SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended June 30, 2003
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____________ to _____________
Commission File No. 0-20190
AUTHENTIDATE HOLDING CORP.
Delaware | 14-1673067 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
2165 Technology Drive Schenectady, N.Y. | 12308 | |
(Address of principal executive offices) | (Zip Code) | |
Issuer’s telephone number, including area code (518) 346-7799 | ||
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class | Name of Each Exchange on Which Registered | |
None |
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $.001 per share |
(Title of class) |
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 such filing requirements for the past 90 days. Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes No
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter (December 31, 2002): $58,901,483.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 20,477,741 as of September 12, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933.
None
EXPLANATORY NOTE
PART IV
Item 15. | Exhibits, Financial Statement |
Schedules and Reports on Form 8-K |
(a)(1) | Financial Statements | ||
The following Financial Statements of AHC are included in Part II, Item 8 of this report: | |||
• | Report of Independent Auditors; | ||
• | Consolidated Balance Sheets as of June 30, 2003 and 2002; | ||
• | Consolidated Statements of Operations for the years ended June 30, 2003, 2002 and 2001; | ||
• | Consolidated Statements of Shareholders’ Equity for the years ended June 30, 2003, 2002 and 2001; | ||
• | Consolidated Statements of Cash Flows for the years ended June 30, 2003, 2002 and 2001; and | ||
• | Notes to Consolidated Financial Statements |
(a)(2) Financial Statement Schedules |
Schedule II, Valuation and Qualifying Accounts
(a)(3) Exhibits
The exhibits designated with an asterisk (*) are filed herewith. All other exhibits have been previously filed with the Commission and, pursuant to 17 C.F.R. §230.411, are incorporated by reference to the document referenced in brackets following the descriptions of such exhibits. Certain portions of exhibits marked with the symbol (‡) have been granted confidential treatment by the Securities and Exchange Commission. Such portions were omitted and filed separately with the Securities and Exchange Commission.
Item No. | Description |
2.1 | Form of Stock Purchase Agreement dated as of March 4, 2002 by and among Authentidate Holding Corp., Authentidate International AG and PFK Acquisition Group I, LLC. (Exhibit 2.1 to Form 8-K dated March 15, 2002). |
3.1 | Certificate of Incorporation of Bitwise Designs, Inc.-Delaware (Exhibit 3.3.1 to Registration Statement on Form S-18, File No. 33-46246-NY) |
3.1.1 | Certificate of Designation of Series B Preferred Stock (Exhibit 3.2.1 to Form 10-KSB dated October 4, 1999) |
1
3.1.2 | Certificate of Amendment to Certificate of Incorporation (filed as Exhibit 3 to Definitive Proxy Statement dated February 16, 2001 as filed with the Securities and Exchange Commission). |
3.1.3 | Certificate of Designations, Preferences and Rights and Number of Shares of Series C Convertible Preferred Stock (Exhibit 4.1 to Form 10-Q dated May 14, 2001). |
3.1.4 | Certificate of Amendment of Certificate of Designations, Preferences and Rights and Number of Shares of Series C Convertible Preferred Stock (Exhibit 3.1.4 to Form 10-K dated September 26,2001). |
3.1.5 | Certificate of Amendment of Certificate of Designations, Preferences and Rights and Number of Shares of Series B Convertible Preferred Stock (Exhibit 3.1 to Form 10-Q for the quarter endedDecember 31, 2002). |
3.2 | By-Laws (Exhibit 3.2 to Registration Statement on Form S-18, File No. 33-46246-NY) |
4.1 | Form of Common Stock Certificate (Exhibit 4.1 to Registration Statement on Form S-18, File No. 33- 46246-NY) |
4.2 | Form of Series A Preferred Stock Certificate (Exhibit 4.2 to Registration Statement on Form S-18, File No. 33-46246-NY) |
4.3 | Form of Series B Preferred Stock Certificates (Exhibit 4.5 to the Registration Statement on form SB-2, |
File No. 33-76494) | |
4.4 | Form of Warrant issued to certain individuals in fiscal year ended June 30, 2001 (Exhibit 4.7 to Form |
10-K dated September 26, 2001). | |
4.5 | Form of Warrant issued in connection with Series C Preferred Stock Offering (Exhibit 4.2 to Form 10-Q dated May 14, 2001). |
4.6 | Form of Series C Preferred Stock Certificate (Exhibit 4.9 to Form 10-Q dated May 14, 2001). |
4.7 | Form of Warrant Agreement issued to certain Warrant holders dated as of February 19, 2002 (Exhibit 10.1 to Form 8-K dated March 19, 2002). |
4.8 | Form of Warrant issued in connection with Unit Offering (Exhibit 4.12 to Form 10-K dated September 30, 2002) |
4.9 | Form of Debenture, dated as of October 25, 2002, between Authentidate Holding Corp. and certain investors (Exhibit 4.1 to Form 8-K dated October 25, 2002). |
4.10 | Form of Warrant, dated as of October 25, 2002, issued in connection with private placement (Exhibit 4.2 to Form 8-K dated October 25, 2002). |
4.11 | Form of Debenture, dated as of May, 2003, between Authentidate Holding Corp. and certain investors (Exhibit 4.1 to Form 8-K dated May 30, 2003). |
4.12 | Form of Warrant, dated as of May, 2003, issued in connection with private placement (Exhibit 4.2 to Form 8-K dated May 30, 2003). |
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4.13 | Form of Debenture, dated as of September 12, 2003, between Authentidate Holding Corp. and certain investors (Exhibit 4.1 to Form 8-K dated September 15, 2003). |
4.14 | Form of Warrant, dated as of September 12, 2003, issued in connection with private placement (Exhibit 4.2 to Form 8-K dated September 15, 2003). |
4.15 | Form of Warrant , dated as of September 22, 2003, issued in connection with private placement (Exhibit 4.1 to Form 8-K dated September 22, 2003). |
10.1 | 1992 Employee stock option plan (Exhibit 10.10 to Registration Statement on Form S-18, File No. 33-46246-NY) |
10.2 | 1992 Nonexecutive Directors stock option plan (Exhibit 10.11 to Registration Statement on Form S-18, File No. 33-46246-NY) |
10.3 | Agreement with Prime Computer, Inc. (Exhibit 10.14 to Registration Statement on Form S-18, File No. 33-46246-NY) |
10.4 | Agreement with Mentor Computer Graphics Ltd. (Exhibit 10.15 to Registration Statement on Form S-18, File No. 33-46246-NY) |
10.5 | Agreement and Plan of Merger by and among Bitwise Designs, Inc., Bitwise DJS, Inc., certain individuals and DJS Marketing Group, Inc. dated March 6, 1996 (Exhibit 2 to Form 8-K dated March 22, 1996) |
10.6 | Employment Agreement between John Botti and the Company dated January 1, 2000 (Exhibit 10.27 to the Company’s Form 10-KSB dated June 30, 2000). |
10.7 | Employment Agreement between Robert Van Naarden and Authentidate.com, Inc. dated July 5, 2000 (Exhibit 10.29 to the Company’s Form 10-KSB dated June 30, 2000). |
10.8‡ | Joint Venture Agreement between the Company, Authentidate, Inc. and Windhorst New Technologies, Agi.G (Exhibit 10.30 to the Company’s Form 10-KSB dated June 30, 2000) |
10.9‡ | Technology License Agreement between the Company, Authentidate, Inc. and Windhorst New Technologies, Agi.G (Exhibit 10.31 to the Company’s Form 10-KSB dated June 30, 2000) |
10.10 | Series C Preferred Stock and Warrant Purchase Agreement between Authentidate Holding Corp. and purchasers of Series C Preferred Stock (Exhibit 10.1 to Form 10-Q dated May 14, 2001). |
10.11 | Registration Rights Agreement between Authentidate Holding Corp. and purchasers of Series C Preferred Stock (Exhibit 10.2 to Form 10-Q dated May 14, 2001). |
10.12 | 2000 Employee Stock Option Plan (filed as Exhibit 2 to Definitive Proxy Statement dated February 16, 2001 as filed with the Securities and Exchange Commission). |
10.13 | Form of Security Exchange Agreement entered into between Authentidate Holding Corp., Authentidate, Inc. and certain security holders of Authentidate, Inc. (Exhibit 10.15 to the Company’s Form 10-K dated September 26, 2001) |
10.14 | Agreement dated May 24, 2001 between Authentidate Holding Corp., Authentidate, Inc., Internet Venture Capital, LLC and Nicholas Themelis. (Exhibit 10.16 to the Company’s Form 10-K/A dated January 24, 2002) |
3
10.15 | Underlease Agreement of Authentidate, Inc. for a portion of the 43rd Floor at 2 World Financial Center. (Exhibit 10.17 to the Company’s Form 10-K dated September 26, 2001) |
10.16 | 2001 Non-Executive Director Stock Option Plan (filed as Exhibit A to Proxy Statement dated December 18, 2001, as filed with the Commission). |
10.17 | Form of Letter of Credit dated as of May 6, 2002 between DJS Marketing Group, Inc. and Transamerica (filed as Exhibit 10.2 to Form 10-Q dated May 15, 2002). |
10.18 | Form of Unit Purchase Agreement entered into between Authentidate Holding Corp. and certain investors (Exhibit 10.21 to Form 10-K dated September 30, 2002). |
10.19 | Form of Registration Rights Agreement entered into between Authentidate Holding Corp. and certain investors (Exhibit 10.22 to Form 10-K dated September 30, 2002). |
10.20‡ | Strategic Alliance Agreement between Authentidate Holding Corp., Authentidate, Inc. and United States Postal Service dated as of July 31, 2002. (Exhibit 10.23 to Form 10-K dated September 30, 2002). |
10.21 | Form of Securities Purchase Agreement entered into between Authentidate Holding Corp. and certain investors, dated as of October 25, 2002 (Exhibit 10.1 to Form 8-K dated October 25, 2002). |
10.22 | Form of Registration Rights Agreement entered into between Authentidate Holding Corp. and certain investors, dated as of October 25, 2002 (Exhibit 10.2 to Form 8-K dated October 25, 2002). |
