants to purchase an aggregate of 1,000,000 shares of common stock. The warrants are exercisable commencing twelve months following their issuance for a period of 54 months at an exercise price of $0.30 per share.
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Due to our need for additional capital, we may be required to issue additional shares of common stock or securities convertible into or exercisable for common stock at prices reflecting a dilution to existing stockholders. We may seek to obtain capital from the holders of existing warrants or convertible securities by reducing the exercise or conversion prices and may include additional issuance of equity securities. All of these potential transactions may result in dilution to existing stockholders.
Our executive officers, directors and significant stockholders will be able to influence matters requiring stockholder approval
As of the date of this report, our executive officers, directors and largest shareholder (Lazarus Investment Partners, LLLP) possess beneficial ownership (without, however, giving effect to any limitations on the ability of such persons to convert shares of Series D preferred stock or exercise warrants) of approximately 44.9% of our common stock and within this amount, Lazarus Investment Partners beneficially owns approximately 29.0% of our outstanding common stock. Due to such ownership position, these persons have increased influence over the outcome of future stockholder votes, including the election of directors and other significant business matters that require stockholder approval, and their interests may differ from the interests of other stockholders. This concentration of ownership may also have the effect of delaying, preventing or deterring a change in control of our company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale or merger of our company and may negatively affect the market price of our common stock. These transactions might include proxy contests, tender offers, mergers or other business combinations or purchases of common stock that could give our stockholders the opportunity to realize a premium over the then-prevailing market price for shares of our common stock. In addition, the sale of these shares of common stock may adversely affect the market price of our common stock and our stock price may decline substantially.
The exercise of our outstanding options and warrants, or conversion of our outstanding shares of convertible preferred stock, may depress our stock price and dilute your ownership of the company.
As of September 30, 2015, the following options, restricted stock units and warrants were outstanding:
| Stock options to purchase 5,577,000 shares of common stock at exercise prices ranging from $0.18 to $9.00 per share, not all of which are immediately exercisable. The weighted average exercise price of the outstanding stock options is $1.09 per share. These stock options are employee and non-executive director options. |
| Warrants to purchase 34,769,000 shares of common stock with a weighted average exercise price of $.67 per share. |
| An aggregate of 883,000 unvested restricted stock units. |
In addition, there are currently outstanding 28,000 shares of our Series B convertible preferred stock which the holder may convert into shares of our common stock at a conversion price equal to $2.80 per share. Accordingly, the outstanding 28,000 shares of Series B convertible preferred stock are presently convertible into an aggregate of 250,000 shares of our common stock, which will be available for immediate resale in accordance with the provisions of Rule 144 under the Securities Act. Further, there are currently outstanding 665,000 shares of Series D preferred stock, which are initially convertible into an aggregate of 6,125,024 shares of common stock at the initial conversion rate of $1.08571 per share commencing six months after the original issue date of the Series D preferred stock (exclusive of any additional shares of common stock that we may elect to issue in lieu of paying cash dividends on the Series D preferred stock). Shares of common stock issued upon conversion of Series D preferred stock may be resold from time to time by a holder in accordance with Rule 144 under the Securities Act.
Further, on June 8, 2015, we issued a principal amount of 900,000 of senior secured convertible debentures and common stock purchase warrants. Subject to certain limitations, the debentures are convertible at any time at the option of the holder into an initial amount of 3.6 million shares of our common stock at an initial conversion price of $0.25 per share. The conversion rate of these debentures is subject to adjustment, including if we issue or sell shares of its common stock or other equity securities for a price per share that is less than the conversion price then in effect, in which event the conversion price will be decreased to equal 85% of such lower price.
To the extent that these securities are exercised or converted, or we issue additional common shares, dilution to our stockholders will occur. Moreover, the terms upon which we will be able to obtain additional equity capital may be adversely affected, since the holders of these securities can be expected to exercise or convert them at a time when we would, in all likelihood, be able to obtain any needed capital on terms more favorable to us than the exercise and conversion terms provided by those securities. Further, in the event the conversion price of our outstanding convertible debentures or shares of convertible preferred stock is lower than the actual trading price on the day of conversion, the holders could immediately sell their converted common shares, which would have a dilutive effect on the value of the outstanding common shares. Furthermore, the significant downward pressure on the trading price of our common stock as preferred stock or debentures holders converted these securities and sell the common shares received on conversion could encourage short sales by the holders of preferred stock or other security holders. This would place further downward pressure on the trading price of our common stock. Even the mere perception of eventual sales of common shares issued on the conversion of the shares of preferred stock or debentures could lead to a decline in the trading price of our common stock.
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Our currently outstanding shares of convertible preferred stock or the issuance of additional shares of preferred stock could adversely affect the rights of the holders of shares of our common stock.
We have issued a total of 28,000 shares of Series B preferred stock and 665,000 shares of Series D preferred stock and our board is authorized to issue up to an additional 4,307,000 shares of preferred stock without any further action on the part of our stockholders. Pursuant to our certificate of incorporation, our board has the authority to fix and determine the voting rights, rights of redemption and other rights and preferences of preferred stock. Our board may, at any time, authorize the issuance of a series of preferred stock that would grant to holders the preferred right to our assets upon liquidation, the right to receive dividend payments before dividends are distributed to the holders of common stock, and the right to the redemption of the shares, before the redemption of our common stock, which may have a material adverse effect on the rights of the holders of our common stock. In addition, our board, without further stockholder approval (but subject to the rules of the Nasdaq Stock Market) may, at any time, issue large blocks of preferred stock. Pursuant to the certificates of designations governing the rights and preferences of our outstanding shares of Series B preferred stock and Series D preferred stock, each share of preferred stock has certain rights and preferences, including the right to receive dividends in preference to our common stockholders. In addition, we must obtain the approval of the holders of a majority of the shares of outstanding convertible preferred stock in order to: (i) amend, alter or repeal any provisions of our Certificate of Incorporation which would materially adversely affect any of the preferences, rights, powers or privileges of such preferred stock (ii) create, authorize or issue any other class or series of preferred stock on a parity with, or having greater or preferential rights than, the outstanding convertible preferred stock, (iii) redeem, repurchase or otherwise acquire for value, or set aside for payment or make available for a sinking fund for the purchase or redemption of, any stock ranking junior to on a parity with the outstanding convertible preferred stock, or (iv) enter into any agreement which would prohibit or restrict our right to pay dividends on the outstanding convertible preferred stock. The need to obtain the approval of holders of our convertible preferred stock before taking these actions could impede our ability to take certain actions that management or our board may consider to be in the best interests of our stockholders. Any failure to obtain such approval could limit our business flexibility, harm our business and result in a decrease in the value of our common stock or convertible preferred stock.
We have granted liens on all of our assets to the holders of the certain debt instruments and the senior secured convertible debentures we have issued include additional provisions that could adversely affect the interests of the holders of our common stock. If we are required to repay our outstanding debt securities on their scheduled due date, our financial condition may be adversely affected.
On June 8, 2015, we entered into definitive agreements relating to a private placement of up to a principal amount of $3.0 of senior secured convertible debentures (the Convertible Debentures) and common stock purchase warrants. An initial closing for an aggregate principal amount of $900,000 of these debentures and warrants to purchase 3,626,667 shares of common stock was held on June 8, 2015. A final closing of up to $2.1 million of these debentures and warrants to purchase 8,400,000 shares of common stock was expected to occur prior to June 24, 2015, but did not transpire.
Subject to certain exceptions, the Convertible Debentures rank senior to our existing and future indebtedness and these debentures mature on the one-year anniversary of the issuance date. Subject to certain limitations, the Convertible Debentures are convertible at any time at the option of the holder into shares of our common stock at an initial conversion price of $0.25 per share. If we issue or sell shares of our common stock, rights to purchase shares of its common stock, or securities convertible into shares of its common stock for a price per share that is less than the conversion price then in effect, the conversion price will be decreased to equal 85% of such lower price. Similarly, the warrants issued with the Convertible Debentures have an initial exercise price of $0.30, but such exercise price is subject to adjustment if we issue or sell shares of our common stock or other securities convertible into or exercisable for shares of common stock for a price per share that is less than the conversion price of the Convertible Debentures. The Convertible Debentures bear interest at 9% per annum with interest payable upon maturity or on any earlier redemption date. If we are unable to consummate an additional financing prior to the maturity date of the Convertible Debentures, we will be required to repay these securities, which may have an adverse effect on our cash position. In addition, the Convertible Debentures are secured by a first priority lien on our assets related to our Inscrybe Referral and Order Management and Inscrybe Hospital Discharge solutions (the Inscrybe Solutions Business) in accordance with, and subject to, a security agreement between us and the investors.
The Convertible Debentures contain covenants and events of default customary for similar transactions. Accordingly, without the consent of the holders of the Convertible Debentures we must comply with certain restrictions against incurring additional indebtedness and granting additional security interests on our assets. Among the defined events of default are defaults of our payment obligations, breach of any material covenant or representation of the Convertible Debentures or the related transaction agreements, and the commencement of proceedings under applicable U.S. federal or state bankruptcy, insolvency, reorganization or other similar
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laws either against us or by us. Upon the occurrence of an event of default under the Convertible Debentures, a holder may require us to repay all or a portion of the Convertible Debentures in cash, at a price equal to 110% of the principal and accrued and unpaid interest. If we are unable to repay the Convertible Debentures when due, or upon an event of default, the holders could foreclose on our encumbered assets.
In addition, in August 2015, we issued a senior secured promissory note (the August Note) in the aggregate principal amount of $320,000 to MKA 79, LLC, in a private transaction. The August Note is due and payable on December 31, 2015 and interest shall accrue on the August Note at the rate of 10.0% per annum. The August Note is not convertible into any of our equity securities and it contains terms and events of default customary for similar transactions. Accordingly, without the consent of the holder of the August Note we must comply with certain restrictions against incurring additional indebtedness and granting additional security interests on our assets. The events of default defined in the August Note include customary terms, including a default of our payment obligation, a breach of material terms of the August Note and the commencement of bankruptcy proceedings. The August Note is secured by a first priority lien on certain of our assets, as described in a security agreement entered into between the company and the purchaser, which collateral consists of those of our assets other than those covered by the security agreement we entered into with the holders of the Convertible Debentures. In consideration of the loan, we agreed to amend certain of the terms of the existing 5,474,829 Common Stock Purchase Warrants currently held by the lender and an affiliate. In amending these warrants, we agreed to reduce the exercise price of such warrants to $0.17 and to extend the expiration date of the warrants to December 13, 2019. The initial exercise prices of these warrants were between $0.95 and $1.34. The Purchaser is an entity affiliated with J. David Luce, a member of the Companys board of directors.
Provisions in our charter documents and Delaware law could discourage or prevent a takeover, even if an acquisition would be beneficial to our stockholders.
Provisions of our certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. These provisions include:
| authorizing the issuance of blank check preferred that could be issued by our board of directors to increase the number of outstanding shares and thwart a takeover attempt; |
| prohibiting cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates; and |
| advance notice provisions in connection with stockholder proposals that may prevent or hinder any attempt by our stockholders to bring business to be considered by our stockholders at a meeting or replace our board of directors. |
Together these provisions may delay, deter or prevent a change in control of us, adversely affecting the market price of our common stock.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
a) Sales of Unregistered Securities
Except as previously reported and as described elsewhere in this Quarterly Report on Form 10-Q, we did not sell unregistered securities during the quarter ended September 30, 2015.
As of September 30, 2015 we issued options to purchase an aggregate of 496,768 shares of common stock to our non-executive directors that elected to receive options and in October 2015, we issued an aggregate of 43,980 restricted shares of our common stock to non-executive directors that elected to receive shares of common stock in lieu of the cash fees earned for their service as members of our board of directors pursuant to our 2011 Omnibus Equity Incentive Plan. The options are exercisable for a period of ten years at an exercise price of $0.29 per share. Such securities were issued for service on our board during the quarter ended September 30, 2015. These securities were issued pursuant to the exemption from registration provided by Section 4 (a)(2) of the Securities Act of 1933, as amended.
b) Not applicable
c) Repurchase of Equity Securities
We did not repurchase any of our equity securities during the three months ended September 30, 2015.
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Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
As of November 12, 2015, the company entered into an agreement, dated September 25, 2015, with the holder of a majority-in-interest of the convertible debentures and common stock purchase warrants issued pursuant to that certain Securities Purchase Agreement dated as of May 29, 2015 (the Amendment Agreement). Pursuant to the Amendment Agreement, the parties agreed to (i) further amend the Securities Purchase Agreement in order to modify certain covenants including a deferral of the date by which the Company was required to seek the approval of its shareholders of the issuance of all of the shares of common stock underlying the convertible debentures and warrants in excess of 19.99% of the Companys issued and outstanding common stock on the initial closing date, in accordance with the rules of the Nasdaq Stock Market and (ii) amend that certain Registration Rights Agreement dated as of May 29, 2015 to defer the date by which the Company was required to file the registration statement in accordance with the terms of the Registration Rights Agreement to a date no later than February 17, 2016.
The following exhibits are filed herewith or incorporated by reference. A management contract or compensation plan or arrangement is indicated with (*).
Incorporated by Reference | ||||||||||||
Exhibit |
Exhibit Description |
Form |
Filing Date |
Exhibit |
Filed | |||||||
4.1 | Form of Promissory Note issued to MKA 79, LLC dated August 7, 2015 | 8-K | 8/12/15 | 4.1 | ||||||||
4.2 | Warrant Amendment Agreement dated August 7, 2015 between Authentidate Holding Corp. and MKA 79, LLC | 8-K | 8/12/15 | 10.2 | ||||||||
4.3 | Form of Note issued August 26, 2015 | 8-K | 8/28/15 | 10.1 | ||||||||
4.4 | Form of Note issued September 18, 2015 | 8-K | 9/24/15 | 4.1 | ||||||||
4.5 | Form of Warrant issued September 18, 2015 | 8-K | 9/24/15 | 4.2 | ||||||||
4.6 | Form of Note issued October 28, 2015 | X | ||||||||||
4.7 | Form of Warrant issued October 28, 2015 | X | ||||||||||
10.1* | Employment Agreement with William P. Henry | 10-K | 10/13/15 | 10.49 | ||||||||
10.2* | Security Agreement between the Company and MKA79, LLC dated August 7, 2015 | 8-K | 8/12/15 | 10.1 | ||||||||
10.3 | Form of Purchase Agreement dated September 15, 2015 | 8-K | 9/24/15 | 10.1 | ||||||||
10.4 | Amendment to Lease dated September 15, 2015 | 10-K | 10/13/15 | 10.56 | ||||||||
10.5* | Employment Letter with Ian C. Bonnet dated September 28, 2015 | 8-K | 9/30/15 | 10.1 | ||||||||
10.6 | Note Extension Agreement with VER 83, LLC dated October 30, 2015 | X | ||||||||||
10.7 | Note Extension Agreement with Lazarus Investment Partners LLLP dated October 30, 2015 | X | ||||||||||
10.8 | Form of Note Purchase Agreement dated October 28, 2015 | X | ||||||||||
10.9 | Second Amendment to Securities Purchase Agreement and Registration Rights Agreement, entered into on November 12, 2015 | X | ||||||||||
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | X |
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31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | X | ||||||||
32.1 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | X | ||||||||
101.1 | The following financial information from the Authentidate Holding Corp.s Quarterly Report on Form 10-Q for the fiscal quarter September 30, 2015, formatted in XBRL (eXtensible Business Reporting Language) and filed electronically herewith: (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Operations and Comprehensive Operations; (iii) the Condensed Consolidated Statements of Cash Flows; and, (iv) the Notes to Condensed Consolidated Financial Statements. | X |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
AUTHENTIDATE HOLDING CORP. | ||||||
November 13, 2015 | /s/ Ian C. Bonnet | |||||
Date | Ian C. Bonnet | |||||
Chief Executive Officer and President | ||||||
/s/ William A. Marshall | ||||||
William A. Marshall | ||||||
Chief Financial Officer and Treasurer |
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Exhibit 4.6
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE FEDERAL OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR HYPOTHECATED IN ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH LAWS AS MAY BE APPLICABLE OR, AN OPINION OF COUNSEL THAT AN EXEMPTION FROM SUCH APPLICABLE LAWS EXIST.
PROMISSORY NOTE
Principal Amount: $450,000.00 |
Issuance Date: October 28, 2015 | |
Maturity Date: October 28, 2016 |
FOR VALUE RECEIVED, Authentidate Holding Corp., a Delaware corporation (the Borrower), with its principal offices located at 300 Connell Drive, Fifth Floor, Berkeley Heights, N.J. 07922, hereby promises to pay to Peachstate Health Management, LLC d/b/a AEON Clinical Laboratories (the Holder) at such address as the Holder designates in writing to the Borrower, the principal sum of Four Hundred Fifty Thousand and NO/100 Dollars ($450,000.00) (the Principal Amount), on the earlier of the Maturity Date stated above, or the Accelerated Payment Date (as defined below). This Note is a direct obligation of the Borrower. This Note is being issued pursuant to that certain Note Purchase Agreement dated as of the October 28, 2015 among the Borrower and the original holder of the Notes (the Purchase Agreement). By its acceptance of this Note, each Holder agrees to be bound by the terms of the Purchase Agreement. This Note is a direct obligation of the Borrower and ranks (i) subordinate to the rights of the holders of outstanding debt securities previously issued by Borrower and (ii) pari passu in right of payment with all other Notes now or hereafter issued in accordance with the Purchase Agreement under the terms set forth herein.
1. Interest on this Note shall be computed at the rate of 20% per annum, payable in arrears on the Maturity Date or the Accelerated Payment Date, as the case may be, at which time all accrued and unpaid interest shall be immediately due and payable. All computations of interest payable hereunder shall be on the basis of a 365-day year and actual days elapsed in the period for which such interest is payable. Accrued interest on the outstanding principal amount shall be due and payable on the Maturity Date or the Accelerated Payment Date in cash. Payments of all amounts due hereunder shall be made in lawful money of the United States.
2. Payment of the Principal Amount of this Note, and interest thereon, shall be made upon the surrender of this Note to the Borrower, at its chief executive office (or such other office within the United States as shall be designated by the Borrower to the Holder hereof) (the Designated Office), in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts. If the Maturity Date (or the Accelerated Payment Date) shall be a Saturday or a Sunday or shall be a legal holiday in the State of New York, then such action may be taken or such right may be exercised on the next succeeding day not a legal holiday. For purposes of this note, a month shall mean a 30 day period.
3. As used herein, the term Accelerated Payment Date shall mean a date 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.
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4. Events of Default.
(a) For purposes of this Note, an Event of Default shall consist of any of the following events:
(1) The Borrower shall fail to pay any portion of the Principal Amount of this Note when the same becomes due and payable, whether at the Maturity Date or at any accelerated date of maturity or at any other date fixed for payment, and such default continues for 10 days or more.
(2) The Borrower shall voluntarily commence any case, proceeding or other action under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it as bankrupt or insolvent, or seeking other relief with respect to its debts; or a court shall enter an order for relief or any such adjudication or appointment, which case, proceeding or action or order, adjudication, or appointment, as the case may be, remains undismissed, undischarged or unbonded for a period of 60 days, then, or any time thereafter during the continuance of any of such events.
(3) A final judgment for money damages or order for the payment of money damages in excess of One Hundred and Fifty Thousand Dollars ($150,000) (exclusive of amounts covered by insurance) shall be entered against the Borrower, which has not been vacated or stayed within 15 days of entry.
(4) Any material representation or warranty of the Borrower herein or in the Purchase Agreement shall prove to have been false in any material respect upon the date when made.
(5) The occurrence of a default (after giving effect to any grace periods or rights to cure held by the Borrower) under any material indebtedness of the Borrower resulting from other than the failure to timely pay interest or principal of such indebtedness which results in the acceleration of the maturity of such indebtedness.
(6) The Borrower shall liquidate, dissolve, terminate or suspend its business operations.
(b) Acceleration of Payment. If an Event of Default (other than an Event of Default specified in Section 4(a)(2) hereof with respect to the Company) occurs and is continuing, the Holder, by written notice to the Company, may declare due and payable the principal amount of this Note, plus accrued and unpaid interest thereon. Upon a declaration of acceleration, such principal shall be immediately due and payable. If an Event of Default specified in Section 4(a)(2) occurs with respect to the Company, the principal of this Note shall become and be immediately due and payable, without any declaration or other act on the part of the Holder. Further, upon an Event of Default, from such date of the Event of Default, Holder shall be entitled, and this Note shall bear
2
interest at the rate of 2.48% per month until such Event of Default is cured. Upon the payment in full of the amounts due under this Note, the Holder shall promptly surrender this Note to or as directed by the Borrower.
(c) Collections. If an Event of Default with respect to this Note occurs and is continuing, the Holder may pursue any available remedy by proceeding at law or in equity to collect the defaulted payment or to enforce the performance of any provision of this Note. Notwithstanding any other provision in this Note, the Holder of this Note shall have the right, which is absolute and unconditional, to receive payment of the principal in respect of the Notes held by the Holder, on or after the final Maturity Date, or to bring suit for the enforcement of any such payment on or after such date, and such rights shall not be impaired or affected adversely without the consent of the Holder.
(d) No Exclusive Right or Remedy. Except as otherwise provided herein, no right or remedy conferred in this Note upon the Holder is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. No delay or omission of the Holder of this Note to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or any acquiescence therein. Every right and remedy given by this Section 4 or by law to the Holder may be exercised from time to time, and as often as may be deemed expedient, by the Holder.
5. Transferability; Loss and Replacement.
(a) This Note has not been registered under the Securities Act, or the securities laws of any state or other jurisdiction. Neither this Note nor any interest or participation herein may be reoffered, sold, assigned, transferred, pledged, encumbered or otherwise disposed of (a Transfer) in the absence of registration under the Securities Act and any applicable state securities laws, or unless (i) such transaction is exempt from, or not subject to, registration under the Securities Act or the securities laws of any state or other jurisdiction and (ii) is made in compliance with applicable federal and state statutory resale restrictions, if any. The Holder by its acceptance of this Note agrees that it shall not offer, sell, assign, transfer, pledge, encumber or otherwise dispose of this Note or any portion thereof or interest therein other than in a minimum denomination of $50,000 principal amount (or any integral multiple of $10,000 in excess thereof) and then (other than with respect to a Transfer pursuant to a registration statement that is effective at the time of such Transfer) only (a) to the Borrower, (b) to an affiliate of the Holder, (c) to a Person it reasonably believes to be an accredited investor within the meaning of Rule 501(a) under the Securities Act, or (d) pursuant to a transaction in compliance with Rule 144 or Rule 144A under the Securities Act, and in the case of (b), (c) and (d) above in which the transferor furnishes the Borrower with such certifications, legal opinions or other information as the Borrower may reasonably request to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act as applicable.
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(b) By receipt and acceptance of this Note, Holder and any permitted transferee represents and warrants to the Borrower that (i) it is an accredited investor as defined in Rule 501(a) under the Securities Act; (ii) either alone or together with its representatives, has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in the Note, and has so evaluated the merits and risks of such investment; (iii) is able to bear the economic risk of an investment in the Note and, at the present time, is able to afford a complete loss of such investment; (iv) understands that the Note will be characterized as restricted securities under U.S. federal securities laws and have not been and are not being registered under the Securities Act or any state securities laws, must be held indefinitely and may not be offered for sale, sold, assigned or transferred except in accordance therewith and (vii) it has reviewed the Borrowers filings with the Securities and Exchange Commission (SEC Report) and has been afforded (A) the opportunity to ask such questions as it has deemed necessary of, and to receive answers from, representatives of the Borrower concerning the terms and conditions of this Note and the merits and risks of the prospective investment in the Note and the Borrower generally and, (B) it has access to information about the Borrower and its subsidiaries and their respective financial condition, results of operations, business, properties, management and prospects sufficient to enable it to evaluate the terms and conditions of this Note and the merits and risks of the prospective investment in the Borrower.
(c) The Transfer of this Note is registrable on the books of the Borrower upon surrender of this Note for registration of Transfer at the Borrowers designated office, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Borrower duly executed by, the Holder hereof or such Holders attorney duly authorized in writing, and thereupon one or more new Notes, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. Prior to due presentation of this Note for registration of Transfer, the Borrower and any agent of the Borrower may treat the Person in whose name this Note is registered as the owner thereof for all purposes, whether or not this Note be overdue, and neither the Borrower nor any such agent shall be affected by notice to the contrary. Upon presentation of this Note for registration of Transfer at the Borrowers designated office accompanied by (i) certification by the transferor that such Transfer is in compliance with the terms hereof and (ii) by a written instrument of Transfer in a form approved by the Borrower executed by the Holder, in person or by the Holders attorney thereunto duly authorized in writing, and including the name, address and telephone and fax numbers of the transferee and name of the contact person of the transferee, such Note shall be transferred on the Note Register, and a new Note of like tenor and bearing the same legends shall be issued in the name of the transferee and sent to the transferee at the address and c/o the contact person so indicated. Transfers and exchanges of Notes shall be subject to such additional restrictions as are set forth in the legends on the Notes and to such additional reasonable regulations as may be prescribed by the Borrower as specified herein. Successive registrations of Transfers as aforesaid may be made from time to time as desired, and each such registration shall be noted on the Note register. No Transfer shall be allowed except to an accredited investor as defined under the rules and regulations of the Securities and Exchange Commission.
(d) Upon receipt by the Borrower of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Note, and in the case of loss, theft or destruction, receipt
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of indemnity reasonably satisfactory to the Borrower and upon surrender and cancellation of this Note, if mutilated, the Borrower will deliver a new Note of like tenor and dated as of such cancellation, in lieu of such Note.
6. Miscellaneous.
(a) This Note constitutes the entire agreement between the parties relating to the subject matter hereof and supersedes any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. Neither this Note nor any term hereof may be amended or waived orally or in writing, except that any term of this Note may be amended and the observance of any term of this Note may be waived (either generally or in a particular instance and either retroactively or prospectively), and such amendment or waiver shall be applicable upon the approval of the Borrower and the Holder.
(b) This Note and the rights and obligations of the Holder and of the undersigned shall be governed and construed in accordance with the laws of the State of New York.
(c) Upon the occurrence and during the continuance of an Event of Default under this Note, the Borrower shall, upon demand, pay to the Holder the amount of any and all reasonable costs and expenses (including reasonable attorneys fees) that Holder may incur in connection with the enforcement or collection of this Note.
(d) No failure or delay on the part of the Holders hereof in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege. All rights and remedies existing hereunder are cumulative to, and not exclusive of, any rights or remedies.
(e) The Borrower hereby, to the fullest extent permitted by applicable law, waives presentment, demand, notice (including without limitation notice of default (except as otherwise specifically set forth herein), notice of protest, notice of intention to accelerate maturity, notice of acceleration of maturity and notice of nonpayment or dishonor), protest and all other demands and notices in connection with delivery, acceptance, performance, default, acceleration or enforcement of or under this Note, and the bringing of suit and diligence in taking any action to collect amounts owing hereunder or in proceeding against any of the rights and properties securing payment hereof, and is directly and primarily liable for the amount of all sums owing or to be owing hereon. No extension of the time for the payment of this Note made by agreement with any person now or hereafter liable for the payment of this Note shall operate to release, discharge, modify, change or affect the original liability of the Borrower under this Note.
(f) To the extent that Holder receives any payment on account of any of Borrowers obligations under this Note, and any such payment(s) or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside, subordinate and/or required to be repaid to a trustee, receiver or any other person or entity under any bankruptcy act, state or federal law, common law or equitable cause, then, to the extent of such payment(s) received, the Borrowers obligations or part thereof intended to be satisfied shall be revived and continue in full force and effect, as if such payment(s) had not been received by the Holder and applied on account of Borrowers obligations.
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(g) Section headings used herein are for convenience of reference only, are not part of this Note and shall not affect the construction of, or be taken into consideration in interpreting, this Note.
(h) If any provision of this Note is invalid, illegal or unenforceable, the balance of this Note shall remain in effect, and if any provision is inapplicable to any person or circumstance, it shall nevertheless remain applicable to all other persons and circumstances. If the Borrower is at any time required or obligated to pay interest hereunder at a rate that would be in excess of a statutory or legally permitted rate, then the rate of interest shall be deemed to be immediately reduced to such maximum rate and the interest payable shall be computed at such maximum rate and any prior interest payments in excess of such maximum rate shall be applied and shall be deemed to have been payments in reduction of the principal balance of this Note.
(i) All notices, offers, acceptance and any other acts under this Note (except payment) shall be in writing, and shall be sufficiently given if delivered to the addressees in person, by FedEx or similar receipted next business day delivery, or by facsimile or email delivery followed by overnight next business day delivery to the Borrower at the address set forth above (or such other address as the Borrower may by notice to the Holder may designate from time to time) and to the Holder at the address set forth above (or such other address as the Holder by notice to the Borrower may designate from time to time). Time shall be counted to, or from, as the case may be, the date of delivery.
[Signature Page Follows]
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IN WITNESS WHEREOF, the Borrower has caused this Note to be executed as of the Issuance Date.
BORROWER: | ||
AUTHENTIDATE HOLDING CORP. | ||
By: |
| |
Name: | Ian C. Bonnet | |
Title: | Chief Executive Officer |
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Exhibit 4.7
NEITHER THIS WARRANT NOR ANY OF THE SECURITIES ISSUABLE HEREUNDER HAVE BEEN REGISTERED UNDER THE SECURITIES ACT (AS DEFINED BELOW), OR APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT, OR (B) AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT (II) UNLESS SOLD OR TRANSFERRED TO A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT OR (III) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT.
AUTHENTIDATE HOLDING CORP.
COMMON STOCK PURCHASE WARRANT
No. 2015 - 9 | October 28, 2015 |
THIS CERTIFIES THAT, for value received, the Holder is entitled to purchase, and AUTHENTIDATE HOLDING CORP., a Delaware corporation (the Company), promises and agrees to sell and issue to the Holder, at any time, or from time to time, during the Exercise Period, up to ONE MILLION (1,000,000) shares of Common Stock, par value $0.001 per share (the Common Stock), of the Company, at the Exercise Price, subject to the provisions and upon the terms and conditions hereinafter set forth. This Warrant is issued by the Company pursuant to that certain Note Purchase Agreement dated as of October 28, 2015 (the Purchase Agreement) pursuant to which the Company has offered and sold to the purchasers named therein certain promissory notes (the Notes) and Warrants.
1. Definitions of Certain Terms. In addition to the terms defined elsewhere in this Warrant, the following terms have the following meanings:
(a) Business Day means a day on which banks are open for business in the city of New York.
(b) Commission means the U.S. Securities and Exchange Commission.
(c) Exchange Act means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.
(d) Exercise Price means the price at which the Holder may purchase one share of Common Stock upon exercise of this Warrant as determined from time to time pursuant to the provisions hereof. The initial Exercise Price is $0.30 per share, subject to adjustment as provided herein.
(e) Expiration Date means the 54-month anniversary of the Initial Exercise Date.
(f) Holder means a record holder of the Warrant or shares of Common Stock obtained or obtainable upon exercise of the Warrant, as applicable. The initial Holder is Peachstate Health Management, LLC d/b/a AEON Clinical Laboratories.
(g) Initial Exercise Date means the first Business Day following the twelve-month anniversary of the Issue Date.
(h) Issue Date means October 28, 2015.
(i) Securities Act means the Securities Act of 1933, as amended.
(j) Warrant means this Common Stock purchase warrant and any warrant or warrants hereafter issued as a consequence of the exercise or transfer of this warrant in whole or in part.
2. Exercise of Warrant.
(a) Manner of Exercise.
(i) Cash Exercise. This Warrant may be exercised, in whole or in part, at any time or from time to time, during the period commencing as of 9:30:01 a.m., New York time, on the Initial Exercise Date and ending as of 5:30 p.m., New York time, on the Expiration Date (the Exercise Period), for ONE MILLION (1,000,000) fully paid and non-assessable shares of Common Stock (the Warrant Shares), for an exercise price per share equal to the Exercise Price, by delivery to the Company at its headquarters, or at such other place as is designated in writing by the Company, of:
(1) a duly executed Notice of Exercise, substantially in the form of Attachment I attached hereto and incorporated by reference herein;
(2) this Warrant; and
(3) subject to Section 2(a)(ii) below, payment of an amount in cash equal to the product of the Exercise Price multiplied by the number of Warrant Shares being purchased upon such exercise, with such payment being in the form of a wire transfer of immediately available U.S. funds to an account designated in writing by the Company.
The date on which the Company receives the Notice of Exercise, this Warrant, and the Exercise Price payable with respect to the Warrant Shares being purchased shall be deemed to be the date of exercise (the Date of Exercise).