10.23 | Form of Securities Purchase Agreement entered into between Authentidate Holding Corp. and certain investors, dated as of May 21, 2003 (Exhibit 10.1 to Form 8-K dated May 30, 2003). |
10.24 | Form of Registration Rights Agreement entered into between Authentidate Holding Corp. and certain investors, dated as of May 21, 2003 Exhibit 10.2 to Form 8-K dated May 30, 2003) |
10.25 | Form of Securities Purchase Agreement entered into between Authentidate Holding Corp. and certain investors, dated as of September 12, 2003 (Exhibit 10.1 to Form 8-K dated September 15, 2003). |
10.26 | Form of Registration Rights Agreement entered into between Authentidate Holding Corp. and certain investors, dated as of September 12, 2003 (Exhibit 10.2 to Form 8-K dated September 15, 2003). |
10.27 | Form of Securities Purchase Agreement entered into between Authentidate Holding Corp. and a certain investor, dated as of September 22, 2003 (Exhibit 10.1 to Form 8-K dated September 22, 2003). |
10.28 | Form of Registration Rights Agreement entered into between Authentidate Holding Corp. and a certain investor, dated as of September 22, 2003 (Exhibit 10.2 to Form 8-K dated September 22, 2003). |
14 | Code of Ethics (Exhibit 14 to Form 10-K dated September 29, 2003). |
21 | Subsidiaries of Registrant (Exhibit 21 to Form 10-K dated September 29, 2003). |
23* | Consent of PricewaterhouseCoopers LLP |
31.1* | Certification of Chief Executive Officer |
31.2* | Certification of Chief Financial Officer |
32* | Section 1350 Certification of Chief Executive Officer and Chief Financial Officer |
4
(b) Reports on Form 8-K
Date of Report | Item(s) | Description |
May 16, 2003 | 5, 7, 9 | Announcement of quarterly financial information and proposed financing event and including related pressreleases. |
May 23, 2003 | 5, 9 | Announcement of partial closing of private financing and including related press release. |
June 3, 2003 | 5, 7, 9 | Announcement of partial closing of private financing and including related press release and form of transaction documents. |
June 17, 2003 | 5, 7 | Announcement of streamlining of operations and including related press release. |
June 23, 2003 | 5, 7 | Announcement of consummation of related-party transaction and including related press release. |
5
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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. | |
By: /s/ John T. Botti | |
John T. Botti | |
Chief Executive Officer, President | |
and Chairman of the Board | |
Dated: November 14, 2003 |
AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES
VALUATIONS AND QUALIFYING ACCOUNTS
Schedule II | ||||||||||||||
Column A | Column B | Column C | Column D | Column E | ||||||||||
Description | Balance at Beginning of Period | Additions Charged to Expense | Additions Charged to Other Accounts | Deductions | Balance At End of Period | |||||||||
Allowance for doubtful accounts | ||||||||||||||
Year ended June 30: | ||||||||||||||
2003 | $ | 609,185 | $ | 58,688 | $ | (207,133 | ) | $ | 460,740 | |||||
2002 | $ | 532,241 | $ | 53,965 | $ | 54,289 | $ | (31,310 | ) | $ | 609,185 | |||
2001 | $ | 410,761 | $ | 152,711 | $ | (31,231 | ) | 532,241 | ||||||
Reserve for slow moving or obsolete inventory | ||||||||||||||
Year ended June 30: | ||||||||||||||
2003 | $ | 458,045 | $ | 137,610 | $ | (408,286 | ) | $ | 187,369 | |||||
2002 | $ | 788,151 | $ | 234,976 | $ | (565,082 | ) | $ | 458,045 | |||||
2001 | $ | 736,926 | $ | 314,937 | $ | (263,712 | ) | $ | 788,151 | |||||
Allowance for Note Receivable | ||||||||||||||
Year ended June 30: | ||||||||||||||
2003 | $ | 100,000 | $ | 0 | $ | (100,000 | ) | $ | 0 | |||||
2002 | $ | 0 | $ | 100,000 | $ | 0 | $ | 100,000 | ||||||
2001 | $ | 0 | $ | 0 | $ | 0 | $ | 0 |
7
Authentidate Holding Corp. and Subsidiaries Contents For the Years Ended June 30, 2003, 2002 and 2001 | |||
Page(s) | |||
F-1 | |||
Consolidated Financial Statements | |||
F-2 | |||
F-3 | |||
F-4 - F-5 | |||
F-6 | |||
F-7 - F-33 |
Report of Independent Auditors
To the Board of Directors and Shareholders
Of Authentidate Holding Corp.:
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)1 present fairly, in all material respects, the financial position of Authentidate Holding Corp. and its subsidiaries at June 30, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2003 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)2 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/S/ PricewaterhouseCoopers LLP
Albany, New York
September 5, 2003, except for Note 22,
as to which the dates are September 12,
2003 and September 22, 2003
F-1
Authentidate Holding Corp. and Subsidiaries
Consolidated Balance Sheets
June 30, 2003 and 2002
Assets | 2003 | 2002 | |||||
Current assets | |||||||
Cash and cash equivalents | $ | 3,460,446 | $ | 2,269,353 | |||
Accounts receivable, net of allowance for doubtful accounts of $460,740 and $609,185 at June 30, 2003 and 2002 | 3,642,221 | 4,222,472 | |||||
Due from related parties | 2,279 | 27,444 | |||||
Inventories | 193,101 | 479,702 | |||||
Note receivable | — | 197,287 | |||||
Prepaid expenses and other current assets | 69,248 | 123,766 | |||||
Total current assets | 7,367,295 | 7,320,024 | |||||
Property and equipment, net | 3,764,846 | 4,008,925 | |||||
Other assets | |||||||
Software development costs, net of accumulated amortization of $3,659,589 and $2,556,824 on June 30, 2003 and 2002 | 355,082 | 1,161,650 | |||||
Goodwill | 12,795,501 | 12,439,145 | |||||
Investment in affiliated companies | — | 294,427 | |||||
Patent costs, net | 277,406 | 235,789 | |||||
Other intangible assets | 189,479 | 258,766 | |||||
Note receivable | — | 302,713 | |||||
Deferred financing fees | 268,935 | — | |||||
Other assets | 27,296 | 30,547 | |||||
Total assets | $ | 25,045,840 | $ | 26,051,986 | |||
Liabilities and shareholders’ equity | |||||||
Current liabilities | |||||||
Accounts payable | $ | 1,436,943 | $ | 1,899,786 | |||
Accrued expenses and other current liabilities | 2,772,710 | 1,932,034 | |||||
Current portion of obligations under capital leases | 112,520 | 88,827 | |||||
Current portion of long-term debt | 218,811 | 35,747 | |||||
Line of credit | 877,863 | 1,753,394 | |||||
Income taxes payable | 24,843 | 17,800 | |||||
Total current liabilities | 5,443,690 | 5,727,588 | |||||
Convertible debentures | 3,316,815 | — | |||||
Long-term debt, net | 1,331,129 | 1,281,768 | |||||
Deferred grant | 1,000,000 | 1,000,000 | |||||
Obligations under capital leases, net of current portion | 85,556 | 97,296 | |||||
Total liabilities | 11,177,190 | 8,106,652 | |||||
Commitments and contingencies | |||||||
Shareholders’ equity | |||||||
Preferred stock $.10 par value, 5,000,000 shares authorized: | |||||||
Series A — 100 shares issued and outstanding at June 30, 2002 | — | 10 | |||||
Series B — 28,000 shares issued and outstanding at June 30, 2003 and June 30, 2002 | 2,800 | 2,800 | |||||
Series C — 3,600 shares issued and outstanding at June 30, 2003, and 4,000 shares issued and outstanding at June 30, 2002 | 360 | 400 | |||||
Common stock, $.001 par value; 40,000,000 shares authorized; 20,388,174 shares issued and outstanding at June 30, 2003 and 19,308,594 shares issued and outstanding at June 30, 2002 | 20,388 | 19,309 | |||||
Additional paid-in capital | 66,916,663 | 61,376,632 | |||||
Accumulated deficit | (53,062,512 | ) | (42,999,497 | ) | |||
13,877,699 | 18,399,654 | ||||||
Currency translation adjustment | (9,049 | ) | 53,111 | ||||
Other equity | — | (507,431 | ) | ||||
Total shareholders’ equity | 13,868,650 | 17,945,334 | |||||
Total liabilities and shareholders’ equity | $ | 25,045,840 | $ | 26,051,986 | |||
The accompanying notes are an integral part of the consolidated financial statements.
F-2
Authentidate Holding Corp. and Subsidiaries
Consolidated Statements of Operations
Years Ended June 30, 2003, 2002 and 2001
2003 | 2002 | 2001 | ||||||||
Net sales | ||||||||||
Product sales | $ | 24,143,959 | $ | 15,135,663 | $ | 16,472,754 | ||||
Service sales | 1,142,512 | 1,507,241 | 1,387,790 | |||||||
Total net sales | 25,286,471 | 16,642,904 | 17,860,544 | |||||||
Cost of sales | ||||||||||
Products | 18,575,474 | 11,398,458 | 13,536,309 | |||||||
Services | 594,362 | 692,077 | 647,137 | |||||||
Total cost of sales | 19,169,836 | 12,090,535 | 14,183,446 | |||||||
Gross profit | 6,116,635 | 4,552,369 | 3,677,098 | |||||||
Selling, general and administrative expenses | 12,600,901 | 11,470,073 | 11,950,719 | |||||||
Product development expenses | 2,534,777 | 2,170,173 | 1,221,639 | |||||||
Total operating expenses | 15,135,678 | 13,640,246 | 13,172,358 | |||||||
Loss from operations | (9,019,043 | ) | (9,087,877 | ) | (9,495,260 | ) | ||||
Other income (expense) | ||||||||||
Interest and other income | 572,481 | 180,360 | 399,996 | |||||||
Interest expense | (871,856 | ) | (124,824 | ) | (124,816 | ) | ||||
Equity in net loss of affiliated companies | (514,427 | ) | (958,788 | ) | (104,023 | ) | ||||
(813,802 | ) | (903,252 | ) | 171,157 | ||||||
Loss before income taxes | (9,832,845 | ) | (9,991,129 | ) | (9,324,103 | ) | ||||
Income tax expense | (6,464 | ) | (14,119 | ) | (16,000 | ) | ||||
Loss before minority interest | (9,839,309 | ) | (10,005,248 | ) | (9,340,103 | ) | ||||
Minority interest | — | 53,846 | — | |||||||
Net loss | $ | (9,839,309 | ) | $ | (9,951,402 | ) | $ | (9,340,103 | ) | |
Per share amounts | ||||||||||
Basic and diluted loss per common share | $ | (.50 | ) | $ | (.69 | ) | $ | (.63 | ) | |
The accompanying notes are an integral part of the consolidated financial statements.
F-3
Authentidate Holding Corp. and Subsidiaries
Consolidated Statements of Shareholders’ Equity
Years Ended June 30, 2003, 2002 and 2001
Preferred Stock | Common Stock | Total | Comprehensive | |||||||||||||||||||||||||||||||
Number of Shares | $.10 Par Value | Number of Shares | $.001 Par Value | Paid-in Capital | Accumulated Deficit | Other Equity | Treasury Stock | Translation Adjustment | Shareholders’ Equity | Income (Loss) | ||||||||||||||||||||||||
Balance, June 30, 2000 | 50,200 | $ | 5,020 | 14,421,758 | $ | 14,422 | $ | 38,740,271 | $ | (21,715,176 | ) | $ | $ | (76,719 | ) | $ | $ | 16,967,818 | $ | |||||||||||||||
Exercise of stock warrants | 459,516 | 459 | 1,584,087 | 1,584,546 | ||||||||||||||||||||||||||||||
Exercise of stock options | 316,626 | 317 | 198,775 | 199,092 | ||||||||||||||||||||||||||||||
Retire treasury shares | (28,082 | ) | (28 | ) | 28 | (76,719 | ) | 76,719 | — | |||||||||||||||||||||||||
Convert preferred stock to common | (2,000 | ) | (200 | ) | 26,667 | 26 | 174 | — | ||||||||||||||||||||||||||
Purchase of an equity interest in Authentidate Inc. | 917,608 | 918 | 4,243,019 | 4,243,937 | ||||||||||||||||||||||||||||||
Private equity offerings | 5,500 | 550 | 5,204,308 | 5,204,858 | ||||||||||||||||||||||||||||||
Retire preferred shares | (100 | ) | (10 | ) | 10 | — | ||||||||||||||||||||||||||||
Warrants for non-employee services | 204,042 | 204,042 | ||||||||||||||||||||||||||||||||
Costs of registration | (32,474 | ) | (32,474 | ) | ||||||||||||||||||||||||||||||
Stock option compensation | 1,380,694 | (517,760 | ) | 862,934 | ||||||||||||||||||||||||||||||
Warrants issued to joint venture partner | 111,849 | 111,849 | ||||||||||||||||||||||||||||||||
Cash dividends to Series B preferred shareholders | (151,667 | ) | (151,667 | ) | ||||||||||||||||||||||||||||||
Loan to shareholder | (317,000 | ) | (317,000 | ) | ||||||||||||||||||||||||||||||
Net loss | (9,340,103 | ) | (9,340,103 | ) | 9,340,103 | |||||||||||||||||||||||||||||
Balance June 30, 2001 | 53,600 | 5,360 | 16,114,093 | 16,114 | 51,634,783 | (31,283,665 | ) | (834,760 | ) | — | 19,537,832 | $ | 9,340,103 | |||||||||||||||||||||
Exercise of stock warrants | 1,109,517 | 1,110 | 1,574,520 | 1,575,630 | $ | |||||||||||||||||||||||||||||
Exercise of stock options | 31,999 | 32 | 80,296 | 80,328 | ||||||||||||||||||||||||||||||
Convert preferred stock to | ||||||||||||||||||||||||||||||||||
common stock | (21,500 | ) | (2,150 | ) | 576,263 | 576 | 1,574 | — | ||||||||||||||||||||||||||
Purchase of Authentidate AG | 1,425,875 | 1,426 | 6,393,881 | 6,395,307 | ||||||||||||||||||||||||||||||
Warrants for services | 74,572 | 74,572 | ||||||||||||||||||||||||||||||||
Cost to register common shares | (66,943 | ) | (66,943 | ) | ||||||||||||||||||||||||||||||
Stock option compensation | 517,760 | 517,760 | ||||||||||||||||||||||||||||||||
Cash and stock dividends to Series B | ||||||||||||||||||||||||||||||||||
and Series C preferred shareholders | 50,847 | 51 | 219,947 | (300,428 | ) | (80,430 | ) | |||||||||||||||||||||||||||
Loan to executive | (190,431 | ) | (190,431 | ) | ||||||||||||||||||||||||||||||
Currency translation adjustment | 53,111 | 53,111 | 53,111 | |||||||||||||||||||||||||||||||
Beneficial conversion | 1,464,002 | (1,464,002 | ) | — | ||||||||||||||||||||||||||||||
Net loss | (9,951,402 | ) | (9,951,402 | ) | (9,951,402 | ) | ||||||||||||||||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements
F-4
Authentidate Holding Corp. and Subsidiaries
Consolidated Statements of Shareholders’ Equity
Years Ended June 30, 2003, 2002 and 2001
Preferred Stock | Common Stock | Total | Comprehensive | |||||||||||||||||||||||||||||||
Number of Shares | $.10 Par Value | Number of Shares | $.001 Par Value | Paid-in Capital | Accumulated Deficit | Other Equity | Treasury Stock | Translation Adjustment | Shareholders’ Equity | Income (Loss) | ||||||||||||||||||||||||
Balance June 30, 2002 | 32,100 | 3,210 | 19,308,594 | 19,309 | 61,376,632 | (42,999,497 | ) | (507,431 | ) | — | 53,111 | $ | 17,945,334 | $ | (9,898,291 | ) | ||||||||||||||||||
Exercise of stock warrants | 3,000 | 3 | 3,297 | 3,300 | ||||||||||||||||||||||||||||||
Exercise of stock options | 94,257 | 94 | 209,440 | 209,534 | ||||||||||||||||||||||||||||||
Convert Series C preferred stock to common stock | (400 | ) | (40 | ) | 82,560 | 82 | (42 | ) | — | |||||||||||||||||||||||||
Warrants for services | 256,283 | 256,283 | ||||||||||||||||||||||||||||||||
Cost to register common shares | (64,672 | ) | (64,672 | ) | ||||||||||||||||||||||||||||||
Cash and stock dividends to Series B and Series C preferred shareholders | 61,996 | 62 | 155,921 | (223,706 | ) | (67,723 | ) | |||||||||||||||||||||||||||
Repayment of note receivable — shareholder | 507,431 | 507,431 | ||||||||||||||||||||||||||||||||
Currency translation adjustment | (62,160 | ) | (62,160 | ) | $ | (62,160 | ) | |||||||||||||||||||||||||||
Buy back Series A preferred shares | (100 | ) | (10 | ) | (849,990 | ) | (850,000 | ) | ||||||||||||||||||||||||||
Offering expenses | (85,000 | ) | (85,000 | ) | ||||||||||||||||||||||||||||||
Private equity offering | 660,077 | 660 | 1,999,375 | 2,000,035 | ||||||||||||||||||||||||||||||
Convertible debenture interest paid in common shares | 47,690 | 48 | 143,618 | 143,666 | ||||||||||||||||||||||||||||||
Debt discount related to issuance of convertible debentures, net of issuance costs ($163,968) | 3,433,931 | 3,433,931 | ||||||||||||||||||||||||||||||||
Purchase minority interest, Trac Medical | 130,000 | 130 | 337,870 | 338,000 | ||||||||||||||||||||||||||||||
Net loss | (9,839,309 | ) | (9,839,309 | ) | (9,839,309 | ) | ||||||||||||||||||||||||||||
Balance June 30, 2003 | 31,600 | $ | 3,160 | 20,388,174 | $ | 20,388 | $ | 66,916,663 | $ | (53,062,512 | ) | $ | — | $ | — | $ | (9,049 | ) | $ | 13,868,650 | $ | (9,901,469) | ||||||||||||
The accompanying notes are an integral part of the consolidated financial statements
F-5
Authentidate Holding Corp. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended June 30, 2003, 2002 and 2001
2003 | 2002 | 2001 | ||||||||
Cash flows from operating activities | ||||||||||
Net loss | $ | (9,839,309 | ) | $ | (9,951,402 | ) | $ | (9,340,103 | ) | |
Adjustments to reconcile net loss to net cash used in operating activities | ||||||||||
Depreciation and amortization | 1,886,085 | 1,690,382 | 1,814,278 | |||||||
Provision for doubtful accounts receivable | 58,688 | 53,965 | 152,711 | |||||||
Equity in net loss of affiliated companies | 514,427 | 958,788 | 104,023 | |||||||
Amortization deferred financing costs and debt discount | 537,172 | — | — | |||||||
Interest paid in stock | 143,666 | — | — | |||||||
Non-cash compensation and other | 160,154 | 709,950 | 1,066,976 | |||||||
Changes in operating assets and liabilities, net of business acquired | ||||||||||
Accounts receivable and due from related parties | 596,728 | (642,299 | ) | 539,750 | ||||||
Inventories | 286,601 | 320,702 | 1,551,983 | |||||||
Prepaid expenses and other current assets | 54,518 | 87,618 | 516,000 | |||||||
Accounts payable, accrued expenses and other current liabilities | 405,110 | 698,700 | 2,186,627 | |||||||
Income taxes | 7,043 | 17,169 | 16,104 | |||||||
Net cash used in operating activities | (5,189,117 | ) | (6,056,427 | ) | (1,391,651 | ) | ||||
Cash flows from investing activities | ||||||||||
Purchases of property and equipment | (283,903 | ) | (556,598 | ) | (893,181 | ) | ||||
Trademarks acquired | (31,775 | ) | (42,673 | ) | (27,114 | ) | ||||
Patent and license costs | (62,005 | ) | (174,240 | ) | (47,985 | ) | ||||
Software development costs | (296,197 | ) | (346,331 | ) | (2,764,678 | ) | ||||
Note receivable | 350,000 | (500,000 | ) | — | ||||||
Investment in affiliated companies | (220,000 | ) | (385,568 | ) | (250,000 | ) | ||||
Acquisition of business, net of cash acquired | — | 58,078 | — | |||||||
Other | (97,999 | ) | (33,678 | ) | (4,149 | ) | ||||
Net cash used in investing activities | (641,879 | ) | (1,981,010 | ) | (3,987,107 | ) | ||||
Cash flows from financing activities | ||||||||||
Proceeds from private equity offering | 1,955,035 | — | 5,204,858 | |||||||
Stock warrants exercised | 3,300 | 1,575,630 | 1,584,546 | |||||||
Stock options exercised | 209,535 | 80,328 | 199,092 | |||||||
Dividends | (35,000 | ) | (104,525 | ) | (151,667 | ) | ||||
Sale of convertible debentures, net of issuance costs ($163,968) | 6,261,332 | — | — | |||||||
Principal payments on obligations under capital leases | (121,935 | ) | (47,920 | ) | (3,300 | ) | ||||
Loan to shareholder, net of repayments | — | (190,431 | ) | (317,000 | ) | |||||
Payment of registration costs | (64,672 | ) | (66,943 | ) | (32,474 | ) | ||||
Net payments under line of credit | (875,531 | ) | — | — | ||||||
Deferred financing costs | (142,000 | ) | — | — | ||||||
Principal payments on long-term debt | (35,815 | ) | (32,926 | ) | (30,327 | ) | ||||
Purchase Series A preferred shares | (70,000 | ) | — | — | ||||||
Net cash provided by financing activities | 7,084,249 | 1,213,213 | 6,453,728 | |||||||
Effect of exchange rate changes on cash flows | (62,160 | ) | 53,111 | — | ||||||
Net increase (decrease) in cash and cash equivalents | 1,191,093 | (6,771,113 | ) | 1,074,970 | ||||||
Cash and cash equivalents, beginning of period | 2,269,353 | 9,040,466 | 7,965,496 | |||||||
Cash and cash equivalents, end of period | $ | 3,460,446 | $ | 2,269,353 | $ | 9,040,466 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
F-6
Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001
1. | Summary of Significant Accounting Policies |
Description of Business and Business Continuity |
Authentidate Holding Corp. (AHC) and its subsidiaries Authentidate, Inc., Authentidate International, AG (AG), DJS Marketing Group, Inc. (DJS), and Trac Medical Solutions, Inc. (Trac Med), collectively referred to as the “Company”, are engaged in the following businesses. Through its DocStar Division the Company markets and sells document imaging software and related products. Through DJS the Company markets network integration services, Internet services and related computer hardware. Authentidate, Inc., AG and Trac Med are all engaged in the business of providing authentication and security software services. |
In June 1999, AHC established a majority owned subsidiary Authentidate, Inc. (Authentidate), to engage in a new software business providing users with a service which can verify the authenticity of digital images by employing a secure clock that will date stamp the images when received providing proof of time, date and also proof of content via the Internet. |