(ii) Cashless Exercise. Notwithstanding the provisions of Section 2(a)(i)(3) above (requiring payment by wire transfer), the Company agrees that, if at the time of exercise hereof there is no effective registration statement registering, or the prospectus contained therein is not available for the issuance of the Warrant Shares to the Holder, then Holder shall have the right at such time to exercise this Warrant in full or in part on a cashless basis, computed using the following formula:
X = Y (A - B)
A
Where:
X = The number of Warrant Shares to be issued to the Holder pursuant to this cashless exercise;
Y = The number of Warrant Shares in respect of which the net issue election is made;
A = The Fair Market Value (as defined below) of one Warrant Share at the time the cashless exercise election is made; and
B = The Exercise Price then in effect at the time of such exercise.
The term Fair Market Value shall mean, on any given day: (A) if the class of Warrant Shares is exchange-traded, the average of the closing sales prices per share of the class of Warrant Shares for the
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ten (10) consecutive Trading Days ending on the day that is two (2) Trading Days prior to the applicable date of determination of Fair Market Value; or (B) if the class of Warrant Shares is not listed or admitted to trading on any securities exchange but is regularly traded in any over-the-counter market, then the average of the bid and ask prices per share of the class of Warrant Shares for the ten (10) consecutive Trading Days ending on the day that is two (2) Trading Days prior to the applicable date of determination of Fair Market Value; or (C) if the class of Warrant Shares is not traded as described in clauses (A) or (B), then the per share fair market value of the class of Warrant Shares as determined in good faith by the Companys Board of Directors. As used in this Warrant, the term Trading Days shall have the meaning ascribed to such term in the Purchase Agreement.
(b) Delivery of Certificates. Certificates for Warrant Shares purchased hereunder shall be transmitted by the transfer agent of the Company to the Holder by crediting the account of the Holders prime broker with the Depository Trust Company (DTC) through its Deposit Withdrawal Agent Commission system if the Company is a participant in such system and such Warrant Shares are eligible for delivery in such a manner, and otherwise by physical delivery to the address specified by the Holder in the Notice of Exercise within three Business Days from the delivery to the Company of the Notice of Exercise, surrender of this Warrant and payment of the aggregate Exercise Price as set forth above (the Delivery Period). This Warrant shall be deemed to have been exercised on the date on which this Warrant is surrendered and payment of the Exercise Price is received by the Company. The Warrant Shares shall be deemed to have been issued, and Holder or any other person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date on which all of the criteria described in the immediately preceding sentence have occurred, irrespective of the date of delivery of such certificate or certificates, except that, if the date of such surrender and payment is a date when the stock transfer books of the Company are closed, such person shall be deemed to have become the holder of such shares at the close of business on the next succeeding date on which the stock transfer books are open. If fewer than all of the Warrant Shares purchasable under the Warrant are purchased, the Company will, upon such partial exercise, execute and deliver to the Holder a new Warrant (dated as of the Issue Date), in the same form and tenor as this Warrant, evidencing that portion of the Warrant not exercised.
(c) Delivery of Electronic Shares. In lieu of delivering physical certificates representing the Warrant Shares issuable upon exercise (provided that the transfer agent is participating in the DTC Fast Automated Securities Transfer program and provided further that the Holder provides the transfer agent with information required in order to issue such Warrant Shares to the Holder electronically), upon the request of the Holder as set forth in the Notice of Exercise, but only if the Warrant Shares may be issued without restrictive legends, the Company shall cause its transfer agent to electronically transmit, within the Delivery Period, the Warrant Shares issuable upon exercise to the Holder by crediting Holders account with DTC through its Deposit Withdrawal Agent Commission system. Any delivery not effected by electronic transmission shall be effected by delivery of physical certificates.
(d) No Fractional Shares. If a fractional share of Warrant Shares would, but for the provisions of this Section 2(d), be issuable upon exercise of the rights represented by this Warrant, the Company shall (i) round a half share or greater to be delivered to Holder up to the next whole share and (ii) round a less-than-half share to be delivered to Holder down to the nearest whole share.
(e) No Charge to Holder Upon Issuance. The issuance of Warrant Shares upon exercise of this Warrant shall be made without charge to Holder for any issuance tax in respect thereof or other cost incurred by the Company in connection with such exercise and the related issuance of Warrant Shares (other than any transfer taxes resulting from the issuance of Warrant Shares to any person other than Holder).
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(f) Reservation of Shares. During the Exercise Period, the Company shall reserve and keep available out of its authorized but unissued Common Stock such number of Warrant Shares issuable upon the full exercise of this Warrant. All Warrant Shares which are so issuable shall, when issued and upon the payment of the applicable Exercise Price, be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges and not subject to the pre-emptive rights of any holder of Common Stock or any other class or series of stock of the Company. During the Exercise Period, the Company shall not take any action which would cause the number of authorized but unissued Common Stock to be less than the number of such shares required to be reserved hereunder for issuance upon exercise of this Warrant.
(g) Limitations on Exercises. Notwithstanding anything to the contrary contained in this Warrant, this Warrant shall not be exercisable by the Holder hereof to the extent (but only to the extent) that after giving effect to such issuance after exercise, such Holder or any of its affiliates, as a result of such exercise, would beneficially own in excess of the Beneficial Ownership Limitation (as defined below). For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which such determination is being made, but shall exclude the number of shares of Common Stock which are issuable upon (i) exercise of the remaining, unexercised portion of this Warrant beneficially owned by the Holder or any of its Affiliates and (ii) exercise or conversion of the unexercised or unconverted portion of any other securities of the Company, in both cases which are subject to a limitation on conversion or exercise analogous to the limitation contained herein (including, without limitation, any other Warrants) beneficially owned by the Holder or any of its Affiliates. Except as set forth in the preceding sentence, for purposes of this Section 2(g), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. To the extent that the limitation contained in this Section 2(g) applies, the determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates) and of which such securities shall be exercisable shall be in the sole discretion of the Holder, and the submission of a Notice of Exercise shall be deemed to be the Holders determination of whether this Warrant may be exercised (in relation to other securities owned by the Holder together with any Affiliates), in each case subject to the Beneficial Ownership Limitation. No prior inability to exercise this Warrant pursuant to this paragraph shall have any effect on the applicability of the provisions of this paragraph with respect to any subsequent determination of exercisability. To ensure compliance with this restriction, the Holder will be deemed to represent to the Company each time it delivers a Notice of Exercise that such notification has not violated the restrictions set forth in this paragraph and the Company shall have no obligation to verify or confirm the accuracy of such determination. In addition, a determination as to any group status as contemplated above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. For purposes of this Section 2(g), in determining the number of outstanding shares of Common Stock, the Holder may rely on the number of outstanding shares of Common Stock as stated in the most recent of the following: (i) the Companys most recent periodic or annual report filed with the Commission, as the case may be, (ii) a more recent public announcement by the Company, or (iii) a more recent written notice by the Company or the Companys transfer agent setting forth the number of shares of Common Stock outstanding. Upon the written or oral request of a Holder, the Company shall within two Trading Days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Warrant, by the Holder or its Affiliates since the date as of which such number of outstanding shares of Common Stock was reported. The Beneficial Ownership Limitation shall be 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon exercise of this Warrant held by the Holder. The Holder, upon not less than 61 days prior notice to the Company, may increase or decrease the Beneficial
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Ownership Limitation provisions of this Section 2(g), provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock upon exercise of this Warrant held by the Holder and the Beneficial Ownership Limitation provisions of this Section 2(g) shall continue to apply. Any such increase or decrease will not be effective until the 61st day after such notice is delivered to the Company. The Beneficial Ownership Limitation provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 2(g) to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Beneficial Ownership Limitation contained herein or to make changes or supplements necessary or desirable to properly give effect to such limitation. The limitations contained in this paragraph shall apply to a successor holder of this Warrant.
3. Adjustments in Certain Events. The number, class, and price of Warrant Shares for which this Warrant may be exercised are subject to adjustment from time to time upon the happening of certain events as follows:
(a) Subdivisions, Combinations and Other Issuances. If the outstanding shares of the Companys Common Stock are divided into a greater number of shares, by forward stock split or otherwise, or a dividend in stock is paid on the Common Stock, then the number of shares of Warrant Shares for which the Warrant is then exercisable will be proportionately increased and the Exercise Price will be proportionately reduced. Conversely, if the outstanding shares of Common Stock are combined into a smaller number of shares of Common Stock, by reverse stock split or otherwise, then the number of Warrant Shares for which the Warrant is then exercisable will be proportionately reduced and the Exercise Price will be proportionately increased. The increases and reductions provided for in this Section 3(a) will be made with the intent and, as nearly as practicable, the effect that neither the percentage of the total equity of the Company obtainable on exercise of the Warrants nor the price payable for such percentage upon such exercise will be affected by any event described in this Section 3(a).
(b) Merger, Consolidation, Reclassification, Reorganization, Etc. In case of any change in the Common Stock through merger, consolidation, reclassification, reorganization, partial or complete liquidation, purchase of all or substantially all the assets of the Company, or other change in the capital structure of the Company, then, as a condition of such change, lawful and adequate provision will be made so that the Holder will have the right thereafter to receive upon the exercise of the Warrant the kind and amount of shares of stock or other securities or property to which the Holder would have been entitled if, immediately prior to such event, the Holder had held the number of Warrant Shares obtainable upon the exercise of the Warrant. In any such case, appropriate adjustment will be made in the application of the provisions set forth herein with respect to the rights and interest thereafter of the Holder, to the end that the provisions set forth herein will thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon the exercise of the Warrant. The Company will not permit any change in its capital structure to occur unless the issuer of the shares of stock or other securities to be received by the Holder, if not the Company, agrees to be bound by and comply with the provisions of this Warrant.
(c) If securities of the Company or securities of any subsidiary of the Company are distributed pro rata to holders of Common Stock, such number of securities will be distributed to the Holder or its assignee upon exercise of its rights hereunder as such Holder or assignee would have been entitled to if this Warrant had been exercised prior to the record date for such distribution. The provisions with respect to adjustment of the Common Stock provided in this Section 3 will also apply to the securities to which the Holder or its assignee is entitled under this Section 3(c).
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4. No Rights as a Stockholder. Nothing contained in this Agreement shall be construed as conferring upon the Holder any rights whatsoever as a stockholder of the Company, either at law or in equity, including without limitation, or Holders the right to vote or to consent or to receive notice as a stockholder in respect of any meetings of stockholders for the election of directors the right to receive dividends or any other matter.
5. Restrictions on Transfer; Legends.
(a) Registration or Exemption Required. Assuming the accuracy of the representations and warranties of the Holder contained in herein, this Warrant has been issued in a transaction exempt from the registration requirements of the Securities Act by virtue of Section 4(a)(2) of the Securities Act and Regulation D promulgated thereunder and exempt from state registration or qualification under applicable state laws. The Holder acknowledges that it has been advised by the Company that this Warrant and the Warrant Shares issuable upon exercise thereof have not been registered under the Securities Act. Neither this Warrant nor the Warrant Shares may be pledged, transferred, sold or assigned except pursuant to an effective registration statement or an exemption to the registration requirements of the Securities Act and applicable state laws. If, at the time of the surrender of this Warrant in connection with any transfer of this Warrant, the transfer of this Warrant shall not be registered pursuant to an effective registration statement under the Securities Act and under applicable state securities or blue sky laws, the Company may require, as a condition of allowing such transfer (i) that the Holder or transferee of this Warrant, as the case may be, furnish to the Company a written opinion of counsel (which opinion shall be in form, substance and scope customary for opinions of counsel in comparable transactions) to the effect that such transfer may be made without registration under the Securities Act and under applicable state securities or blue sky laws, (ii) that the holder or transferee execute and deliver to the Company an investment letter in form and substance acceptable to the Company and (iii) that the transferee be an accredited investor as defined in Rule 501(a) promulgated under the Securities Act or a qualified institutional buyer as defined in Rule 144A(a) under the Securities Act.
(b) Representations of Holder. The Holder represents and warrants that it has acquired this Warrant and will acquire the Warrant Shares for its own account for investment and not with a view to the sale or distribution thereof or the granting of any participation therein, and that the Holder has no present intention of distributing or selling to others any of such interest or granting any participation therein. The Holder acknowledges that the Warrant and Warrant Shares must be held indefinitely unless a subsequent disposition thereof is registered under the Securities Act or registered or qualified under any applicable state securities or blue-sky laws or is exempt from registration and/or qualification. The Holder has no need for liquidity in its investment in the Company, and is able to bear the economic risk of such investment for an indefinite period and to afford a complete loss thereof. The Holder is an accredited investor as such term is defined in Rule 501 (the provisions of which are known to the Holder) promulgated under the Act.
(c) Restrictive Legend. The Holder understands that until such time as the Warrant Shares have been registered under the Securities Act, or otherwise may be sold pursuant to Rule 144 under the Securities Act or an exemption from registration under the Securities Act without any restriction as to the number of securities as of a particular date that can then be immediately sold, this Warrant and the Warrant Shares, as applicable, shall bear a restrictive legend in substantially the form set forth on the cover page of this Warrant (and a stop-transfer order may be placed against transfer of the certificates for such securities).
(d) Disposition of Warrant or Warrant Shares. With respect to any offer, sale or other disposition of this Warrant or any Warrant Shares prior to registration of such Warrant Shares, the Holder agrees to give written notice to the Company prior thereto, describing briefly the manner thereof, together
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with evidence, reasonably satisfactory to the Company (which shall include such representation of the transferee regarding investment intent as the Company may request, to the effect that such offer, sale or other disposition may be effected without registration or qualification (under the Act as then in effect or any federal or state securities law then in effect) of this Warrant or such Warrant Shares and indicating whether or not under the Securities Act certificates for this Warrant or Warrant Shares to be sold or otherwise disposed of require any restrictive legend as to applicable restrictions on transferability in order to ensure compliance with such law. Upon receiving such written notice and reasonably satisfactory evidence, the Company, as promptly as practicable but no later than seven (7) days after receipt of the written notice, shall notify the Holder that the Holder may sell or otherwise dispose of this Warrant or Warrant Shares, all in accordance with the terms of the notice delivered to the Company. If the Company determines that the evidence is not reasonably satisfactory to the Company, the Company shall so notify the Holder promptly with details thereof after such determination has been made. Notwithstanding the foregoing, any Warrant Shares may be offered, sold or otherwise disposed of in accordance with Rule 144 under the Act and in compliance with the applicable statutory resale restrictions imposed by state securities laws, provided that the Company shall have been furnished with such information as the Company may reasonably request to provide a reasonable assurance that the provisions of Rule 144 and the applicable resale restrictions imposed by state securities laws have been satisfied. Each certificate representing this Warrant or the Warrant Shares thus transferred shall bear a legend as to the applicable restrictions on transferability in order to ensure compliance with such laws, unless pursuant to an opinion of counsel for the Holder, such legend is not required in order to ensure compliance with such laws. The Company may issue stop transfer instructions to its transfer agent in connection with such restrictions.
(e) Removal of Restrictive Legends. The certificates evidencing the Warrant Shares shall not contain any legend restricting the transfer thereof: (A) while a registration statement covering the sale or resale of the Warrant Shares is effective under the Securities Act and such legend removal is permitted under applicable securities laws (including compliance with the prospectus delivery requirements of the Securities Act), or (B) following any sale of such Warrant Shares pursuant to Rule 144, or (C) if such Warrant Shares are eligible for sale under Rule 144(b)(1), or (D) if such legend is not required under applicable requirements of the Securities Act (including judicial interpretations and pronouncements issued by the staff of the Commission) and the Company shall have received an opinion of counsel to the Holder in form reasonably acceptable to the Company to such effect (collectively, the Unrestricted Conditions). The Company shall cause its counsel to issue a legal opinion to its transfer agent if required by the transfer agent to effect the issuance of the Warrant Shares, as applicable, without a restrictive legend or removal of the legend hereunder. The Company agrees that at such time as the Unrestricted Conditions are met, it will, no later than three (3) Trading Days following the delivery by the Holder to the Company or the transfer agent of a certificate representing Warrant Shares, issued with a restrictive legend, deliver or cause to be delivered to such Holder a certificate (or electronic transfer) representing such Warrant Shares that is free from all restrictive and other legends.
(f) Notwithstanding anything else herein, the Holder agrees that it shall not, to its knowledge, transfer all or any portion of this Warrant or any of the Warrant Shares to any other person or entity, which person or entity is either (i) the beneficial holder of more than 4.99% of the Common Stock of the Company or (ii) would become, by reason of such transfer, the beneficial holder of more than 4.99% of the Common Stock of the Company.