In 2001, the Company formed a subsidiary named Trac Medical Solutions, Inc., to develop and provide authentication software services in the medical supply industry, for the processing of Certificates of Medical Necessity and other related forms. |
In March 2000, Authentidate, Inc. formed a joint venture known as Authentidate International Holdings, AG, with a German company, Windhorst New Technologies, Agi.G., to market Authentidate in countries outside of the Americas, Japan, Australia, New Zealand and India. AHC owned 39% of this joint venture originally. In March 2002, the Company purchased the 61% of Authentidate AG that it did not own in order to secure worldwide rights for the marketing of the Authentidate technology. Prior to consolidation (March 2002), the Company’s share of net losses of AG under the equity method of accounting for fiscal year ended June 30, 2002 was $625,282. |
In May 2001, the Company became a 50% owner in a joint venture known as Authentidate Sports (Sports) with outside partners to provide the same Authentidate services in the sports memorabilia industry. During fiscal 2003, the Company and its partner closed Sports and discontinued operations. The Company may revive Sports in the event they are able to attract a partner in the sports memorabilia industry. The Company’s share of net losses in this joint venture in 2003 approximated $515,000. |
During the fiscal year ended June 30, 2003 the Company incurred a net loss of $9,839,309, and cash used in operating activities totaled $5,189,117. To date, the Company has been largely dependent on its ability to sell additional shares of its common stock or other financing to fund its operating deficits. Under its current operating plan to introduce the new Authentidate technology, the Company’s ability to improve operating cash flow is highly dependent on the market acceptance of the Authentidate related businesses. If the Company is unable to attain projected sales levels for Authentidate, AG and Trac Med, it may be necessary to raise additional capital to fund operations to meet its obligations. |
F-7
Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001
There is no assurance that such funding will be available, if needed. As a result of net losses incurred during fiscal 2003, the Company reduced its workforce (Note 12). If the Company is unable to raise additional capital necessary to fund operations for fiscal 2004 and is unable to attain projected sales levels for Authentidate and related products then it will implement additional cost reduction strategies in early fiscal 2004, including the possible shutdown or reduction of operations at Authentidate, AG, or Trac Med, as well as reductions in corporate expenses (including salary, marketing, professional fees and other costs). In the event the Company is required to shut down or reduce operations at Authentidate, AG and/or Trac Med, goodwill approximating $11,600,000 could potentially become impaired and result in charges to operations. The Company’s available cash balance at June 30, 2003 totaled $3,460,446. The Company believes that its existing cash and cash equivalents which include the funds raised in September 2003 (Note 22) will be sufficient to meet its working capital and capital expenditure requirements for at least the next twelve months. |
Purchase 100% Interest of Authentidate, International, AG. |
In March 2002, the Company purchased 61% of the outstanding shares of Authentidate AG which it did not already own, and as a result, now owns 100% of AG. The Company issued 1,425,875 common shares and issued 100,000 common stock warrants to the sellers. The sellers also returned 250,000 outstanding warrants to the Company as part of the transaction. The aggregate fair value of equity consideration to consummate the acquisition approximated $6,400,000. The acquisition was recorded under the purchase method of accounting and the operations of AG have been included in the statement of operations since the acquisition date of March 15, 2002. |
Purchase Minority Interest of Trac Medical Solutions, Inc. |
During the quarter ended March 31, 2003, AHC acquired the remaining outstanding shares of capital stock of its subsidiary, Trac Medical Solutions, Inc., previously held by four other shareholders. Prior to the acquisition, AHC owned 85.8% of the outstanding stock of Trac Med. As a result of the acquisition, AHC now owns 100% of Trac Med. Pursuant to the Stock Purchase Agreement dated as of March 13, 2003, AHC issued an aggregate of 130,000 shares of its common stock to the sellers, and also issued to the sellers who will continue as employees of Trac Med 20,000 options to purchase shares of common stock at an exercise price equal to the closing price of AHC’s common stock as of the closing date of the transaction. In addition, the sellers who will continue as employees of Trac Med may receive, up to an aggregate amount of 75,000 additional shares of common stock of AHC in the event that Trac Med achieves certain sales and income performance targets during the twelve month period from October 1, 2002 to September 30, 2003. Upon achievement of each performance target, the Company will recognize compensation expense for such additional shares based on the fair value of the shares issued. Additional bonus options of up to 390,000 in fiscal year 2004 and 525,000 in fiscal year 2005 may be granted if certain sales and income performance targets are met in these years upon achievement of the performance targets, such options will be issued to the certain employees at an exercise price equal to the fair value of the Company’s common stock on the grant issuance date. In addition, the sellers agreed to place an aggregate of 52,000 shares of the AHC common stock issued to them into a six month escrow to provide for the potential breaches of representations and warranties contained in the Stock Purchase Agreement regarding the financial condition and operations of Trac Med. The parties completed the transaction effective on March 18, 2003. The acquisition does not have a material effect upon the financial condition of AHC. |
F-8
Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001
Purchase Minority Interest of Authentidate, Inc. |
In fiscal year ended June 30, 2001, the Company issued 917,608 shares of Authentidate Holding Corp. common stock (valued at approximately $4,200,000) to acquire approximately 25% of the outstanding shares not owned by AHC of Authentidate, Inc. As of June 30, 2003, the Company owns approximately 98% of Authentidate, Inc. The acquisition of the minority interest has been accounted under the purchase method of accounting. The excess purchase price which approximates $4,200,000 was being amortized over a 5-year period. Beginning July 1, 2001, the Company no longer amortizes goodwill (see “Goodwill”). |
In connection with the aforementioned transaction, the Company’s CEO was granted options to acquire 444,668 shares of Company common stock with an intrinsic value of approximately $1,380,000 which was expensed during the fiscal years ended June 30, 2001 and June 30, 2002. |
Principles of Consolidation |
The consolidated financial statements include the accounts of AHC and its subsidiaries. The accounts of the subsidiaries have been consolidated since the acquisition date. All material intercompany balances and transactions have been eliminated in consolidation. |
Cash Equivalents |
The Company considers all highly liquid debt instruments with original maturities not exceeding three months to be cash equivalents. At June 30, 2003 and 2002, cash equivalents were composed primarily of investments in commercial paper and overnight interest bearing deposits. |
Inventories |
Inventories are stated at the lower of cost or market and are valued at average cost. |
Property and Equipment |
Property and equipment are stated at cost. Depreciation and amortization are determined using the straight-line method. Estimated useful lives of the assets range from three to forty years. |
Repairs and maintenance are charged to expense as incurred. Renewals and betterments are capitalized. When assets are sold, retired or otherwise disposed of, the applicable costs and accumulated depreciation or amortization are removed from the accounts and the resulting gain or loss, if any, is recognized. |
Software Development Costs |
Software development and modification costs incurred subsequent to establishing technological feasibility are capitalized and amortized based on anticipated revenue for the related product with an annual minimum equal to the straight-line amortization over the remaining economic life of the related products (generally three years). Software development costs capitalized during 2003, 2002 and 2001 amounted to approximately $296,000, $346,000 and $2,765,000, respectively. Amortization expense related to software development costs for the years ended June 30, 2003, 2002 and 2001 was $1,102,765, $1,087,293 and $1,033,646, respectively. These expenses are included in cost of sales. |
F-9
Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001
Goodwill |
Effective July 1, 2001, the Company applied FAS No. 142, Goodwill and Other Intangible Assets. FAS 142 changed the accounting for goodwill from an amortization method to an impairment-only approach. Prior to July 1, 2001, goodwill was amortized on a straight-line basis over periods ranging from 5 to 20 years. Goodwill amortization expense for the year ended June 30, 2001 was not material to the Company’s financial statements. The adoption of FAS 142 on July 1, 2001 did not result in an impairment of goodwill. |
The Company periodically reviews goodwill to assess recoverability, and impairments would be recognized in operating results if a permanent diminution in value were to occur. The Company completed annual impairment tests, as required. These tests did not result in any impairment charges. The changes in the carrying amount of goodwill for the year ended June 30, 2003 are as follows: | |
DJS | Authentidate | AG | TracMed | Total | ||||||||||||
Balance, June 30, 2001 | $ | 1,173,665 | $ | 4,102,471 | $ | $ | $ | 5,276,136 | ||||||||
Reclass to patents based on valuation | (120,000 | ) | (120,000 | ) | ||||||||||||
Purchase 61% of AG | 6,709,801 | 6,709,801 | ||||||||||||||
Reclassification of 39% of AG | 573,208 | 573,208 | ||||||||||||||