6. Notices; Adjustments.
(i) All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (i) upon personal delivery to the party to be notified; (ii) when sent by confirmed electronic mail or facsimile if sent during normal business hours of the recipient, and if not, then on the next business day; (iii) two (2) Business Days after having been sent by registered or certified
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mail, return receipt requested, postage prepaid; or (iv) one (1) Business Day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the Company or to Holder, as applicable, at the respective addresses set forth on the signature page to the Purchase Agreement or at such other address(es) as they may designate, respectively, by ten (10) days advance written notice to the other party hereto.
(ii) Upon the occurrence of any adjustments pursuant to Sections 3(a) or 3(c) hereof, the Company at its expense shall, as promptly as reasonably practicable but in any event not later than 10 days thereafter, compute such adjustment in accordance with the terms hereof and furnish to Holder a certificate setting forth such adjustment and showing in detail the facts upon which such adjustment is based. In the event of any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, the Company shall mail to the Holder, at least ten (10) days prior to the date on which any such record is to be taken for the purpose of such dividend or distribution, a notice specifying such date. In the event of any voluntary dissolution, liquidation or winding up of the Company, the Company shall mail to the Holder, at least ten (10) days prior to the date of the occurrence of any such event, a notice specifying such date. If the approval of any stockholders of the Company shall be required in connection with any transaction contemplated by Section 3(b) above, then, the Company shall cause to be mailed to the Holder at least 10 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating the date on which such transaction is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such transaction. Notwithstanding the immediately preceding sentences, however, if the date on which the Company is obliged to provide notice hereunder to the Holders is prior to a public announcement relating to the events set forth and on such date the Companys securities are traded or quoted on any recognized national securities exchange or quotation system, then such notice shall be provided to each Holder simultaneously with the notice provided to the Companys common stockholders. Failure to give such notice, or any defect therein, shall not, however, affect the legality or validity of any such action.
7. Non-Circumvention. The Company hereby covenants and agrees that the Company will not, by amendment of its certificate of incorporation, bylaws or through any reorganization, transfer of assets, consolidation, merger, scheme of arrangement, dissolution, issue or sale of securities, or any other action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, and will at all times in good faith carry out all the provisions of this Warrant and take all action as may be reasonably required to protect the rights of the Holder.
8. Governing Law. This Warrant shall be governed by and construed in accordance with the laws of the State of New York, without regard to conflict of law principles, and notwithstanding the fact that one or more counterparts hereof may be executed outside of the state, or one or more of the obligations of the parties hereunder are to be performed outside of the state.
9. Loss, Theft, Destruction or Mutilation of Warrant. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and, in the case of loss, theft, or destruction, of indemnity reasonably satisfactory to it, and, if mutilated, upon surrender and cancellation of this Warrant, the Company will execute and deliver a new Warrant, having terms and conditions identical to this Warrant, in lieu hereof.
10. Modification and Waiver of Warrants. This Warrant may only be modified or amended or the provisions hereof waived with the written consent of the Company and the Holder. No waivers of any term, condition or provision of this Warrant, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such term, condition or provision.
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11. Successors. This Warrant shall be binding and inure to the benefit of the parties and their respective successors and assigns hereunder; provided that this Warrant may be assigned by Holder only in compliance with the conditions specified in and in accordance with all of the terms of this Warrant. This Warrant does not create and shall not be construed as creating any rights enforceable by any other person or corporation.
12. Headings. The headings used in this Warrant are used for convenience only and are not to be considered in construing or interpreting this Warrant.
13. Saturdays, Sundays, Holidays. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday or a Sunday or shall be a legal holiday in the State of New York, then such action may be taken or such right may be exercised on the next succeeding day not a legal holiday.
14. Severability. If any provision of this Warrant shall be held to be invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions of this Warrant.
15. Execution and Counterparts. This Warrant may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, and such counterparts together shall constitute only one instrument. Any one of such counterparts shall be sufficient for the purpose of proving the existence and terms of this Warrant, and no party shall be required to produce an original or all of such counterparts in making such proof.
16. Acceptance. Receipt of this Warrant by the Holder shall constitute acceptance of and agreement to all of the terms and conditions contained herein.
Signature page to Common Stock Purchase Warrant follows.
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IN WITNESS WHEREOF, the Company has caused this Common Stock Purchase Warrant to be executed and delivered as of the Issue Date by an officer thereunto duly authorized.
AUTHENTIDATE HOLDING CORP. | ||||
By: |
| |||
Name: | Ian C. Bonnet | |||
Title: | President and Chief Executive Officer | |||
Address for Notice: | ||||
300 Connell Drive, 5th Floor | ||||
Berkeley Heights, NJ 07922 |
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ATTACHMENT I
NOTICE OF EXERCISE
TO: | AUTHENTIDATE HOLDING CORP. |
Attention: Chief Financial Officer
The undersigned hereby elects to purchase, pursuant to the provisions of the Common Stock Warrant issued by Authentidate Holding Corp., and held by the undersigned, the original of which is attached hereto, and (check the applicable box):
¨ | Tenders herewith payment of the Exercise Price in the form of cash, via wire transfer of immediately available funds, in the amount of $ for shares of Common Stock. |
¨ | Elects the cashless exercise option pursuant to this Warrant, and accordingly requests delivery of shares of Common Stock, net, pursuant to the following calculation: |
X = Y (A-B)/A
( ) = ( ) [( ) - ( )]/( )
Where
X = The number of shares of Common Stock to be issued to the Holder pursuant to this cashless exercise;
Y = The number of shares of Common Stock in respect of which the net issue election is made;
A = The Fair Market Value of one share of Common Stock, as calculated per the terms of the Warrant; and
B = The Exercise Price then in effect as of the date of exercise.
¨ | If this box is checked, as long as the Companys transfer agent participates in the DTC Fast Automated Securities Transfer program (FAST), and except as otherwise provided in the next following sentence, the Company shall effect delivery of the shares of Common Stock to the Holder by crediting to the account of the Holder or its nominee at DTC (as specified in this Exercise Notice) with the number of shares of Common Stock required to be delivered. In the event that the Companys transfer agent is not a participant in FAST, or if the shares of Common Stock are not otherwise eligible for delivery through FAST, the Company shall effect delivery of the shares of Common Stock by delivering to Holder or its nominee physical certificates representing such shares. |
Information for Delivery of uncertificated Shares by DWAC:
Account Number: |
|
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Account Name: |
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DTC Number: |
|
¨ If this box is checked, the Holder requests delivery of physical certificates representing the Warrant Shares and requests that such certificates be delivered to the following address:
Name: |
|
|||||
(please typewrite or print in block letters) | ||||||
Address: |
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|||||
Tax I.D. No. or Social Security No.: |
|
If such number of shares shall not be all the shares purchasable upon the exercise of the Warrants evidenced by this Warrant, a new warrant certificate for the balance of such Warrants remaining unexercised shall be registered in the name of and delivered to:
Name: |
|
|||||
(please typewrite or print in block letters) | ||||||
Address: |
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Tax I.D. No. or Social Security No.: |
|
HOLDER: | ||
| ||
Name: | ||
Title: | ||
Date: |
|
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ATTACHMENT II
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED, the undersigned Holder of this Warrant hereby sells, assigns and transfers the foregoing Warrant and all rights evidenced thereby to
Name: |
| |
(Please Print) | ||
Address: |
| |
(Please Print) | ||
Tax ID No.: |
|
and does hereby irrevocably constitute and appoint , Attorney, to transfer the within Warrant Certificate on the books of Authentidate Holding Corp., Inc., with full power of substitution.
NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatever. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.
Dated: |
|
Holder: |
| |||||
| ||||||||
(Print Name) | ||||||||
| ||||||||
| ||||||||
(Signature) |
STATE OF ) |
COUNTY OF ) ss: |
On this day of , before me personally came , to me known or who has produced the sufficient identification and who being by me duly sworn, did depose and say that he/she resides at , that he/she, being duly authorized, executed the foregoing instrument on behalf of the holder of such instrument, and acknowledged before me that he/she had the authority to execute same in the name of said entity and did, in fact, execute the same in the capacity as stated herein.
|
Notary Public |
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Exhibit 10.6
NOTE AMENDMENT AGREEMENT
This NOTE AMENDMENT AGREEMENT (this Amendment), dated as of October 30, 2015 (the Effective Date), is entered into by and among AUTHENTIDATE HOLDING CORP., a Delaware corporation (the Company) and VER 83, LLC the holder (the Holder) of the Prior Note (as such term is defined below).
WHEREAS, the Company has issued to the Holder a promissory note in the aggregate principal amount of $950,000 (the Prior Note) with a maturity date of October 30, 2015 (the Maturity Date);
WHEREAS, the Company seeks Holders consent to modify and extend the Maturity Date of the Prior Note to the date specified hereinafter and, in consideration thereof, the Company and the Holder have agreed to the additional terms set forth herein.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged the Company and the Holder agree as follows:
SECTION 1. Definitions. As used herein, terms that are defined herein shall have the meanings as so defined, and terms not so defined shall have the meanings as set forth in the Prior Note.
SECTION 2. Amendments to the Prior Note. The Prior Note shall be amended as follows:
(a) The Prior Note is hereby amended to modify the definition of the term Maturity Date such that from and after the Effective Date of this Amendment, the term Maturity Date shall mean November 3, 2015.
SECTION 3. No Defaults. The Company and Holder, by execution of this Amendment, each hereby represent and warrant to the other, that as of the date hereof, no Event of Default has occurred under the Prior Note and no Event of Default exists or is continuing with respect to the Prior Note.
SECTION 4. Effect of Amendment. Upon the Effective Date of this Amendment, (i) the applicable portions of this Amendment shall be a part of the Prior Note and the Prior Note shall incorporate the provisions of Section 2 hereof, and (ii) each reference in the Prior Note to this Note, this Agreement, hereof, hereunder, or words of like import, and each reference in any other document or agreement to the Prior Note shall mean and be a reference to the Prior Note as amended hereby. Except as expressly amended hereby, the Prior Note (as it may have previously been amended) shall remain in full force and effect in accordance with its terms, and is hereby ratified and confirmed by the parties hereto.
SECTION 5. Consent. Each of the Holder and the Company hereby consents to the terms of the amendments to the Prior Note contained in this Amendment. This Amendment is not intended to serve as, and shall not be construed by operation of law or otherwise, as a novation of the Prior Note.
SECTION 6. Representations and Warranties. Each of the parties hereto represents and warrants that it is duly incorporated or otherwise organized, validly existing and (to the extent applicable) in good standing under the laws of the jurisdiction of its formation, that it has all requisite power and authority to enter into this Amendment and that this Amendment has been duly authorized, executed and delivered by it and constitutes its legal, valid and binding obligation. The Holder further represents and warrants that (i) it is the beneficial or record owner of the Prior Note originally issued to it, free and clear of any and all pledges, liens, security interests, mortgage, claims, charges, restrictions, options, title defects or encumbrances and (ii) such Holder has not assigned any interest in the Prior Note.
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SECTION 7. Governing Law; Miscellaneous.
(a) This Amendment shall be governed by and construed in accordance with the laws of the State of New York without reference to principles of conflicts of law. Headings used herein are for convenience of reference only and shall not affect the meaning of this Amendment. This Amendment may be executed in any number of counterparts, and by the parties hereto on separate counterparts, each of which shall be an original and all of which taken together shall constitute one and the same agreement. Executed counterparts may be delivered via facsimile or other means of electronic transmission.
(b) Each Holder hereby represents that it is the owner of the Prior Note issued to it and that such Prior Note has not been assigned, pledged or otherwise transferred. Each Holder agrees that this Amendment shall be affixed by each Holder to its Prior Note and become a part thereof.
(c) This Amendment contains the entire agreement and understanding of the parties with respect to its subject matter and supersedes all prior arrangements and understandings between the parties, either written or oral, with respect to its subject matter. No provision of this Amendment may be waived, modified, supplemented or amended except in a written instrument signed by the Company and the Holder. The failure of any party at any time or times to require performance of any provision hereof shall in no manner affect the rights at a later time to enforce the same. No waivers of or exceptions to any term, condition, or provision of this Amendment, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such term, condition, or provision. This Amendment shall be binding upon and shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns.
(d) Each Holder has been advised and had the opportunity to consult with an attorney or other advisor prior to executing this Amendment. The undersigned Holder understands, confirms and agrees that counsel to the Company and its counsel are not acting as counsel to the Holder and the undersigned Holder has not relied upon any legal advice except as provided by its own counsel.
(e) This Amendment is subject to the Companys receipt of a comparable amendment agreement executed on behalf of Lazarus Investment Partners LLLP with respect to amending the maturity date of the promissory note held by it in the aggregate principal amount of $500,000.
SECTION 8. The Company confirms that Holder has extended the Prior Note several times at Companys request and based on Companys representations that the extensions are to benefit the Company and will in no way impair the Holders rights or collateral and by agreeing to this Amendment in no way affects or modifies Holders warrants, conversion rights, or other privileges under the Prior Note, amendments to the Prior Note, or any other agreements between Company and Holder, including, but not limited to Holders alternative transaction rights under a Waiver and Consent Agreement dated May 20, 2015.
Signature Page Follows.
2
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by their respective duly authorized representatives, as of the date first set forth above
AUTHENTIDATE HOLDING CORP. | ||
By: | /s/ Ian C. Bonnet | |
Name: | Ian C. Bonnet | |
Title: | Chief Executive Officer |
ACCEPTED AND AGREED: | ||
HOLDER: VER 83, LLC | ||
By: | /s/ Douglas B. Luce | |
Name: | Douglas B. Luce | |
Title: | ||
Principal Amount of Prior Note: $950,000.00 |
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Exhibit 10.7
NOTE AMENDMENT AGREEMENT
This NOTE AMENDMENT AGREEMENT (this Amendment), dated as of October 30, 2015 (the Effective Date), is entered into by and among AUTHENTIDATE HOLDING CORP., a Delaware corporation (the Company) and Lazarus Investment Partners LLLP, the holder (the Holder) of the Prior Note (as such term is defined below).
WHEREAS, the Company has issued to the Holder a promissory note in the aggregate principal amount of $500,000 (the Prior Note) with a maturity date of October 30, 2015 (the Maturity Date);
WHEREAS, the Company seeks Holders consent to further modify and extend the Maturity Date of the Prior Note to the date specified hereinafter and, in consideration thereof, the Company and the Holder have agreed to the additional terms set forth herein.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged the Company and the Holder agree as follows:
SECTION 1. Definitions. As used herein, terms that are defined herein shall have the meanings as so defined, and terms not so defined shall have the meanings as set forth in the Prior Note.
SECTION 2. Amendments to the Prior Note. The Prior Note shall be amended as follows:
(a) The Prior Note is hereby amended to modify the definition of the term Maturity Date such that from and after the Effective Date of this Amendment, the term Maturity Date shall mean November 3, 2015.
SECTION 3. No Defaults. The Company and Holder, by execution of this Amendment, each hereby represent and warrant to the other, that as of the date hereof, no Event of Default has occurred under the Prior Note and no Event of Default exists or is continuing with respect to the Prior Note.
SECTION 4. Effect of Amendment. Upon the Effective Date of this Amendment, (i) the applicable portions of this Amendment shall be a part of the Prior Note and the Prior Note shall incorporate the provisions of Section 2 hereof, and (ii) each reference in the Prior Note to this Note, this Agreement, hereof, hereunder, or words of like import, and each reference in any other document or agreement to the Prior Note shall mean and be a reference to the Prior Note as amended hereby. Except as expressly amended hereby, the Prior Note (as it may have previously been amended) shall remain in full force and effect in accordance with its terms, and is hereby ratified and confirmed by the parties hereto.
SECTION 5. Consent. Each of the Holder and the Company hereby consents to the terms of the amendments to the Prior Note contained in this Amendment. This Amendment is not intended to serve as, and shall not be construed by operation of law or otherwise, as a novation of the Prior Note.
SECTION 6. Representations and Warranties. Each of the parties hereto represents and warrants that it is duly incorporated or otherwise organized, validly existing and (to the extent applicable) in good standing under the laws of the jurisdiction of its formation, that it has all requisite power and authority to enter into this Amendment and that this Amendment has been duly authorized, executed and delivered by it and constitutes its legal, valid and binding obligation. The Holder further represents and warrants that (i) it is the beneficial or record owner of the Prior Note originally issued to it, free and clear of any and all pledges, liens, security interests, mortgage, claims, charges, restrictions, options, title defects or encumbrances and (ii) such Holder has not assigned any interest in the Prior Note.
1
SECTION 7. Governing Law; Miscellaneous.
(a) This Amendment shall be governed by and construed in accordance with the laws of the State of New York without reference to principles of conflicts of law. Headings used herein are for convenience of reference only and shall not affect the meaning of this Amendment. This Amendment may be executed in any number of counterparts, and by the parties hereto on separate counterparts, each of which shall be an original and all of which taken together shall constitute one and the same agreement. Executed counterparts may be delivered via facsimile or other means of electronic transmission.
(b) Each Holder hereby represents that it is the owner of the Prior Note issued to it and that such Prior Note has not been assigned, pledged or otherwise transferred. Each Holder agrees that this Amendment shall be affixed by each Holder to its Prior Note and become a part thereof.
(c) This Amendment contains the entire agreement and understanding of the parties with respect to its subject matter and supersedes all prior arrangements and understandings between the parties, either written or oral, with respect to its subject matter. No provision of this Amendment may be waived, modified, supplemented or amended except in a written instrument signed by the Company and the Holder. The failure of any party at any time or times to require performance of any provision hereof shall in no manner affect the rights at a later time to enforce the same. No waivers of or exceptions to any term, condition, or provision of this Amendment, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such term, condition, or provision. This Amendment shall be binding upon and shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns.
(d) Each Holder has been advised and had the opportunity to consult with an attorney or other advisor prior to executing this Amendment. The undersigned Holder understands, confirms and agrees that counsel to the Company and its counsel are not acting as counsel to the Holder and the undersigned Holder has not relied upon any legal advice except as provided by its own counsel.
(e) This Amendment is subject to the Companys receipt of a comparable amendment agreement executed on behalf of VER 83, LLC with respect to amending the maturity date of the promissory note held by it in the aggregate principal amount of $950,000.
Signature Page Follows.
2
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by their respective duly authorized representatives, as of the date first set forth above
AUTHENTIDATE HOLDING CORP. | ||
By: | /s/ Ian C. Bonnet | |
Name: | Ian C. Bonnet | |
Title: | Chief Executive Officer |
ACCEPTED AND AGREED: | ||
HOLDER: LAZARUS INVESTMENT PARTNERS LLLP | ||
By: | /s/ Justin Borus | |
Name: | Justin Borus | |
Title: | Manager | |
Principal Amount of Prior Note: $500,000.00 |
3
Exhibit 10.8
NOTE PURCHASE AGREEMENT
This Securities Purchase Agreement (this Agreement) is dated as of October 28, 2015, among Authentidate Holding Corp., a Delaware corporation (the Company), and each of the purchasers identified on the signature pages hereto (each, a Purchaser and collectively, the Purchasers).
BACKGROUND
WHEREAS, subject to the terms and conditions set forth in this Agreement and pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the Securities Act), and Rule 506 as promulgated by the U.S. Securities and Exchange Commission (the Commission) under the Securities Act, the Company desires to issue and sell to each Purchaser, and each Purchaser, severally and not jointly, desires to purchase from the Company certain securities of the Company as more fully described in this Agreement.
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this Agreement and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Company and the Purchasers hereby agree as follows:
ARTICLE I
DEFINITIONS
1.1 Certain Definitions. In addition to the other terms specifically defined elsewhere in this Agreement, the following capitalized terms shall have the following respective meanings when used herein:
Affiliate of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, control, when used with respect to any specified Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms controlling and controlled have meanings correlative to the foregoing.
Board of Directors means the board of directors of the Company or any authorized committee of the board of directors.
Business Day means each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which the banking institutions in the City of New York, New York are authorized or obligated by law or executive order to close or be closed.
Capital Stock of any Person means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interest in (however designated) equity of such Person, but excluding any debt securities convertible into such equity.
Closing means the closing of the purchase and sale of the Notes and Warrants pursuant to Section 2.1.
Closing Date means with respect to the Closing, the Trading Day on which all of the Transaction Agreements have been executed and delivered by the applicable parties thereto, and all conditions precedent to (i) the Purchasers obligations to pay the Purchase Price for the Notes and Warrants to be purchased at the Closing and (ii) the Companys obligations to deliver such Notes and Warrants at the Closing, in each case, have been satisfied or waived.
Commission means the United States Securities and Exchange Commission.
Common Stock shall mean the common stock of Authentidate Holding Corp., par value $0.001 per share.
Common Stock Equivalents means any securities of the Company which entitle the holder thereof to acquire at any time Common Stock, including, without limitation, any debt, preferred stock, right, option, warrant or other instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock.
Exchange Act means the Securities Exchange Act of 1934, as amended and the rules and regulations promulgated thereunder.
GAAP means generally accepted accounting principles in the United States as in effect from time to time.
Indebtedness means, without duplication, with respect to any Person (the subject Person), all liabilities, obligations and indebtedness of the subject Person to any other Person, of any kind or nature, now or hereafter owing, arising, due or payable, howsoever evidenced, created, incurred, acquired or owing, whether primary, secondary, direct, contingent, fixed or otherwise, consisting of indebtedness for borrowed money or the deferred purchase price of property, excluding purchases of property, product, merchandise and services in the ordinary course of business, but including (a) all obligations and liabilities under guarantees; (b) the present value of lease payments due under synthetic leases; and (c) all obligations and liabilities under any asset securitization or sale/leaseback transaction; provided, further, however, that in no event shall the term Indebtedness include the capital stock surplus, retained earnings, minority interests in the common stock of Subsidiaries, lease obligations (other than pursuant to (b) above), reserves for deferred income taxes and investment credits, other deferred credits or reserves.
Liens means any lien, charge, security interest, encumbrance, right of first refusal, preemptive right or other restriction, other than restrictions imposed by securities laws.
Majority in Interest shall mean the holders of fifty-one percent (51%) or more of the outstanding principal amount of all then outstanding Notes at the time of such determination.
Notes means the promissory notes due, subject to the terms therein, one year from their date of issuance, issued by the Company to the Purchasers hereunder, in the form of Exhibit A attached hereto.
Person shall mean and include an individual, a partnership, a corporation (including a business or other trust), a joint stock company, a limited liability company, an unincorporated association, a joint venture or other entity or a governmental authority.
Purchase Price means the aggregate amount to be paid for the Notes and Warrants purchased hereunder as specified beneath each Purchasers name on the signature page of this Agreement and next to the heading Purchase Price, in United States dollars and in immediately available funds.
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Required Approvals means (i) filings expressly required pursuant to this Agreement, (ii) if required, application(s) to the Companys principal Trading Market for the listing of the shares of Common Stock which may be issued pursuant to the terms of this Agreement for trading thereon in the time and manner required thereby; (iii) such filings as are required to be made under applicable federal and state securities laws; (iv) approvals or consents that have been made or obtained prior to or contemporaneously with the date of this Agreement; and (v) filings pursuant to the Exchange Act.
Securities means the Notes, the Warrants and the Warrant Shares.
Securities Act means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
Subsidiary means, in respect of any Person, any corporation, association, partnership or other business entity of which more than 50% of the total voting power of shares of Capital Stock or other interests (including partnership interests) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers, general partners or trustees thereof is at the time owned or controlled, directly or indirectly, by (i) such Person; (ii) such Person and one or more Subsidiaries of such Person; or (iii) one or more Subsidiaries of such Person.
Trading Day means a day on which the Trading Market on which the Companys Common Stock is listed for trading is open for trading.
Trading Market means any of the following markets or exchanges on which the Common Stock is listed or quoted for trading on the date in question: the NYSE AMEX, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the New York Stock Exchange or the OTC Bulletin Board.
Transaction Agreements means this Agreement, the Notes, the Warrants and any other agreement or instrument executed by a party to this Agreement or in connection with the transactions contemplated hereunder.
Warrants means, collectively, the Common Stock purchase warrants delivered to the Purchasers at the Closing in accordance with Section 2.2(a) hereof, which Warrants shall be in the form of Exhibit B attached hereto.
Warrant Shares means the shares of Common Stock issuable upon exercise of the Warrants.
ARTICLE II
PURCHASE AND SALE OF SECURITIES
2.1 Purchase and Sale of Securities; Closings.
(a) The Company is authorized to offer and sell to the Purchasers an aggregate principal amount of $450,000 of Notes and Warrants to purchase 1,000,000 shares of Common Stock on the terms and conditions set forth herein. On the Closing Date, upon the terms and subject to the conditions set forth herein, substantially concurrent with the execution and delivery of this Agreement by the parties hereto, the Company agrees to sell, and the Purchasers, severally and not jointly, agree to purchase $450,000 in principal amount of the Notes and Warrants to purchase 1,000,000 shares of Common Stock. If there is more than one Purchaser, then each Note and Warrant to be issued at the Closing shall be identical in all respects except for (i) the name of the Person to whom such Note or Warrant is being issued, and (ii) the principal amount of each such Note or number of shares of Common Stock issuable upon exercise of each such Warrant.
(b) The obligations of the Purchasers to purchase Notes are several and not joint. Each Purchaser shall deliver its Purchase Price by delivering to the account of the Company, via wire transfer, immediately available funds equal to such Purchasers Purchase Price as set forth on the signature page hereto executed by such Purchaser. The Company shall deliver to each Purchaser its respective Note and a Warrant, as determined pursuant to Section 2.2(a), and the Company and each Purchaser shall deliver the other items set forth in Section 2.2 deliverable at the Closing. Upon satisfaction of the covenants and conditions set forth in Sections 2.2 and 2.3, the Closing shall occur at the offices of Companys counsel or such other location and on such Business Day as the parties shall mutually agree.
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2.2 Deliveries.
(a) On or prior to the Closing Date, the Company shall deliver or cause to be delivered to each Purchaser the following: (i) this Agreement duly executed by the Company; (ii) a Note with a principal amount equal to such Purchasers Purchase Price, registered in the name of such Purchaser (such original Note may be delivered within three Trading Days following the applicable Closing Date, as the case may be); (iii) a Warrant with an exercise price per share equal to $0.30, subject to adjustment as provided therein (such original Warrant certificate may be delivered within three Trading Days following the applicable Closing Date, as the case may be) registered in the name of such Purchaser; and (iv) such other documents relating to the transactions contemplated by this Agreement as the Purchasers or their counsel may reasonably request.
(b) On or prior to the Closing Date, each Purchaser shall deliver or cause to be delivered to the Company the following: (i) this Agreement, duly executed by such Purchaser; (ii) the Purchasers Purchase Price by wire transfer of immediately available U.S. funds to the account as specified in writing by the Company; and (iii) such other documents relating to the transactions contemplated by this Agreement as the Company or its counsel may reasonably request.
2.3 Closing Conditions.
(a) Closing Conditions in Favor of the Purchasers. The obligation of each of the Purchasers to deliver the Purchase Price to the Company in connection with the Initial Closing or any Interim Closing or Final Closing, as the case may be, is subject to the satisfaction, or the waiver by such Purchaser, on or prior to such payment, of each of the following conditions:
(i) Representations and Warranties. The representations and warranties of the Company contained herein shall be true and correct in all material respects as of the date hereof and as of the applicable Closing as though made on and as of such date (provided that representations and warranties which are confined to a specified date shall speak only as of such date).
(ii) Performance. The Company shall have performed, satisfied and complied with, in all material respects, all covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by it at or prior to the applicable Closing, including the making of the deliveries required by Section 2.2(a).
(iii) Required Approvals. The Company shall have received all Required Approvals for the applicable Closing.
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(b) Closing Conditions in Favor of the Company. The entering into of this Agreement by the Company with each of the Purchasers, and the acceptance by the Company of such Purchasers Purchase Price, is subject to the satisfaction, or the waiver by the Company, at or prior to the applicable Closing, of each of the following conditions:
(i) Representations and Warranties. The representations and warranties of such Purchaser contained herein shall be true and correct in all material respects as of the date hereof and as of the applicable Closing as though made on and as of such date.
(ii) Performance. Such Purchaser shall have performed, satisfied and complied with, in all material respects, all other covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by him, her or it at or prior to the applicable Closing, including the making of the deliveries required by Section 2.2(b).
(iii) Required Approvals. The Company shall have received all Required Approvals for the applicable Closing.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of the Company. The Company hereby represents and warrants to the Purchasers as follows:
(a) Organization and Qualification. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has the requisite legal authority to own and use its properties and assets and to carry on its business as currently conducted. The Company is duly qualified to do business and is in good standing as a foreign corporation or other entity in each jurisdiction in which the nature of the business conducted or property owned by the Company makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, would not, individually or in the aggregate, have, or reasonably be expected to result in, a Material Adverse Effect (defined below). For purposes of this Agreement, Material Adverse Effect means (i) a material adverse effect on the results of operations, assets, business or financial condition of the Company and its Subsidiaries, taken as a whole on a consolidated basis, or (ii) material and adverse impairment of the Companys ability to perform its obligations under this Agreement, provided that none of the following alone shall be deemed, in and of itself, to constitute a Material Adverse Effect: (A) a change in the market price or trading volume of the shares of Common Stock of the Company or (B) changes in general economic conditions or changes affecting the industry in which the Company operates generally (as opposed to Company-specific changes) so long as such changes do not have a disproportionate effect on the Company and its Subsidiaries, taken as a whole.
(b) Authorization; Enforcement. The Company has the requisite corporate authority to enter into this Agreement and to carry out its obligations hereunder. The execution and delivery of this Agreement and the certificates representing the Notes and Warrants have been duly authorized by all necessary corporate action on the part of the Company. This Agreement has been duly executed and delivered by the Company and constitutes, and the certificates representing the Notes and Warrants, when executed and delivered in accordance with the terms hereof, will constitute, a valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as may be limited by (i) applicable bankruptcy, insolvency, reorganization or other laws of general application relating to or affecting the enforcement of creditors rights generally; (ii) the effect of rules of law governing the availability of specific performance and other equitable remedies; and (iii) insofar as indemnification and contribution provisions may be limited by applicable law.
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(c) Required Approvals; No Conflicts. Subject to the Required Approvals, the execution and delivery by the Company of this Agreement and the certificates representing the Notes and Warrants, and the performance by the Company of its obligations hereunder and thereunder, do not and will not (i) conflict with or violate any provision of the Companys certificate of incorporation, bylaws or other organizational or charter documents, (ii) conflict with, or constitute a default under (or an event that, with notice or lapse of time or both, would become a default under), or give to others any rights of termination, amendment, acceleration or cancellation under (with or without notice, lapse of time or both), any agreement, credit facility, debt or other instrument evidencing a debt of the Company or other understanding to which the Company is a party, or by which any of its properties or assets is bound, except to the extent that such conflict or default or termination, amendment, acceleration or cancellation right would not reasonably be expected to have a Material Adverse Effect, or (iii) result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which the Company is subject, or by which any of its properties or assets is bound, except to the extent that such violation would not reasonably be expected to have a Material Adverse Effect. The Company is not required to obtain any consent, waiver, authorization or order of, give any notice to, or make any filing or registration with, any court or other federal, state, local or other governmental authority or other Person in connection with the execution, delivery and performance by the Company of the Transaction Agreements, other than: (i) the filings required pursuant to Section 4.1 of this Agreement and (ii) the Required Approvals.
(d) Due Issuance. The Notes and the Warrants are duly authorized and, when issued and paid for in accordance with the applicable Transaction Agreements, the Notes and the Warrants will constitute legal, valid and binding obligations of the Company. The Warrant Shares, when issued in accordance with the terms of the Warrants, will be validly issued, fully paid and non-assessable, free and clear of all Liens imposed by the Company other than restrictions on transfer provided for in the Transaction Agreements.
(e) Property. The Company does not own any real property. The Company and its subsidiaries have good and marketable title to all properties and assets described in the SEC Reports as owned by it, in each case free and clear of all Liens, except such as (i) are described in the SEC Reports or (ii) do not materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company and its subsidiaries. Any real property and buildings held under lease by the Company and its subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as do not interfere with the use made and proposed to be made of such property and buildings by the Company and its subsidiaries.