Balance, June 30, 2002 | 1,173,665 | 3,982,471 | 7,283,009 | 12,439,145 | ||||||||||||
Acquisition of minority interest | 338,000 | 338,000 | ||||||||||||||
Changes in carrying amount of goodwill | 5,100 | 5,100 | 8,156 | 18,356 | ||||||||||||
Balance, June 30, 2003 | $ | 1,178,765 | $ | 3,987,571 | $ | 7,291,165 | $ | 338,000 | $ | 12,795,501 | ||||||
Income Taxes |
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. |
F-10
Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001
Revenue Recognition and Warranty Provisions |
Revenue from the sale of products and services is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed and collectibility is reasonably assured. Service revenue is recognized as it is earned. The Company provides a one- year warranty on hardware products it assembles. On products distributed for other manufacturers, the original manufacturer warranties the product. Warranty expense was not significant to any of the years presented. |
Stock-Based Compensation |
The Company has also adopted the disclosure requirements of Financial Accounting Standard No. 123, Accounting for Stock-Based Compensation (FAS No. 123) and FAS No. 148 with respect to pro forma disclosure of compensation expense for options issued. For purposes of the pro forma disclosures, the fair value of each option grant is estimated on the grant date using the Black-Scholes option-pricing model. Had the Company recorded compensation expense for the fair value of stock options, net loss and loss per share would have been affected as indicated by the pro forma amounts below. |
The Company applies APB No. 25 in accounting for its stock option plans and, accordingly, no compensation cost has been recognized in the Company’s financial statements for stock options under any of the stock plans which on the date of grant the exercise price per share was equal to or exceeded the fair value per share. However, compensation cost has been recognized for warrants granted to non-employees for services provided. If under FAS No. 123, the Company determined compensation cost based on the fair value at the grant date for its stock options, net loss and loss per share would have been increased to the pro forma amounts indicated below: | |
2003 | 2002 | 2001 | ||||||||
Net loss | ||||||||||
As reported | $ | (9,839,309 | ) | $ | (9,951,402 | ) | $ | (9,340,103 | ) | |
Deduct: total stock based employee compensation expense determined under fair value method | (1,981,504 | ) | (4,480,325 | ) | (3,529,170 | ) | ||||
Pro forma | $ | (11,820,813 | ) | $ | (14,431,727 | ) | $ | (12,869,273 | ) | |
Basic and diluted loss per share | ||||||||||
As reported | $ | (.50 | ) | $ | (.69 | ) | $ | (.63 | ) | |
Pro forma | $ | (.59 | ) | $ | (.95 | ) | $ | (.86 | ) |
F-11
Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001
The weighted average fair value of each option granted under the Company’s employee option plans during fiscal 2003, 2002 and 2001 was $.60, $1.11 and $2.90, respectively. These amounts were determined using the Black Scholes option-pricing model, which values options based on the stock price at the grant date, the expected life of the option, the estimated volatility of the stock, expected dividend payments and the risk-free interest rate over the expected life of the option. The dividend yield was zero in 2003, 2002 and 2001. The expected volatility was based on the historic stock prices. The expected volatility was 95.3%, 89.6% and 91.6% for 2003, 2002 and 2001, respectively. The risk-free interest rate was the rate available on zero coupon U.S. government issues with a term equal to the remaining term for each grant. The risk-free rate ranged from 3.0% to 5.1% in 2003, 4.4% to 5.1% in 2002 and 5.1% in 2001, respectively. The expected life of the options was estimated based on the exercise history from previous grants and is estimated to be one to five years. |
The effects of applying FAS 123 on providing pro-forma disclosures are not necessarily likely to be representative of the effects on reported net income for future years. |
New Accounting Pronouncements |
In May 2003, the Financial Accounting Standards Board (FASB) issued FAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Standard establishes how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This standard becomes effective for any financial instruments entered into or modified after May 31, 2003. The Company does not expect the adoption of FAS No. 150, to have a material effect on its financial statements. |
In April 2003, the FASB issued FAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FAS No. 133, Accounting for Derivative Instruments and Hedging Activities entered into after June 30, 2003. The Company does not expect the adoption of FAS No. 149 to have a material effect on its financial statements. |
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities. This interpretation gives guidance that determines whether consolidation of a Variable Interest Entity is required and is effective for all variable interest entities with which the Company becomes involved beginning in February 2003, and all pre-existing entities beginning after June 15, 2003. The Company does not expect the adoption of FIN 46 to have a material effect on its financial statements. |
In December 2002, the FASB issued FAS No. 148, Accounting for Stock Based Compensation – Transition and Disclosure – an amendment of FAS No. 123. This Statement amends FAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Statement has varying effective dates commencing with interim periods beginning after December 15, 2002. The Company has adopted the disclosure requirements of FAS No. 148. |
F-12
Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001
In November 2002, the FASB issued FAS Interpretation No. 45 (FIN 45), Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Guarantees of Indebtedness of Others. FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. The initial recognition and measurement should be applied on a prospective basis to guarantees issued or modified after December 31, 2002. Disclosure requirements are effective for financial statements of both interim and annual periods that end after December 15, 2002. The Company has no guarantees to unaffiliated third parties so the adoption of FIN 45 had no impact on the Company’s financial statements. |
In June 2002, the FASB issued FAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This Standard addresses the recognition, measurement and reporting of costs that are associated with exit or disposal activities. FAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of FAS No. 146 had no impact on the Company’s financial statements. |
Advertising Expenses |
The Company recognizes advertising expenses as incurred. Advertising and promotion expense for 2003, 2002 and 2001 was approximately $461,000, $454,000 and $835,000, respectively. |
Currency Translation Adjustment |
Assets and liabilities of non-U.S. operations are translated at year-end rates of exchange, and the income statements are translated at the average rates of exchange for the year. Gains or losses resulting from translating non-U.S. currency financial statements are recorded in “Comprehensive Income” and accumulated in shareholders’ equity in the caption “Translation Adjustments”. |
Use of Estimates |
Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates. |
Reclassifications |
It is the Company’s policy to reclassify, where appropriate, prior year financial statements to conform to the current year presentation. |
2. | Loss Per Share |
The following is basic and diluted loss per common share information: | |
2003 | 2002 | 2001 | ||||||||
Net loss | $ | (9,839,309 | ) | $ | (9,951,402 | ) | $ | (9,340,103 | ) | |
Preferred stock dividends | (223,706 | ) | (1,764,430 | ) | (151,667 | ) | ||||
Net loss applicable to common shareholders | $ | (10,063,015 | ) | $ | (11,715,832 | ) | $ | (9,491,770 | ) | |
Weighted average shares | 20,028,736 | 17,035,030 | 15,013,135 | |||||||
Basic and diluted loss per common share | $ | (.50 | ) | $ | (.69 | ) | $ | (.63 | ) |
F-13
Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001
Options (5,003,117), warrants (3,968,539), convertible preferred stock (1,243,034) and convertible debentures (2,528,192) were antidilutive to the fiscal year 2003 calculation of dilutive loss per share, and were accordingly excluded from the calculation. Options (5,280,000), warrants (2,685,000) and convertible preferred stock (1,190,000) were antidilutive to the fiscal year 2002 calculation and options (4,325,000), warrants (2,908,000) and convertible preferred stock (1,775,000) were antidilutive to the fiscal year 2001 calculation, and were accordingly excluded from the respective calculations. |
3. | Inventories |
Inventories relate to DocStar and DJS only and at June 30 consist of: | |
2003 | 2002 | ||||||
Purchased components and raw materials | $ | 63,115 | $ | 317,772 | |||
Finished goods | 129,986 | 161,930 | |||||
$ | 193,101 | $ | 479,702 | ||||
4. | Property and Equipment |
Property and equipment at June 30 consist of the following: | |
2003 | 2002 | Estimated Useful Life In Years | ||||||||
Building | $ | 1,618,640 | $ | 1,618,640 | 40 | |||||
Land | 698,281 | 698,281 | N/A | |||||||
Machinery and equipment | 3,494,683 | 3,145,986 | 3-6 | |||||||
Demonstration and rental computers | 125,732 | 125,732 | 5-6 | |||||||
Furniture and fixtures | 651,522 | 594,309 | 5-7 | |||||||
Leasehold improvements | 50,069 | 48,893 | 5 | |||||||
6,638,927 | 6,231,841 | |||||||||
Less: accumulated depreciation and amortization | (2,874,081 | ) | (2,222,916 | ) | ||||||
$ | 3,764,846 | $ | 4,008,925 | |||||||
In June 1999, the Company completed construction of a new office/production facility in Schenectady, New York for approximately $2,300,000. The Company was awarded a grant totaling $1,000,000 from the Empire State Development Corporation (an agency of New York State) to be used towards the construction of the facility. The funding was received in stages as costs are incurred and submitted for reimbursement. The grant stipulates that the Company is obligated to achieve certain annual employment levels at the new site between January 1, 2002 and January 1, 2005 or some or all of the grant will have to be repaid. The Company has not achieved the agreed upon employment levels to date but would like to achieve such levels by 2005. The $1,000,000 is recorded as deferred grant. The remainder of the financing for the new facility, totaling approximately $1,400,000, was provided by a local financial institution in the form of a mortgage loan (Note 7). |