(f) Capitalization. The capitalization of the Company is as set forth in the Companys SEC Reports and as set forth in this paragraph. The Company has not issued any capital stock since its most recently filed report under the Exchange Act, other than (i) pursuant to the exercise of stock options or vesting of restricted stock units granted under the Companys equity compensation plans, (ii) the issuance of shares of Common Stock or restricted stock units to employees, directors or other eligible persons pursuant to the Companys equity compensation plans, (iii) pursuant to the conversion and/or exercise of Common Stock Equivalents outstanding as of the date hereof, and pursuant to the terms and conditions for the payment of dividends pursuant to the Certificate of Designations, Preferences and Rights and Number of Shares of Series D Convertible Preferred Stock. Except as disclosed in the SEC Reports or as a result of the purchase and sale of the Securities, there are no outstanding options, warrants, scrip rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities, rights or obligations convertible into or exercisable or exchangeable for, or giving any Person any right to subscribe for or acquire any shares of Common Stock or Common Stock Equivalents, or binding written contracts by which the Company or any Subsidiary is bound to issue additional shares of Common Stock or Common Stock Equivalents other than (x) such equity and/or debt securities of the
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Company as may be issued in a transaction with the holder of a promissory note in the aggregate principal amount of $950,000 and (y) a maximum of 900,000 common stock purchase warrants issuable to a consultant pursuant to a services agreement. The issuance and sale of the Securities will not obligate the Company to issue shares of Common Stock or other securities to any Person (other than the Purchaser) and will not result in a right of any holder of Company securities to adjust the exercise, conversion, exchange or reset price under any of such securities. All of the outstanding shares of capital stock of the Company are duly authorized, validly issued, fully paid and non-assessable, have been issued in compliance with all federal and state securities laws, and none of such outstanding shares was issued in violation of any preemptive rights or similar rights to subscribe for or purchase securities.
(g) SEC Reports; Financial Statements. The Company has filed all SEC Reports required to be filed by it under the Exchange Act for the two years preceding the date hereof (the SEC Reports) on a timely basis or has received a valid extension of such time of filing and has filed any such SEC Reports prior to the expiration of any such extension. As of their respective dates, the SEC Reports filed for the two years preceding the date hereof have complied in all material respects with the requirements of the Exchange Act and the rules and regulations promulgated thereunder, and none of such SEC Reports, when filed, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The financial statements of the Company, together with the related schedules and the notes thereto, included or incorporated by reference in the SEC Reports comply in all material respects with applicable accounting requirements and the applicable requirements of the Securities Act and Exchange Act as in effect at the time of filing. Such financial statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved (GAAP), except as may be otherwise specified in such financial statements or the notes thereto, and fairly present in all material respects the financial position of the Company as of and for the dates thereof and the results of operations and cash flows for the periods then ended, subject, in the case of unaudited statements, to normal, immaterial, year-end audit adjustments.
(h) Material Liabilities and Indebtedness. Since the date of the latest financial statements included in the SEC Reports, except as disclosed in the SEC Reports: (i) there has been no event, occurrence or development that, individually or in the aggregate, has had or would reasonably be expected to result in a Material Adverse Effect; (ii) the Company has not incurred any liabilities (contingent or otherwise) other than (A) trade payables and accrued expenses incurred in the ordinary course of business consistent with past practice and (B) liabilities not required to be reflected in the Companys financial statements pursuant to GAAP or required to be disclosed in filings made with the Commission; (iii) the Company has not altered its method of accounting or the identity of its auditors; and (iv) other than with respect to the Companys outstanding shares of Series B Convertible Preferred Stock and Series D Convertible Preferred Stock, the Company has not declared or made any dividend or distribution of cash or other property to its shareholders or purchased, redeemed or made any agreements to purchase or redeem any shares of its capital stock.
(i) Litigation. Except as described in the Companys SEC Reports, there is no pending action, suit, proceeding or investigation before any court, governmental agency or body, or arbitrator having jurisdiction over the Company, or any of its Affiliates that would affect the execution by the Company or the performance by the Company of its obligations under this Agreement, and all other agreements entered into by the Company relating hereto. Except as contemplated in Section 3.1(h) of this Agreement or as disclosed in the SEC Reports, there is no pending action, suit, proceeding or investigation before any court, governmental agency or body, or arbitrator having jurisdiction over the Company, or any of its Affiliates which litigation if adversely determined would reasonably be expected to have a Material Adverse Effect.
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(j) No Defaults. Except as disclosed in the Companys SEC Reports, the Company and its Subsidiaries are not, nor have they received notice that they would be with the passage of time, giving of notice, or both, in breach or violation of any of the terms and provisions of, or in default under (a) their charters and bylaws, (b) any statute, rule, regulation or order of any governmental agency or body or any court, domestic or foreign, having jurisdiction over them, or any of their material assets or properties, or (c) any material agreement or instrument to which they are a party or by which they are bound or to which any of their assets or properties are subject, except, in the case of clauses (b) and (c) only, for such conflicts, breaches or violations as have not and are not reasonably be expected to result in, individually or in the aggregate, a Material Adverse Effect.
(k) Sarbanes-Oxley Compliance. The Company is in compliance in all material respects with all provisions of the Sarbanes-Oxley Act of 2002, as amended, applicable to it, and the applicable rules and regulations promulgated thereunder by all government and regulatory authorities and agencies. The Company maintains a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with managements general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles in the United States and to maintain accountability for assets, (iii) access to assets is permitted only in accordance with managements general or specific authorization and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect thereto. The Company has established and maintains and evaluates disclosure controls and procedures (as such term is defined in Rule 13a-15 and Rule 15d-15 under the Exchange Act) and internal control over financial reporting (as such term is defined in Rule 13a-15 and Rule 15d-15 under the Exchange Act). The Companys certifying officers have evaluated the effectiveness of the Companys disclosure controls and procedures and the Company presented in its Annual Report on Form 10-K for the fiscal year ended June 30, 2015, the conclusions of the Companys certifying officers about the effectiveness of such disclosure controls and procedures.
(l) Intellectual Property. Except as disclosed in the SEC Reports, each of the Company and its Subsidiaries owns or has the valid right to use all Intellectual Property (as defined below) necessary for the conduct of the businesses of the Company and its Subsidiaries in the manner described in the SEC Reports as now conducted or proposed to be conducted. Except as disclosed in the SEC Reports: (i) to the knowledge of the Company, no third party has infringed, misappropriated, diluted or otherwise violated in any material respect any Intellectual Property rights of the Company or any of its Subsidiaries, and no claims for any of the foregoing have been brought against any third party by the Company or any of its Subsidiaries; (ii) the Intellectual Property owned by the Company or its Subsidiaries and, to the knowledge of the Company, the Intellectual Property licensed to the Company or its Subsidiaries have not been adjudged invalid or unenforceable, in whole or in part, and there is no pending or, to the knowledge of the Company, threatened action, suit, proceeding, investigation or claim challenging the validity, enforceability, scope, issuance/registration, use or ownership of any such Intellectual Property, and the Company is unaware of any facts which would form a reasonable basis for any such claim; (iii) there is no pending or, to the knowledge of the Company, threatened action, suit, proceeding or claim by others that the Company or any of its Subsidiaries infringes, misappropriates, dilutes or otherwise violates any Intellectual Property of others, which could have or would reasonably be expected to have a Material Adverse Effect; and (iv) each of the Company and its Subsidiaries has taken reasonable steps to maintain and protect all Intellectual Property that is material to the conduct of its business, except where failure to do so could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. The term Intellectual Property as used herein means all patents, patent applications, trademarks, trademark applications, service marks, trade names, trade dress, domain names, copyrights, licenses, inventions, trade secrets, technology, software, systems, know-how and other intellectual property and proprietary rights.
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(m) Private Placement. Assuming the accuracy of the Purchasers investment representations set forth in Section 3.2, no registration under the Securities Act is required for the offer and sale of the Securities by the Company to the Purchasers as contemplated hereby.
(n) General Solicitation. Neither the Company nor any person acting on behalf of the Company has offered or sold any of the Securities by any form of general solicitation or general advertising. The Company has offered the Securities for sale only to the Purchasers and certain other accredited investors within the meaning of Rule 501 under the Securities Act.
(o) Insurance. The Company and each of its Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as management of the Company believes to be prudent and customary in the businesses in which the Company and its Subsidiaries are engaged.
(p) Tax Status. The Company has filed all federal, state, local and foreign income and franchise tax returns required to be filed through the date hereof, subject to permitted extensions, and other than for amounts that the Company is contesting in good faith, the Company (i) has paid all taxes due thereon and (ii) does not have any knowledge of any tax deficiencies that could, in the aggregate, reasonably be expected to have a Material Adverse Effect. Except as may be contemplated by the immediately preceding sentence, the Company has no knowledge of any proposed liability for any tax to be imposed upon the properties or assets of the Company for which there is not an adequate reserve reflected in the Companys financial statements included or incorporated by reference in the SEC Reports.
The Purchaser acknowledges and agrees that the Company does not make and has not made any representations or warranties with respect to the transactions contemplated hereby other than those representations and warranties specifically set forth in this Agreement.
3.2 Representations, Warranties and Acknowledgements of the Purchasers. Each Purchaser, severally and not jointly, represents and warrants with respect to only itself, as of the date hereof and each applicable Closing Date, as the case may be, that:
(a) Organization; Authority. Each Purchaser certifies that it is resident in the jurisdiction set out on the applicable signature page of this Agreement. Such address was not created and is not used solely for the purpose of acquiring the Notes and Warrants and each Purchaser was solicited to purchase in such jurisdiction. The Purchaser is either a natural person or an entity, and in the case of an entity, (i) such Purchaser is an entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and has the requisite corporate, partnership or other power and authority to enter into this Agreement, to subscribe for and purchase the Notes and Warrants as contemplated herein and to carry out its obligations hereunder, and (ii) the execution and delivery of, and performance under, this Agreement and the other Transaction Agreements have been duly authorized by all necessary corporate, partnership or other action on the part of such Purchaser. The Purchaser is duly authorized to execute, deliver and perform this Agreement, the other Transaction Agreements and all other necessary documentation. In the case of all Purchasers, whether or not a natural person, this Agreement has been duly authorized, executed and delivered by such Purchaser and constitutes a legal, valid and binding obligation of each such Purchaser, enforceable against him, her or it in accordance with its terms, except as may be limited by (A) applicable bankruptcy, insolvency, reorganization or other laws of general application relating to or affecting the enforcement of creditors rights generally, (B) the effect of rules of law governing the availability of specific performance and other equitable remedies, and (C) insofar as indemnification and contribution provisions may be limited by applicable law.
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(b) No Conflicts. The execution, delivery and performance by the Purchaser of this Agreement and each of the Transaction Agreements to which it is a party, and the consummation by the Purchaser of the transactions contemplated by this Agreement and each such Transaction Agreement, do not and will not (i) conflict with or violate any provision of the Purchasers certificate of incorporation, bylaws or other organizational or charter documents, or (ii) conflict with or result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which the Purchaser is subject (including federal and state securities laws and regulations), or by which any property or asset of the Purchaser is bound or affected.
(c) No General Solicitation. The purchase of the Notes and Warrants by each Purchaser has not been made through or as a result of, and the distribution of the Notes and Warrants is not being accompanied by any advertisement, including without limitation in printed public media, radio, television or telecommunications, including electronic display, or as part of a general solicitation.
(d) Restricted Securities. Each Purchaser understands that the Notes and Warrants will be characterized as restricted securities under U.S. federal securities laws inasmuch as, if issued, they will be acquired from the Company in a transaction not involving a public offering and that, under U.S. federal securities laws and applicable regulations, the Notes and Warrants may be resold without registration under the Securities Act only in certain limited circumstances. Such Purchaser acknowledges that all certificates representing any of the Securities will bear a restrictive legend in a form as set forth on the form of Note or Warrant annexed hereto and as set forth in Section 4.3 of this Agreement. Such Purchaser understands that except as provided in the Transaction Agreements: (i) the Securities have not been and are not being registered under the Securities Act or any state securities laws, must be held indefinitely and may not be offered for sale, sold, assigned or transferred unless (A) subsequently registered thereunder, (B) such Purchaser shall have delivered to the Company an opinion of counsel, in a generally acceptable form, to the effect that such Securities to be sold, assigned or transferred may be sold, assigned or transferred pursuant to an exemption from such registration, or (C) such Purchaser provides the Company with reasonable assurance that such Securities can be sold, assigned or transferred pursuant to Rule 144 or Rule 144A promulgated under the Securities Act (or a successor rule thereto) (collectively, Rule 144); (ii) any sale of the Securities made in reliance on Rule 144 may be made only in accordance with the terms of Rule 144 and further, if Rule 144 is not applicable, any resale of the Securities under circumstances in which the seller (or the Person (through whom the sale is made) may be deemed to be an underwriter (as that term is defined in the Securities Act) may require compliance with some other exemption under the Securities Act or the rules and regulations of the Commission thereunder; and (iii) neither the Company nor any other Person is under any obligation to register the Securities under the Securities Act or any state securities laws or to comply with the terms and conditions of any exemption thereunder. Further, the Company may place a stop transfer order on its transfer books against the Warrant Shares if such is required in the reasonable opinion of counsel to the Company pursuant to applicable securities laws. Subject to the restrictions in the Warrant, such stop order will be removed, and further transfer of such shares of Common Stock will be permitted, upon an effective registration of the Warrant Shares or the receipt by the Company of an opinion of counsel satisfactory to the Company that such further transfer may be effected pursuant to an applicable exemption from registration.
(e) Own Account. Such Purchaser understands that the Securities have not been registered under the Securities Act or any applicable state securities law and is acquiring the Securities as principal for its own account and not with a view to or for distributing or reselling such Securities or any part thereof in violation of the Securities Act or any applicable state securities law, has no present intention of distributing any of such Securities in violation of the Securities Act or any applicable state securities law and has no direct or indirect arrangement or understandings with any other persons to distribute or regarding the distribution of such Securities in violation of the Securities Act or any
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applicable state securities law (this representation and warranty not limiting such Purchasers right to sell the Securities pursuant to the Registration Statement or otherwise in compliance with applicable federal and state securities laws). Such Purchaser is acquiring the Securities hereunder in the ordinary course of its business.
(f) Reliance on Representations. Such Purchaser understands that the Notes and Warrants are being offered and sold to it in reliance on specific exemptions from the registration requirements of United States federal and state securities laws and that the Company is relying in part upon the truth and accuracy of, and such Purchasers compliance with, the representations, warranties, agreements, acknowledgments and understandings of such Purchaser set forth herein and in the applicable schedules and exhibits in order to determine the availability of such exemptions and the eligibility of such Purchaser to acquire the Notes and Warrants The Purchaser undertakes to immediately notify the Company of any change in any statement or other information relating to the Purchaser set forth in such applicable schedules and exhibits which takes place prior to the applicable Closing time. No Person has made any written or oral representations to the Purchaser that (i) any Person will resell or repurchase the Notes or Warrants, (ii) that any Person will refund all or any part of the Purchase Price, or (iii) as to the future price or value of the shares of Common Stock of the Company.
(g) Purchaser Status. On the date such Purchaser was offered the Notes and Warrants and on the date hereof and on each date on which it exercises any Warrants, such Purchaser is and will be either an accredited investor as defined in Rule 501(a) promulgated under Regulation D of the Securities Act or a qualified institutional buyer as defined in Rule 144A(a) under the Securities Act. Such Purchaser is not required to be registered as a broker-dealer under Section 15 of the Exchange Act. The Purchaser has properly completed, executed and delivered to the Company the applicable accredited investor certificate set forth in the annexes hereto and the information contained therein is true and correct. If Purchaser is a trust, it either (i) owns total assets in excess of $5,000,000, was not formed for the specific purpose of acquiring the Securities offered hereby and its investment decisions are directed by a person who has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risk of the trusts investments; (ii) is a revocable trust which may be amended or revoked at any time by the grantors thereof and all of the grantors are accredited investors and such grantors have separately indicated the basis on which they are accredited investors; or (iii) is a bank as defined in Section 3(a)(2) of the Securities Act, a savings and loan association or other institution as defined in Section 3(a)(5) of the Securities Act and is acting in a fiduciary capacity on behalf of a trust account.
(h) Absence of Certain Events. Neither the Purchaser nor any director, executive officer, other member or officer of the Purchaser participating in the transactions contemplated by this Agreement, any beneficial owner of 20% of more of the Purchasers outstanding voting equity securities, calculated on the basis of voting power, nor any promoter (as that term is defined in Rule 405 under the Securities Act) connected with the Purchaser in any capacity at the time of sale (each a Purchaser Covered Person) is subject to any of the Bad Actor disqualifications described in Rule 506(d)(1)(i) to (viii) under the Securities Act (a Disqualification Event), except for a Disqualification Event covered by Rule 506(d)(2) or (3) (provided that the foregoing exception shall not be available hereunder with respect to Rule 506(d)(2)(iv) for any Disqualification Event of which the Company did not know as a result of the Purchasers failure to disclose such Disqualification Event to the Company as otherwise required by this Section 3.2). Such Purchaser has exercised reasonable care to determine (i) the identity of each person that is a Purchaser Covered Person and (ii) whether any Purchaser Covered Person is subject to a Disqualification Event.