F-14
Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001
Depreciation and amortization expense on property and equipment for the years ended June 30, 2003, 2002 and 2001 was $661,870, $553,615 and $377,832, respectively. |
5. | Accrued Expenses and Other Current Liabilities |
Accrued expenses and other current liabilities consist of the following at June 30: | |
2003 | 2002 | ||||||
Accrued severance | $ | 405,065 | $ | — | |||
Accrued legal | 500,000 | 577,964 | |||||
Deferred revenue | 738,166 | 250,612 | |||||
Other | 1,129,479 | 1,103,458 | |||||
$ | 2,772,710 | $ | 1,932,034 | ||||
6. | Line of Credit |
The Company’s subsidiary, DJS has a revolving line of credit in the amount of $2.5 million with a financial institution of which approximately $878,000 was outstanding at June 30, 2003. The interest rate is prime (minimum prime rate of 7%) plus 1.75%. At June 30, 2003, the interest rate was 8.75%. DJS may borrow on this line based on a formula of qualified accounts receivable and inventory. Based upon this formula, $1,614,000 was available for use at June 30, 2003, of which $736,000 was unused. The line was collateralized by all assets of DJS and is guaranteed by Authentidate Holding Corp. Under the line of credit agreement, DJS is required to comply with certain restrictive covenants including tangible net worth and debt to tangible net worth. As of June 30, 2003, the Company was in compliance with its debt covenants. |
7. | Long-term Debt |
Long-term debt at June 30 consists of the following: | |
2003 | 2002 | ||||||
Mortgage payable with Central National Bank in the original amount of $1,400,000 with interest, adjusted every five years, equal to the five-year Treasury Bill rate plus 2.5%, not to be less than 8.25% (8.25% at June 30, 2003). Payments are made on a 20 year amortization schedule with a balloon payment due in October 2009, when it matures. The mortgage is collateralized by a first mortgage lien on the Company’s headquarters. | $ | 1,281,700 | $ | 1,317,515 | |||
Note payable to the Company’s Chief Executive Officer in connection with the purchase of 100 shares of Series A preferred stock. | 268,240 | ||||||
1,549,940 | 1,317,515 | ||||||
Less current portion | (218,811 | ) | (35,747 | ) | |||
Long-term debt, net of current portion | $ | 1,331,129 | $ | 1,281,768 | |||
F-15
Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001
The aggregate principle maturities of long-term debt for each of the subsequent five years and thereafter are as follows: | |
2004 | $ | 218,811 | ||
2005 | 130,381 | |||
2006 | 45,753 | |||
2007 | 49,674 | |||
2008 | 53,931 | |||
Thereafter | 1,051,390 | |||
$ | 1,549,940 | |||
This schedule does not include convertible debentures of $6,425,300 maturing in fiscal year 2006 (Note 18). |
8. | Income Taxes |
Income tax expense for the years ended June 30, 2003, 2002 and 2001 consists of currently payable state and local income taxes. |
At June 30, 2003, the Company has federal net operating loss carryforwards for tax purposes approximating $45,000,000. The years in which the net operating loss carryforwards expire are as follows: 2003-$3,000; 2004-$6,000; 2008-$1,568,000; 2009-$867,000; 2011- $2,762,000; 2012-$686,000; 2013-$3,197,000; 2019-$1,350,000; 2020-$7,698,000; 2021-$9,900,000, 2022-$8,000,000 and 2023-$9,000,000. |
Because of significant changes in ownership during the prior years, the use of net operating loss carryforwards may be subject to limitation. |
Pre-tax book (loss) from foreign sources totaled $(1,544,741), $(1,216,209) and $(99,455) for the years ended June 30, 2003, 2002 and 2001, respectively. |
The following table reconciles the expected tax benefit at the federal statutory rate of 34% to the effective tax rate. | |
2003 | 2002 | 2001 | ||||||||
Computed expected tax benefit | $ | (3,343,167 | ) | $ | (3,396,984 | ) | $ | (3,170,195 | ) | |
Increase in valuation allowance | 3,465,936 | 3,922,113 | 3,008,814 | |||||||
Nondeductible goodwill amortization | — | — | 136,770 | |||||||
Adjustment to prior years’ taxes | — | — | 20,871 | |||||||
State income taxes, net of federal benefit | (659,832 | ) | (727,225 | ) | 10,560 | |||||
Nondeductible foreign losses | 525,212 | 200,915 | — | |||||||
Other nondeductible expenses | 18,315 | 15,300 | 9,180 | |||||||
$ | 6,464 | $ | 14,119 | $ | 16,000 | |||||
F-16
Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001
The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities as of June 30 are presented below: | |
2003 | 2002 | ||||||
Deferred income tax asset: | |||||||
Allowance for doubtful accounts | $ | 122,069 | $ | 174,062 | |||
Inventories | 73,984 | 221,467 | |||||
Software development costs | 884,118 | 612,047 | |||||
Investment in affiliated companies | 292,521 | 407,025 | |||||
Other intangible assets | 1,292,697 | 1,648,655 | |||||
Deferred compensation | 482,558 | 485,018 | |||||
Accrued expenses and other liabilities | 444,971 | 253,897 | |||||
Net operating loss and tax credit carryforwards | 18,318,194 | 14,614,860 | |||||
Other | 2,808 | 1,107 | |||||
Total gross deferred tax assets | 21,913,920 | 18,418,138 | |||||
Less valuation allowance | (21,761,661 | ) | (18,295,725 | ) | |||
Net deferred tax asset | 152,259 | 122,413 | |||||
Deferred income tax liability: | |||||||
Equipment, principally due to differences in | |||||||
depreciation methods | (152,259 | ) | (122,413 | ) | |||
Net deferred income taxes | $ | — | $ | — | |||
The Company has recorded a full valuation allowance against its deferred tax asset since it believes it is more likely than not that such deferred tax asset will not be realized. The valuation allowance for deferred tax assets as of June 30, 2003 and 2002 was $21,761,661 and $18,295,725, respectively. The net change in the total valuation allowance for the years ended June 30, 2003, 2002 and 2001was an increase of $3,465,936, $3,922,113 and $3,008,814, respectively. |
9. | Lease Commitments |
The Company is obligated under operating leases and capital leases for certain equipment and facilities expiring at various dates through the year 2007. |
As of June 30, 2003, future minimum payments by year, and in the aggregate for noncancelable operating leases with initial terms of one year or more consist of the following: | |
Capital | Operating | ||||||
Leases | Leases | ||||||
Fiscal year ending June 30: | |||||||
2004 | $ | 136,901 | $ | 611,125 | |||
2005 | 75,724 | 571,333 | |||||
2006 | 15,230 | 472,950 | |||||
2007 | 5,373 | 139,867 | |||||
233,228 | $ | 1,795,275 | |||||
Amounts representing interest | (35,152 | ) | |||||
Present value of net minimum lease payments | 198,076 | ||||||
Less current portion | (112,520 | ) | |||||
Long-term portion | $ | 85,556 | |||||
F-17
Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001
Rental expense was approximately $516,000, $345,000 and $272,000 for the years ended June 30, 2003, 2002 and 2001, respectively. The amount of accumulated depreciation for capital leases at June 30, 2003 and 2002 was $92,560 and $29,513, respectively. The equipment financed by these capital leases may be purchased at the end of the lease for a bargain purchase amount. |
10. | Preferred Stock |
The Board of Directors is authorized to issue shares of preferred stock, $.10 par value per share, from time to time in one or more series. The Board may issue a series of preferred stock having the right to vote on any matter submitted to shareholders including, without limitation, the right to vote by itself as a series, or as a class together with any other or all series of preferred stock. The Board of Directors may determine that the holders of preferred stock voting as a class will have the right to elect one or more additional members of the Board of Directors, or the majority of the members of the Board of Directors. The Board of Directors has designated a series of preferred stock which has the right to elect a majority of the Board of Directors. The holders of Series A preferred stock which have the right to elect a majority of the Board of Directors are therefore able to control the Company’s policies and affairs. |
In June 2003, the Company purchased all of the Series A preferred stock (100 shares) from its Chief Executive Officer for $850,000. Payment terms are as follows: $70,000 in cash was paid, $485,000 was offset against loans owed to the Company by its Chief Executive Officer, and the remainder will be paid in monthly installments of $15,000 commencing July 2003, interest free (Notes 13 and 19). |
11. | Stock Option Plans and Stock Warrants |
A) | 2000 and 1992 Employees Stock Option Plans |
In March 2001, the shareholders approved the 2000 Employees Stock Option Plan (“the 2000 Plan”) which provided for the grant of options to purchase up to 5,000,000 shares of the Company’s Common Stock. The Company’s shareholders were asked to adopt the 2000 Plan since there were no additional shares available for issuance under the 1992 Plan and the 1992 Plan expired in 2002. In 2001, the Company filed a registration statement with the SEC to register the shares issued under the 2000 Plan. |
The 1992 Employees Stock Option Plan (the “1992 Plan”) provided for the grant of options to purchase 3,000,000 shares of the Company’s common stock. |
Under the terms of the two Plans, options granted thereunder may be designated as options which qualify for incentive stock option treatment (“ISO”) under Section 422 of the Internal Revenue Code, or options which do not so qualify (“non-ISOs”). |
F-18
Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001
The Plans are administered by a Compensation Committee designated by the Board of Directors. The Compensation Committee is comprised entirely of outside directors. The Board or the Committee, as the case may be, has the discretion to determine eligible employees and the times and the prices at which options will be granted, whether such options shall be ISOs or non-ISOs, the period during which each option will be exercisable and the number of shares subject to each option. Options generally begin to vest one year after the date of grant. Vesting generally occurs one-third per year over three years. Options generally have a life of five years. The Board or the Committee has full authority to interpret the Plans and to establish and amend rules and regulations relating thereto. Under the two Plans, the exercise price of an option designated as an ISO may not be less than the fair market value of the Company’s common stock on the date the option is granted. However, in the event an option designated as an ISO is granted to a ten percent shareholder, the exercise price shall be at least 110% of such fair market value. The aggregate fair market value on the grant date of shares subject to options which are designated as ISOs which become exercisable in any calendar year, shall not exceed $100,000 per optionee. |