(i) Experience of Purchaser. There are risks associated with the purchase of and investment in the Notes and Warrants and the Purchaser, either alone or together with his, her or its
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representatives, has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of entering into this Agreement and making his, her or its Purchase Price and the merits and risks of the prospective investment in the Notes and Warrants and such Purchaser has so evaluated such merits and risks. Such Purchaser understands that he, she or it must bear the economic risk of an investment in the Notes and Warrants indefinitely and is able to bear such risk and to afford a complete loss of such investment.
(j) Access to Information. Such Purchaser acknowledges that he, she or it has had the opportunity to review the SEC Reports and has reviewed such SEC Reports as it has, in its discretion, chosen and has been afforded (i) the opportunity to ask such questions as he, she or it has deemed necessary of, and to receive answers from, representatives of the Company concerning the terms and conditions of this Agreement and the merits and risks of the prospective investment in the Notes and Warrants, (ii) access to information about the Company and its Subsidiaries and their respective financial condition, results of operations, business, properties, management and prospects sufficient to enable him, her or it to evaluate the terms and conditions of this Agreement and the merits and risks of the prospective investment in the Notes and Warrants and (iii) the opportunity to obtain such additional information that the Company possesses or can acquire without unreasonable effort or expense that is necessary to make an informed decision. Such Purchaser and its advisors, if any, in acquiring the Notes and Warrants, have relied solely on their independent investigation of the Company and have been afforded the opportunity to ask questions of the Company. Such Purchaser understands that its investment in the Notes and Warrants involves a high degree of risk. Such Purchaser has sought such accounting, legal and tax advice as it has considered necessary to make an informed investment decision with respect to its acquisition of the Notes and Warrants. Purchaser participated in the drafting and negotiation of, has carefully read and is familiar with this Agreement. Purchaser acknowledges that he has received no representations or warranties from the Company, its affiliates, employees, agents or attorneys in making his decision to enter into this Agreement, other than as set forth herein.
(k) Certain Information. The Purchaser acknowledges that the fact of this transaction, and certain other material financial and business matters that have not been publically disclosed, constitute material non-public information of the Company. Any use of this information by you, or any other person to whom you have communicated such information, for any purpose other than your consideration of an investment in the Company, may be a criminal offense and subject you to criminal and civil liability.
(l) No Governmental Review. Each Purchaser understands that no United States federal or state agency, or any other government or governmental agency has reviewed or passed on or made, or will pass on or make, any recommendation or endorsement of the Notes and Warrants or the fairness or suitability of the prospective investment in the Notes and Warrants
(m) No Legal, Tax or Investment Advice. Each Purchaser understands that nothing in this Agreement or any other materials presented by or on behalf of the Company to him, her or it in connection with this Agreement and the transactions contemplated herein, including the prospective investment in the Notes, constitutes legal, tax or investment advice. Each Purchaser has consulted such legal, tax and investment advisors as he, she or it, in his, her or its sole discretion, has deemed necessary or appropriate in the circumstances. The Purchaser is not relying on the Company or its counsel in this regard.
The Company acknowledges and agrees that the Purchaser does not make or has not made any representations or warranties with respect to the transactions contemplated hereby other than those specifically set forth in this Section 3.2.
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ARTICLE IV
OTHER AGREEMENTS
4.1 Securities Laws Disclosure; Publicity. The Company shall, by 5:30 p.m. (New York City time) on the fourth Trading Day immediately following the date hereof, file a Current Report on Form 8-K disclosing the material terms of the transactions contemplated hereby and including the form of this Agreement as an exhibit thereto. The Company and the Purchasers shall consult with each other in issuing any press releases with respect to the transactions contemplated hereby, and neither the Company nor the Purchasers shall issue any such press release without the prior consent of the Company, with respect to any press release of any of the Purchasers, or without the prior consent of the Purchasers holding a majority of the Notes, with respect to any press release of the Company, which consent shall not unreasonably be withheld or delayed, except if such disclosure is required by law, in which case the disclosing party shall promptly provide the other party with prior notice of such public statement or communication.
4.2 Use of Proceeds. The Company shall use the net proceeds from the sale of the Notes and Warrants hereunder for general business and working capital purposes.
4.3 Transfer Restrictions.
(a) The Securities may only be disposed of in compliance with state and federal securities laws. In connection with any transfer of Securities other than pursuant to an effective registration statement or Rule 144, to the Company or to an Affiliate of a Purchaser, the Company may require the transferor thereof to provide to the Company an opinion of counsel selected by the transferor and reasonably acceptable to the Company, the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not require registration of such transferred Securities under the Securities Act. As a condition of transfer, any such transferee shall agree in writing to be bound by the terms of this Agreement. The Purchasers agree to the imprinting, so long as is required by this Section 4.3, of a legend on any of the Securities substantially in the following form:
[NEITHER] THIS SECURITY [NOR THE SECURITIES INTO WHICH THIS SECURITY IS [EXERCISABLE] [CONVERTIBLE]] HAS [NOT] BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE SECURITIES ACT), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY.
4.4 Certain Transactions and Confidentiality. Each Purchaser covenants that neither it nor any Affiliate acting on its behalf or pursuant to any understanding with it will execute any purchases or sales, including short sales, as defined in Rule 200 of Regulation SHO under the Exchange Act (Short Sales), of any of the Companys securities during the period commencing with the execution of this Agreement and ending at such time that the transactions contemplated by this Agreement are first publicly announced pursuant to Section 4.1. Each Purchaser covenants that until such time as the transactions contemplated by this Agreement are publicly disclosed by the Company, such Purchaser will maintain the confidentiality of the existence and terms of this transaction. Notwithstanding the foregoing
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and notwithstanding anything contained in this Agreement to the contrary, the Company expressly acknowledges and agrees that unless a Purchaser possesses material, non-public information with respect to the Company, has entered into a confidentiality agreement with the Company, or otherwise is restricted in its trading activities with respect to the Companys Securities, (i) no Purchaser makes any representation, warranty or covenant hereby that it will not engage in effecting transactions in any securities of the Company after the time that the transactions contemplated by this Agreement are first publicly announced; (ii) no Purchaser shall be restricted or prohibited from effecting any transactions in any securities of the Company in accordance with applicable securities laws from and after the time that the transactions contemplated by this Agreement are first publicly announced; and (iii) no Purchaser shall have any duty of confidentiality to the Company or its Subsidiaries relating to this Agreement after the initial disclosure of the transactions contemplated by this Agreement.
4.5 Form D; Blue Sky Filings. The Company agrees to timely file a Form D with respect to the Securities as required under Regulation D and to provide a copy thereof, promptly upon request of any Purchaser. The Company shall take such action as the Company shall reasonably determine is necessary in order to obtain an exemption for, or to qualify the Securities for, sale to the Purchasers at the Closing under applicable securities or Blue Sky laws of the states of the United States, and shall provide evidence of such actions promptly upon request of any Purchaser.
ARTICLE V
GENERAL
5.1 Termination. If the Closing has not been consummated on or before November 6, 2015, this Agreement may be terminated (a) by any Purchaser (except where any such Purchaser is in breach of this Agreement or has failed to perform or satisfy any closing condition applicable to it), as to such Purchasers obligations hereunder only and without any effect whatsoever on the obligations between the Company and the other Purchasers, or (b) by the Company (except for any breach by it or failure to perform or satisfy any closing condition applicable to it), by written notice to the other parties; provided, however, that such termination will not affect the right of any non-breaching party to sue or seek specific performance for any breach by any other party (or parties).
5.2 Confidentiality. Each Purchaser acknowledges that due to certain of the covenants contained herein or in the other Transaction Agreements, from time to time the Purchasers may come into possession of confidential information of the Company, including material, non-public information relating to the Company. The Purchasers hereby agree that (i) they shall keep all such information strictly confidential, applying, at a minimum, the same degree of care as it does to protect its own confidential information of a similar nature; (ii) shall only use such information in connection with the transactions contemplated by this Agreement; and (iii) shall not disclose any of such information other than: (a) to the Purchasers employees, representatives, directors, attorneys, auditors, or Affiliates who are advised of the confidential nature of such information (so long as any of the foregoing persons agree to be bound by the provisions of this Section), (b) to the extent such information presently is or hereafter becomes available on a non-confidential basis from any source of such information that is in the public domain at the time of disclosure, (c) to the extent disclosure is required by law (including applicable securities law), regulation, subpoena or judicial order or any administrative body or commission to whose jurisdiction the Purchasers are subject (provided that notice of such requirement or order shall be promptly furnished to the Company in advance of such disclosure), (d) to assignees or participants or prospective assignees or participants who agree to be bound by the provisions of this Section, or (e) with the Companys prior written consent. The Purchasers agree to be responsible for any breach of this agreement by any of the persons identified in Section 5.2(iii). The Purchasers are aware that, under certain circumstances, the United States securities laws may prohibit a Person who has received material, non-public information from an issuer from purchasing or selling securities of such issuer or from communicating such information to any other Person under circumstances in which it is reasonably foreseeable that such other Person is likely to purchase or sell such securities.
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5.3 Fees and Expenses. Except as expressly set forth in this Agreement to the contrary, each party shall pay the fees and expenses of its advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of this Agreement.
5.4 Amendments; Waivers. No provision of this Agreement may be amended or waived except in a written instrument signed, (i) in the case of an amendment, by the Company and Purchasers representing a Majority in Interest, or (ii) in the case of a waiver, by the party against whom enforcement of any such waiver is sought; provided that, in the case of waiver by or on behalf of all of the Purchasers, such written instrument shall be signed by Purchasers representing a Majority in Interest; and provided, further that that any amendment that would (i) reduce the principal amount of any Note, (ii) reduce the percentage in aggregate principal amount of Notes outstanding necessary to modify or amend the Notes; or (iii) modify this Section 5.4 shall, in each case, require the approval of each Purchaser to which such amendment shall apply. No waiver of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any subsequent default or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of any party to exercise any right hereunder in any manner impair the exercise of any such right.
5.5 Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (a) the date of transmission, if such notice or communication is delivered via facsimile or e-mail at the facsimile number or e-mail address referred to in this Section 5.5 prior to 5:00 p.m. (Eastern time) on a Business Day, (b) the next Business Day after the date of transmission, if such notice or communication is delivered via facsimile or e-mail at the facsimile number or e-mail address referred to in this Section 5.5 on a day that is not a Business Day or later than 5:00 p.m. (Eastern time) on any Business Day, (c) the Business Day following the date of deposit with a nationally recognized overnight courier service or (d) upon actual receipt by the party to whom such notice is required to be given. The addresses, facsimile numbers and e-mail addresses for such notices and communications are those set forth on the signature pages hereof, or such other address, facsimile number or e-mail address as may be designated in writing hereafter, in the same manner, by the relevant party hereto.
5.6 Headings. The headings herein are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof.
5.7 Entire Agreement. This Agreement, together with the Notes and Warrants contain the entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, with respect to such matters, which the parties acknowledge have been merged into such agreements and exhibits. At or after each applicable Closing, and without further consideration, the parties hereto will make, do and execute and deliver, or cause to be made, done and executed and delivered, such further acts, deeds, assurances, documents and things as may be reasonably requested by any of the other parties hereto in order to give practical effect to the intention of the parties hereunder.
5.8 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and permitted assigns. The Company may not assign this Agreement or any rights or obligations hereunder without the prior written consent of Purchasers representing a Majority in Interest (other than by merger, consolidation or sale of all or substantially all of the Companys assets). A Purchaser may assign any or all of its rights under this Agreement to any
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Person to whom the Purchaser assigns or transfers any Notes, provided that such transferee agrees in writing to be bound, with respect to the transferred Notes, by the provisions of this Agreement that apply to the Purchasers.
5.9 No Third Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective successors and permitted assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other Person or entity.
5.10 Governing Law. All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof. Each party agrees that all legal proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Agreement (whether brought against a party hereto or its respective Affiliates, directors, officers, shareholders, employees or agents) shall be commenced exclusively in the state and federal courts sitting in the City of New York, Borough of Manhattan. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City of New York, borough of Manhattan for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is improper or is an inconvenient venue for such proceeding. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by law. If either party shall commence an action or proceeding to enforce any provisions of this Agreement, then the prevailing party in such action or proceeding shall be reimbursed by the other party for its reasonable attorneys fees and other costs and expenses incurred with the investigation, preparation and prosecution of such action or proceeding.
5.11 Remedies. In addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, each of the Purchasers and the Company will be entitled to specific performance under this Agreement. The parties agree that monetary damages may not be adequate compensation for any loss incurred by reason of any breach of obligations contained in this Agreement and hereby agree to waive and not to assert in any action for specific performance of any such obligation the defense that a remedy at law would be adequate.
5.12 Execution. This Agreement may be executed by one or more of the parties hereto on any number of separate counterparts (including by facsimile or e-mail transmission), all of which when taken together shall be considered one and the same agreement. In the event that any signature is delivered by facsimile transmission or e-mail attachment, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile or e-mail-attached signature page were an original thereof.
5.13 Survival; Severability. All covenants and other agreements set forth in this Agreement shall survive the applicable Closing for the respective periods set forth therein and if no such period is specified until the maturity date of the Notes. If any provision of this Agreement is held to be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Agreement shall not in any way be affected or impaired thereby and the parties will attempt to agree upon a valid and enforceable provision that is a reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Agreement.
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5.14 Interpretation. The parties agree that each of them and/or their respective counsel has reviewed and had an opportunity to revise this Agreement and, therefore, the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement or any amendments hereto. In addition, each and every reference to share prices and shares of capital stock in this Agreement shall be subject to adjustment for reverse and forward stock splits, stock dividends, stock combinations and other similar transactions of the Common Stock that occur after the date of this Agreement. The word including, whenever used in this Agreement, shall be deemed to be followed by the phrase without limitation.
5.15 Replacement of Securities. If any certificate or instrument evidencing any Securities is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation thereof (in the case of mutilation), or in lieu of and substitution therefor, a new certificate or instrument, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction. The applicant for a new certificate or instrument under such circumstances shall also pay any reasonable third-party costs (including customary indemnity) associated with the issuance of such replacement Securities.
5.16 Independent Nature of Purchasers Obligations and Rights. The obligations of each Purchaser under any Transaction Agreement are several and not joint with the obligations of any other Purchaser, and no Purchaser shall be responsible in any way for the performance or non-performance of the obligations of any other Purchaser under any Transaction Agreement. Nothing contained herein or in any other Transaction Agreement, and no action taken by any Purchaser pursuant hereto or thereto, shall be deemed to constitute the Purchasers as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Purchasers are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated by the Transaction Agreements. Each Purchaser shall be entitled to independently protect and enforce its rights, including, without limitation, the rights arising out of this Agreement or out of the other Transaction Agreements, and it shall not be necessary for any other Purchaser to be joined as an additional party in any proceeding for such purpose. Each Purchaser has been represented by its own separate legal counsel in its review and negotiation of the Transaction Agreements.
5.17 Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall not be a Business Day, then such action may be taken or such right may be exercised on the next succeeding Business Day.
[SIGNATURE PAGES TO FOLLOW]
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IN WITNESS WHEREOF, the parties hereto have caused this Note Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.
AUTHENTIDATE HOLDING CORP. | Address for Notice: | |||||||
Connell Corporate Center | ||||||||
300 Connell Drive, 5th Floor | ||||||||
Berkeley Heights, NJ 07922 | ||||||||
Attn: President | ||||||||
By: |
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Fax: | ||||||
Name: | Ian C. Bonnet | |||||||
Title: | Chief Executive Officer and President | |||||||
With a copy to (which shall not constitute notice): | ||||||||
Becker & Poliakoff, LLP | ||||||||
45 Broadway, 8th Floor | ||||||||
New York, NY 10006 | ||||||||
Attn: Michael A. Goldstein | ||||||||
Fax: 212-557-0295 |
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOR PURCHASER FOLLOWS]
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[PURCHASER SIGNATURE PAGE TO NOTE PURCHASE AGREEMENT]
IN WITNESS WHEREOF, the undersigned has caused this Note Purchase Agreement to be duly executed by its authorized signatories as of the date first indicated above.
Name of Purchaser: |
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Signature of Authorized Signatory of Purchaser: |
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Name of Authorized Signatory: |
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Title of Authorized Signatory: |
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Email Address of Authorized Signatory: |
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Facsimile Number of Authorized Signatory: |
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EIN Number: |
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Address for Notices to Purchaser: |
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Address for Delivery of Notes for Purchaser (if not same as address for notices):
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Purchase Price: $ |
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Securities Purchased, comprised of: |
Principal Amount of Notes: |
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No. of Warrants: |
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[TO BE COMPLETED ONLY IF THE PURCHASER IS A TRUST]
TRUST CERTIFICATE
CERTIFICATE OF |
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(Name of Trust)
The Purchaser, being the requisite signatories under the terms of that certain Trust Agreement (hereinafter referred to as the Trust Agreement) of (the Trust), hereby certify as follows:
1. That the Trust was established pursuant to the Trust Agreement dated , .
2. That a true and correct copy of the Trust Agreement is attached hereto and that, as of the date hereof, the Agreement has not been amended (except as to any attached amendments) or revoked and is still in full force and effect.
3. That the requisite trustees of the Trust have determined that an investment in the Securities to be issued by Authentidate Holding Corp. pursuant to the Purchase Agreement to which this certificate is annexed is of benefit to the Trust and has determined to make such investment on behalf of the Trust and has full power and authority to do so and thereby bind the Trust.
IN WITNESS WHEREOF, we have executed this certificate as the Trustee(s) of the Trust this day of , 2015, and declare that it is truthful and correct.
By: |
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Trustee | ||
By: |
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Co-Trustee |
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ACCREDITED INVESTOR CERTIFICATE
This Accredited Investor Certificate is being delivered to the Company pursuant to the Purchase Agreement. Capitalized terms used in this Accredited Investor Certificate, but not defined herein, have the respective meanings attributed to such terms in the Purchase Agreement. Investor agrees to furnish any additional information the Company deems necessary in order to verify the information provided below.
The Purchaser hereby acknowledges that the Company is relying on this Accredited Investor Certificate to determine the Purchasers suitability for investment in the Securities pursuant to the Securities Purchase Agreement (collectively, the Investment) and hereby represents and warrants and certifies that, as of the Closing, the Purchaser:
Category I | ¨ | The Purchaser is an individual (not a partnership, corporation, etc.) whose individual net worth, or joint net worth with his or her spouse, presently exceeds $1,000,000 (excluding the value of such Purchasers principal residence). | ||||
Category II | ¨ | The Purchaser is a corporation, partnership, business trust or a non profit organization within the meaning of Section 501(c)(3) of the Internal Revenue Code of 1986, as amended, that was not formed for the specific purpose of acquiring the securities offered and that has total assets in excess of $5,000,000. | ||||
Category III | ¨ | The Purchaser is an individual (not a partnership, corporation, etc.) who reasonably expects an individual income in excess of $200,000 in the current year and had an individual income in excess of $200,000 in each of the last two years (including foreign income, tax exempt income and the full amount of capital gains and losses but excluding any income of the Purchasers spouse or other family members and any unrealized capital appreciation);
Or | ||||
¨ | The Purchaser is an individual (not a partnership, corporation, etc.) who, together with his or her spouse, reasonably expects joint income in excess of $300,000 for the current year and had joint income in excess of $300,000 in each of the last two years (including foreign income, tax exempt income and the full amount of realized capital gains and losses). | |||||
Category IV | ¨ | The Purchaser is a director or executive officer of the Company. | ||||
Category V | ¨ | The Purchaser is a bank, savings and loan association or credit union, insurance company, registered investment company, registered business development company, licensed small business investment company, or employee benefit plan within the meaning of Title 1 of ERISA whose plan fiduciary is either a bank, insurance company or registered investment advisor or whose total assets exceed $5,000,000. | ||||
Describe entity: |
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Category VI | ¨ | The Purchaser is a private business development company as defined in Section 202(a)(22) of the Investment Advisors Act of 1940. |
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Category VII | ¨ | The Purchaser is a trust with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person (a person who either alone or with his or her purchaser representative(s) has such knowledge and experience in financial and business matters that he or she is capable of evaluating the merits and risks of the prospective investment). A copy of the declaration of trust or trust agreement and a representation as to the sophistication of the person directing purchases for the trust is enclosed. | ||||
Category VIII | ¨ | The Purchaser is a self directed employee benefit plan for which all persons making investment decisions are accredited investors within one or more of the categories described above. | ||||
Category IX | ¨ | The Purchaser is an entity in which all of the equity owners are accredited investors within one or more of the categories described above. If relying upon this category alone, each equity owner must complete a separate copy of this agreement. | ||||
¨ | Describe entity: |
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Category X | ¨ | The Purchaser does not come within any of the Categories I IX set forth above. |
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IN WITNESS WHEREOF, the Purchaser has duly executed this Accredited Investor Certificate as of the Closing.
IF THE PURCHASER IS AN ENTITY: | ||
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(Name of Entity Please Print) | ||
By: |
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Name: |
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Title: |
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IF THE PURCHASER IS AN INDIVIDUAL: | ||
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(Name Please Print) | ||
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(Signature) | ||
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(Address) | ||
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(Telephone) | ||
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(Facsimile) | ||
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(E-Mail) |
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EXHIBIT A
FORM OF NOTE
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EXHIBIT B
FORM OF WARRANT
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Exhibit 10.9
AMENDMENT NO. 2 TO
SECURITIES PURCHASE AGREEMENT
AND REGISTRATION RIGHTS AGREEMENT
Authentidate Holding Corp.
and certain of the
Purchasers to the Securities Purchase Agreement
dated as of May 29, 2015
This Amendment No. 2 to the Securities Purchase Agreement and Registration Rights Agreement is effective as of the 25th day of September, 2015 (the Second Amendment Agreement), and is made by and among Authentidate Holding Corp., a Delaware corporation (the Company) and those persons and entities executing the signature pages to this Second Amendment Agreement (the Purchasers).
W I T N E S S E T H:
WHEREAS, the Company, the Purchasers and certain other entities are parties to that certain Securities Purchase Agreement, dated as of May 29, 2015 (the Purchase Agreement) and that certain Registration Rights Agreement dated as of May 29, 2015 (RRA) ;
WHEREAS, the Purchasers and other signatories to the Purchase Agreement have purchased an aggregate principal amount of $900,000 of Securities (as defined in the Purchase Agreement) pursuant to the Purchase Agreement; and
WHEREAS, the Purchasers and certain of the signatories to the Purchase Agreement and RRA have entered into that certain Amendment No. 1 to the Purchase Agreement and RRA dated as of July 7, 2015 and executed July 30, 2015; and
WHEREAS, Section 5.6 of the Purchase Agreement provides that the Purchase Agreement may be amended upon the written consent of the Company and the Purchasers holding a Majority in Interest (as defined therein) of the Debentures and Warrants issued pursuant to the Purchase Agreement;
WHEREAS, Section 6(c) of the RRA provides that the RRA may be amended upon the written consent of the Company and the Holders (as defined in the RRA) of 51% or more of the Registrable Securities (as defined in the RRA); and
WHEREAS, in connection with the consummation of the transactions contemplated in the Purchase Agreement, the Company and Purchasers desire to amend the Purchase Agreement and the RRA as provided for herein;
NOW, THEREFORE, in consideration of the premises and of the mutual covenants, agreements, representations and warranties herein contained, the parties hereto do hereby agree as follows:
1. Definitions. As used herein, terms not otherwise defined in this Second Amendment Agreement shall have the meaning ascribed to such terms as set forth in the Purchase Agreement or the RRA, as the case may be.
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2. Amendments.
(a) Section 4.13 of the Purchase Agreement is hereby amended and restated in its entirety to read as follows:
4.13 Shareholder Approval. Solely in the event that the Company determines that it is required in order to permit the full conversion of the Debentures (including in connection with the payment of interest thereon) or the full exercise of the Warrants issued pursuant to this Agreement into shares of Common Stock in accordance with applicable listing rules of the Principal Market (the Shareholder Approval), the Company shall hold a special meeting of shareholders (which may also be at the annual meeting of shareholders) as soon as reasonably practicable, but in no event later than January 31, 2016, for the purpose of obtaining Shareholder Approval, with the recommendation of the Companys Board of Directors that such proposal be approved, and the Company shall solicit proxies from its shareholders in connection therewith in the same manner as all other management proposals in such proxy statement and all management-appointed proxyholders shall vote their proxies in favor of such proposal. If the Company does not obtain Shareholder Approval at the first special meeting, the Company shall call a meeting every three months thereafter to seek Shareholder Approval until the earlier of the date Shareholder Approval is obtained or the Debentures are no longer outstanding. Each Purchaser further agrees that it shall not be entitled to vote the shares of Common Stock of the Company issuable to it pursuant to the terms of this Agreement, including pursuant to the conversion of the Debentures or exercise of any Warrants, at any meeting of the Companys stockholders convened to vote on a proposal to enable the Company to issue the Underlying Shares in excess of 19.99% of the issued and outstanding Common Stock of the Company.
(b) Section 4.19 of the Purchase Agreement is hereby amended by adding the following text at the end thereof:
Notwithstanding the foregoing, however, the provisions of Section 4.19 shall not apply to any change in the Chief Executive Officer of the Company that is made in connection with any mergers, acquisitions or other transaction resulting in a change in control of the Company, which are approved by a majority of the disinterested directors of the Company.
(c) The definition of Filing Date in the RRA is hereby amended and restated in its entirety to read as follows:
Filing Date means, (i) with respect to the Initial Registration Statement required hereunder, February 17, 2016; and, (ii) with respect to any additional Registration Statements which may be required pursuant to Section 2(c) or Section 3(c), the earliest practical date on which the Company is permitted by SEC Guidance to file such additional Registration Statement related to the Registrable Securities.
3. Effect. Except as modified by this Second Amendment Agreement, all other terms and conditions of the Purchase Agreement and the RRA (each as previously amended to date) remain in full force and effect. As of the effective date of this Second Amendment Agreement, (i) the applicable portions of this Second Amendment Agreement shall be a part of the Purchase Agreement and RRA, as the case may be, each as previously amended and amended hereby, and (ii) each reference in the Purchase Agreement and the RRA or any of the Transaction Documents to the Purchase Agreement or the Registration Rights Agreement, shall mean and be a reference to the Purchase Agreement and the RRA, as the case may be, each as previously amended and as amended hereby.
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4. Miscellaneous.
(a) This Second Amendment Agreement shall be governed by and construed in accordance with the laws of the state of New York without reference to principles of conflicts of law.
(b) Headings used herein are for convenience of reference only and shall not affect the meaning of this Second Amendment Agreement. This Second Amendment Agreement may be executed in any number of counterparts, and by the parties hereto on separate counterparts, each of which shall be an original and all of which taken together shall constitute one and the same agreement. Executed counterparts may be delivered via facsimile or other means of electronic transmission.
(c) Each Purchaser executing this Second Amendment Agreement hereby represents that it is the owner of the Debentures and Warrants issued to it pursuant to the Purchase Agreement and that neither such Debentures nor such Warrants have been assigned, pledged or otherwise transferred. Each Purchaser agrees that this Second Amendment Agreement shall be affixed by it to the Purchase Agreement and the RRA and become a part thereof.
(d) This Second Amendment Agreement contains the entire agreement and understanding of the parties with respect to its subject matter and supersedes all prior arrangements and understandings between the parties, written or oral, with respect to its subject matter. This Second Amendment Agreement may not be amended or modified except in writing signed by each of the parties to this Second Amendment Agreement. The observance of any term of this Second Amendment Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) by the party or parties waiving compliance. The failure of any party at any time or times to require performance of any provision hereof shall in no manner affect the rights at a later time to enforce the same. No waivers of or exceptions to any term, condition, or provision of this Second Amendment Agreement, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such term, condition, or provision. This Second Amendment Agreement shall be binding upon and shall inure to the benefit of and be binding upon all parties to the Purchase Agreement and the RRA and their respective successors and assigns.
[Remainder of page intentionally left blank. Signature page follows.]
3
IN WITNESS WHEREOF, the parties hereto have executed or caused this Second Amendment Agreement to be executed by their signature by their duly authorized officers as of the date first written above.
Authentidate Holding Corp. | ||
By: | /s/ Ian C. Bonnet | |
Name: | Ian C. Bonnet | |
Title: | President and Chief Executive Officer | |
Purchaser: | ||
Aton Select Fund, Ltd. | ||
By: |
| |
Name: | ||
Title: | ||
Principal Amount of Debentures: $800,000 | ||
Total Number of Warrants: 3,200,000 |
4
Exhibit 31.1
CERTIFICATION
I, Ian C. Bonnet, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of Authentidate Holding Corp.; |
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants Board of Directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: November 13, 2015 | Name: | /s/ Ian C. Bonnet | ||||
Title: | Chief Executive Officer | |||||
(Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION
I, William A. Marshall, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of Authentidate Holding Corp.; |
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants Board of Directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: November 13, 2015 | Name: | /s/ William A. Marshall | ||||
Title: | Chief Financial Officer | |||||
(Principal Accounting Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Authentidate Holding Corp. (the company) on Form 10-Q for the period ending September 30, 2015 as filed with the Securities and Exchange Commission on the date hereof (the Report), the undersigned, being, Ian C. Bonnet, Chief Executive Officer and President of the company, and William A. Marshall, Chief Financial Officer of the company, respectively, do each hereby certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the company.
Dated: November 13, 2015
/s/ Ian C. Bonnet | /s/ William A. Marshall | |||
Chief Executive Officer | Chief Financial Officer | |||
(Principal Executive Officer) | (Principal Accounting Officer) |
A signed original of this written statement required by Section 906 has been provided to the company and will be retained by the company and furnished to the Securities and Exchange Commission or its staff upon request.
Inventory - Schedule of Inventory (Detail) - USD ($) $ in Thousands |
Sep. 30, 2015 |
Jun. 30, 2015 |
---|---|---|
Inventory Disclosure [Abstract] | ||
Purchased components, net | $ 261 | $ 261 |
Finished goods | 337 | 342 |
Total inventory | $ 598 | $ 603 |
Other Subsequent Events - Additional Information (Detail) - USD ($) |
1 Months Ended | |||
---|---|---|---|---|
Aug. 26, 2015 |
Aug. 07, 2015 |
Oct. 31, 2015 |
Sep. 30, 2015 |
|
Subsequent Event [Line Items] | ||||
Issuance of warrants to purchase common stock | 1,050,000 | |||
Warrants exercisable commencing period | 12 months | |||
Warrants, exercisable period | 54 months | |||
Warrant exercise price per share | $ 0.17 | $ 0.30 | ||
Warrant expiration date | Dec. 13, 2019 | |||
20% Promissory Note [Member] | ||||
Subsequent Event [Line Items] | ||||
Aggregate principal amount of promissory notes | $ 400,000 | |||
Promissory Note [Member] | 20% Promissory Note [Member] | ||||
Subsequent Event [Line Items] | ||||
Aggregate principal amount of promissory notes | $ 400,000 | $ 525,000 | ||
Debt instrument interest rate | 20.00% | 20.00% | ||
Maturity date, description | (i) August 26, 2016, or (ii) within 30 days of the closing of the contemplated acquisition, merger or similar transaction with Peachstate Health Management, LLC (d/b/a AEON Clinical Laboratories) as described above, or a similar alternative acquisition, merger or similar transaction with an unaffiliated third party, or (iii) 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. | |||
Subsequent Event [Member] | ||||
Subsequent Event [Line Items] | ||||
Proceeds from notes payable | $ 5,000,000 | |||
Issuance of warrants to purchase common stock | 1,000,000 | |||
Warrants exercisable commencing period | 12 months | |||
Warrants, exercisable period | 54 months | |||
Warrant exercise price per share | $ 0.30 | |||
Warrant expiration date | Oct. 28, 2016 | |||
Subsequent Event [Member] | Promissory Note [Member] | 20% Promissory Note [Member] | ||||
Subsequent Event [Line Items] | ||||
Debt instrument interest rate | 20.00% | |||
Maturity date, description | (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. | |||
Subsequent Event [Member] | Peachstate Medical Holdings LLC [Member] | Promissory Note [Member] | ||||
Subsequent Event [Line Items] | ||||
Aggregate principal amount of promissory notes | $ 450,000 |
Commitments and Contingencies - Additional Information (Detail) $ in Millions |
Sep. 30, 2015
USD ($)
|
---|---|
Contingencies And Commitments [Line Items] | |
Amount at issue with regard to purchase arrangement | $ 1.2 |
Inventory and Accounts Payable [Member] | |
Contingencies And Commitments [Line Items] | |
Amount intended to be returned | $ 0.2 |
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