The Board or the Committee may in its sole discretion grant bonuses or authorize loans to or guarantee loans obtained by an optionee to enable such optionee to pay any taxes that may arise in connection with the exercise or cancellation of an option. As of June 30, 2003, no loans had been granted or guaranteed. Loans may not be granted or guaranteed to executive officers. |
The 1992 Plan expired May 2002 and the 2000 Plan will expire in the year 2010. | ||
Number of Shares | Weighted Average Option Price per Share | ||||||
Outstanding at June 30, 2000 | 2,186,173 | $ | 5.67 | ||||
Options granted equal to market price | 1,863,532 | 4.93 | |||||
Options granted lower than market price | 444,668 | 1.52 | |||||
Options exercised | (61,733 | ) | 2.93 | ||||
Options canceled or surrendered | (247,935 | ) | 5.86 | ||||
Outstanding at June 30, 2001 | 4,184,705 | 4.93 | |||||
Options granted equal to market price | 1,313,875 | 4.22 | |||||
Options granted lower than market price | 151,500 | .01 | |||||
Options exercised | (21,999 | ) | 2.27 | ||||
Options canceled or surrendered | (507,732 | ) | 7.50 | ||||
Outstanding at June 30, 2002 | 5,120,349 | 4.48 | |||||
Options granted equal to market price | 459,075 | 3.15 | |||||
Options granted greater than market price | 373,667 | 3.21 | |||||
Options cancelled or surrendered | (1,046,526 | ) | 4.06 | ||||
Options exercised | (63,448 | ) | 2.04 | ||||
Outstanding at June 30, 2003 | 4,843,117 | 4.38 | |||||
F-19
Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001
The following is a summary of the status of employee stock options at June 30, 2003: | ||
Outstanding Options | Exercisable Options | |||||||||||||||
Exercise Price Range | Number | Average Remaining Contractual Life | Weighted Average Exercise Price | Number | Weighted Average Exercise Price | |||||||||||
$.01 – $4.60 | 2,818,442 | 3.3 | $ | 3.36 | 1,365,877 | $ | 2.99 | |||||||||
$4.61 – $9.125 | 2,024,675 | 2.4 | $ | 5.80 | 1,513,225 | $ | 5.98 |
As of June 30, 2003 and 2002, 2,879,102 shares and 2,840,122 shares, respectively, were exercisable under the 2000 and 1992 Employees Stock Option Plan. |
B) | Non-Executive Director Stock Option Plan |
In January 2002, our shareholders approved the 2001 Non-Executive Director Stock Option Plan (the 2001 Director Plan). Options are granted under the 2001 Director Plan until December 2011 to (i) non-executive directors as defined and (ii) members of any advisory board established by the Company who are not full-time employees of the Company or any of its subsidiaries. The 2001 Director Plan provides that each non-executive director will automatically be granted an option to purchase 20,000 shares upon joining the Board of Directors and 10,000 on each September 1st thereafter, prorated based upon the amount of time such person served as a director during the period beginning twelve months prior to September 1. Each eligible director of an advisory board will receive, upon joining the advisory board, and on each September 1st thereafter, an additional option to purchase 5,000 shares of the Company’s common stock, providing such person has served as a director of the advisory board for the previous 12-month period. |
The Company’s shareholders were asked to adopt the 2001 Director Plan since the 1992 Non-Executive Director Stock Plan (the 1992 Director Plan) expired in April 2002. Under the 1992 Director Plan, which was adopted by our shareholders in April 1992, directors were automatically granted a fully vested option to purchase 20,000 shares upon joining the Board of Directors and a fully vested option to purchase 10,000 shares on each September 1 thereafter. |
The exercise price for options granted under the 2001 and 1992 Director Plans is 100% of the fair market value of the common stock on the date of grant. The “fair market value” is the closing NASDAQ bid price, or if the Company’s common stock is not quoted by NASDAQ, as reported by the National Quotation Bureau, Inc., or a market maker of the Company’s common stock. If the common stock is not quoted by any of the above the Board of Directors acting in good faith will determine fair market value. The exercise price of options granted under both the 2001 and 1992 Director Plans must be paid at the time of exercise in cash. The term of each option commences on the date it is granted and unless terminated sooner, as provided in the 2001 and 1992 Director Plans, expires five years from the date of grant. The 2001 and 1992 Director Plans are administered by a committee of the board of directors composed of not fewer than three persons who are officers of the Company (the “Committee”). The Committee has no discretion to determine which non-executive director or advisory board member will receive options or the number of shares subject to the option, the term of the option or the exercisability of the option. However, the Committee will make all determinations of the interpretation of both the 2001 and 1992 Director Plans. Options granted under the 2001 and 1992 Director Plans are not qualified for incentive stock option treatment. |
F-20
Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001
A schedule of director stock option activity is as follows: | ||
Number of Shares | Weighted Average Option Price Per Share | ||||||
Outstanding June 30, 2000 | 130,000 | $ | 1.92 | ||||
Options granted equal to market price | 30,000 | .84 | |||||
Options exercised | (20,000 | ) | .92 | ||||
Outstanding June 30, 2001 | 140,000 | 2.68 | |||||
Options granted equal to market price | 30,000 | 3.76 | |||||
Options exercised | (10,000 | ) | 3.38 | ||||
Outstanding June 30, 2002 | 160,000 | 2.84 | |||||
Options granted equal to market price | 50,000 | 2.63 | |||||
Options cancelled or surrendered | (10,000 | ) | 3.88 | ||||
Options exercised | (40,000 | ) | 2.78 | ||||
Outstanding June 30, 2003 | 160,000 | 2.72 | |||||
The options range in exercise price from $.84 to $4.81 per share and have a weighted average remaining contractual life of 2.6 years. |
C) | Common Stock Warrants |
A schedule of common stock warrant activity is as follows: | ||
Number of Shares | Weighted Average Warrant Price Per Share | ||||||
Outstanding June 30, 2000 | 3,025,477 | $ | 3.87 | ||||
Warrants granted equal to market price | 106,667 | 2.33 | |||||
Warrants granted greater than market price | 184,780 | 5.57 | |||||
Warrants granted lower than market price | 314,000 | 5.19 | |||||
Warrants cancelled or surrendered | (258,806 | ) | 4.60 | ||||
Warrants exercised | (463,668 | ) | 3.47 | ||||
Outstanding June 30, 2001 | 2,908,450 | 4.14 | |||||
Warrants granted equal to market price | 109,868 | 5.00 | |||||
Warrants granted greater than market price | 1,217,500 | 2.28 | |||||
Warrants cancelled or surrendered | (425,000 | ) | 8.15 | ||||
Warrants exercised | (1,125,000 | ) | 1.48 | ||||
Outstanding June 30, 2002 | 2,685,818 | 3.81 | |||||
Warrants granted greater than market price | 235,000 | 3.28 | |||||
Warrants granted below market price | 1,119,080 | 2.68 | |||||
Warrants exercised | (3,000 | ) | 3.25 | ||||
Warrants cancelled or surrendered | (68,359 | ) | 8.99 | ||||
Outstanding June 30, 2003 | 3,968,539 | 3.37 | |||||
F-21
Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001
During fiscal year ending June 30, 2003, 235,000 warrants were issued to various consultants as compensation for services performed. |
In May 2003, the Company issued 419,279 warrants to a group of investors in connection with a sale of convertible debentures in the amount of $2.7 million. The Company valued these warrants using the Black Scholes Model and will amortize the costs as part of the debt discount over the three year life of the debentures. In addition, 36,923 warrants were issued as finders fees. |
In October 2002, the Company issued 444,000 warrants to a group of investors in connection with a sale of $3.7 million of convertible debentures. The Company valued these warrants using the Black Scholes Model and will amortize the costs as part of the debt discount over the three year life of the debentures. In addition, 86,863 warrants were issued as finders fees. |
In August 2002, the Company issued 132,015 warrants in connection with a private common stock sale of approximately $2.0 million. |
In March 2002, the Company issued 100,000 warrants in connection with the acquisition of Authentidate International AG. In February 2002, the Company issued 1,080,000 warrants to certain series B warrant holders with an exercise price of $2.00 per warrant in exchange for their exercise of 1,080,000 outstanding Series B warrants for which the Company received $1,485,000 in cash (Note 20). |
In May 2001, the Company issued 114,000 warrants to two foreign institutions and 150,000 warrants to investment bankers as professional fees related to two private equity financings further described in Note 18. |
The following is a summary of the status of common stock warrants at June 30, 2003: | ||
Outstanding Warrants | Exercisable Warrants | |||||||||||||||
Exercise Price Range | Number | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Number | Weighted Average Exercise Price | |||||||||||
$1.00 – $2.85 | 2,271,178 | 2.7 | $ | 2.06 | 2,271,178 | $ | 2.06 | |||||||||
$2.86 – $11.00 | 1,697,361 | 2.7 | $ | 5.13 | 1,697,361 | $ | 5.13 |
F-22
Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001
12. | Commitments and Contingencies |
We are the defendant in a third party complaint filed by Shore Venture Group, LLC (Shore Venture) in Federal District Court in Pennsylvania. The third party complaint was filed against us on May 7, 2001. Shore Venture is the defendant to an action commenced by Berwyn Capital. The third party complaint alleges a claim for breach of contract and seeks indemnification. A trial was held in October, 2002 and we are currently awaiting the verdict of the judge. Management believes that the claim will not have a material adverse impact on our financial condition, results of operations or cash flows. |
We have also been advised of a claim by Shore Venture concerning additional shares of the Common Stock of our subsidiary, Authentidate, Inc. We are continuing to conduct settlement negotiations with Shore Venture in an effort to resolve all claims between the partners. Based on the settlement negotiations held between the parties to date, management believes that the resolution of all of our claims with Shore Venture will not have a materially adverse effect on our financial condition, results of operations or cash flows. |
We are engaged in no other litigation which would be anticipated to have a material adverse impact on our financial condition, results of operations or cash flows. |
At June 30, 2003, the Company had a severance accrual of $405,000 for employees that were terminated during fiscal year 2003. These payouts will occur throughout fiscal year 2004. |
13. | Cash Flows – Supplemental Information |
Cash Flows |
The Company paid interest in the amounts of $195,276, $115,378 and $115,323 for the years ended June 30, 2003, 2002 and 2001, respectively. Income taxes paid aggregated $494, $1,912 and $230 for the years ended June 30, 2003, 2002 and 2001, respectively. |
Noncash Investing and Financing Activities |
During the fiscal year ending June 30, 2003, the Company issued 130,000 shares of its common stock to acquire all of the shares of Trac Medical. In addition, the Company entered into capital lease obligations for property and equipment totaling $176,178, including interest (Note 10). |
During the fiscal year ending June 30, 2002, the Company issued 1,425,875 shares of its common stock to acquire all the shares of Authentidate International AG that it did not already own. This transaction is more fully described in Note 1. During the fiscal year, the Company entered into capital lease obligations for property and equipment totaling $278,554, including interest. |
During the fiscal year ended June 30, 2001, the Company issued 917,608 shares of its common stock with a value approximating $4,200,000, to acquire a portion of the remaining minority interest of Authentidate, Inc. In addition, the Company entered into capital lease obligations totaling $15,923, including interest. Furthermore, the Company issued 28,082 shares of common stock out of treasury (totaling $76,719) in connection with preferred stock being converted into common stock. |
F-23
Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001
14. | Employee Benefit Plan |
The Company has a qualified defined contribution 401(k) profit sharing plan for all eligible employees. The Company can make contributions in percentages of compensation, or amounts as determined by the Company. The Company contributed $143,080, $134,640 and $111,869 to the plan during the years ended June 30, 2003, 2002 and 2001, respectively. |
15. | Intangible Assets |
A summary of intangible assets is as follows: | |
June 30, 2003 | June 30, 2002 | |||||||||||||||
Gross | Gross | |||||||||||||||
Carrying | Accumulated | Carrying | Accumulated | Useful Life | ||||||||||||
Amount | Amortization | Amount | Amortization | In Years | ||||||||||||
Patents | $ | 321,085 | $ | 43,679 | $ | 260,581 | $ | 24,792 | 17 | |||||||
Trademarks | 138,578 | 22,583 | 106,803 | 15,654 | 20 | |||||||||||
Completed technologies | 59,400 | 37,125 | 59,400 | 7,425 | 2 | |||||||||||
Accreditation | 121,800 | 76,125 | 121,800 | 15,225 | 2 | |||||||||||
Licenses | 15,101 | 9,567 | 13,600 | 4,533 | 3 | |||||||||||
Total | $ | 655,964 | $ | 189,079 | $ | 562,184 | $ | 67,629 | ||||||||
Also refer to Note 1 with regard to Completed Technologies and Accreditation. The Company amortizes intangible assets under the straight line method. Amortization expense was $121,450, $49,970 and $9,537 for the years ended June 30, 2003, 2002 and 2001, respectively. Intangible amortization expense is expected to be immaterial for the next five fiscal years. |
16. | Financial Instruments |
Concentrations of Credit Risk |
Financial instruments which subject the Company to concentrations of credit risk consist of cash and cash equivalents and trade accounts receivable. To reduce credit risk, the Company places its temporary cash investments with high credit quality financial institutions. The Company’s credit customers are not concentrated in any specific industry or business. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. |
At June 30, 2003, there was one customer whose accounts receivable balance exceeded 30% of total accounts receivable. This receivable has since been substantially collected. At June 30, 2002, there was one customer whose accounts receivable balance exceeded 10% of total accounts receivable. |
F-24
Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001
One DJS customer accounted for approximately 50% of consolidated net sales but only represented approximately $625,000 of gross profit out of total gross profit of $6.1 million, during the fiscal year ended June 30, 2003. Sales to this same customer accounted for approximately 13% of consolidated net sales for the fiscal year ended June 30, 2002, but only represented about $150,000 of gross profit. Sales to this customer were primarily low margin computer hardware sales. |
Fair Value |
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. |
Cash and Cash Equivalents, Accounts Receivable, Accounts Payable and Accrued Expenses and Other Current Liabilities |
The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses and other current liabilities approximates fair value because of the short maturity of these instruments. |
Long Term Debt |
Long-term debt approximates fair value as the Company’s current borrowing rate approximates the interest rates on its debt. |
17. | Segment Information |
FAS 131 establishes standards for reporting financial and descriptive information about an enterprise’s operating segments in its annual financial statements and selected segment information in interim financial reports. |
The Company has three reportable segments: DocStar, a document imaging software company, DJS Marketing Group, Inc. (DJS), a computer systems integrator, and all Authentidate related companies including Authentidate Inc., Authentidate AG and Trac Medical Solutions Inc. DocStar sells document storage and retrieval software and related products through a national dealer network of approximately 100 dealers and DJS markets computer services including network services, internet services and software installation and integration. In addition, DJS sells a complete line of personal computers and peripheral equipment in the Albany, New York area primarily, although DJS has several national accounts. The Authentidate related businesses all provide authentication software services nationally and through AG internationally. |
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. |
The Company’s reportable segments are separate divisions which are managed separately. The corporate expenses which are not managed at the segment level include all public company type expenses and therefore are excluded from the Company’s operating segments results. Goodwill is included in corporate assets. |
F-25
Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001
Segment Information: | DocStar | DJS | Authentidate Related | Totals | |||||||||
2003 | |||||||||||||
Net sales from external customers | $ | 6,781,230 | $ | 17,124,802 | $ | 1,380,439 | $ | 25,286,471 | |||||
Intersegment revenues | 13,770 | 62,268 | — | 76,038 | |||||||||
Interest and other revenue | 566 | — | 181,017 | 181,583 | |||||||||
Interest expense | 107,735 | 18,057 | 100,975 | 226,767 | |||||||||
Depreciation and amortization | 414,848 | 50,757 | 1,322,019 | 1,787,624 | |||||||||
Segment profit/(loss) | 796,866 | 146,917 | (5,974,728 | ) | (5,030,945 | ) | |||||||
Segment assets | 4,327,634 | 3,198,953 | 2,268,673 | 9,795,260 | |||||||||
2002 | |||||||||||||
Net sales from external customers | $ | 6,719,803 | $ | 9,871,923 | $ | 51,178 | $ | 16,642,904 | |||||
Intersegment revenues | — | 88,577 | — | 88,577 | |||||||||
Interest and other revenue | 15,411 | 23 | 25,725 | 41,159 | |||||||||
Interest expense | 110,185 | 1,675 | 12,964 | 124,824 | |||||||||
Depreciation and amortization | 431,910 | 60,819 | 1,172,387 | 1,665,116 | |||||||||
Segment profit/(loss) | 287,859 | 96,801 | (5,723,055 | ) | (5,338,395 | ) | |||||||
Segment assets | 4,878,141 | 4,112,197 | 3,316,513 | 12,306,851 | |||||||||
2001 | |||||||||||||
Net sales from external customers | $ | 6,239,579 | $ | 11,620,407 | $ | 558 | $ | 17,860,544 | |||||
Intersegment revenues | — | 428,488 | — | 428,488 | |||||||||
Interest and other revenue | 14,792 | — | 2,352 | 17,144 | |||||||||
Interest expense | 112,784 | 12,032 | — | 124,816 | |||||||||
Depreciation and amortization | 411,441 | 58,468 | 1,120,840 | 1,590,749 | |||||||||
Segment (loss)/profit | (459,391 | ) | 385,283 | (5,824,663 | ) | (5,898,771 | ) | ||||||
Segment assets | 5,454,528 | 3,372,212 | 3,746,305 | 12,573,045 |
Reconciliations | 2003 | 2002 | 2001 | |||||||
Net sales | ||||||||||
Total net sales for reportable segments | $ | 25,362,509 | $ | 16,731,481 | $ | 18,289,032 | ||||
Elimination of intersegment revenues | (76,038 | ) | (88,577 | ) | (428,488 | ) | ||||
Total consolidated net sales | $ | 25,286,471 | $ | 16,642,904 | $ | 17,860,544 | ||||
Total profit or loss for reportable segments | $ | (5,030,945 | ) | $ | (5,338,395 | ) | $ | (5,898,771 | ) | |
Product development expenses | (2,534,777 | ) | (2,170,173 | ) | (1,221,639 | ) | ||||
Corporate expenses and other | (2,258,830 | ) | (2,494,793 | ) | (2,188,413 | ) | ||||
Elimination of intersegment profits | (8,293 | ) | 12,232 | (15,280 | ) | |||||
Loss before income taxes | $ | (9,832,845 | ) | $ | (9,991,129 | ) | $ | (9,324,103 | ) | |
Assets | ||||||||||
Total assets for reportable segments | $ | 9,795,260 | $ | 12,306,851 | $ | 12,573,045 | ||||
Corporate assets | 15,274,268 | 13,760,530 | 13,322,487 | |||||||
Elimination of intersegment assets | (23,688 | ) | (15,395 | ) | (27,627 | ) | ||||
Consolidated total assets | $ | 25,045,840 | $ | 26,051,986 | $ | 25,867,905 | ||||
F-26
Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001
In Germany, the Company had revenues from external customers of $857,540 for 2003 and $25,267 for the period March 2002 through June 2002 (See Note 1) and segment assets of $918,930 and $635,665 at June 30, 2003 and 2002, respectively. All other revenue and assets are located in the United States. |
18. | Private Equity and Debt Offerings |
In May and June 2003, the Company sold convertible debentures with a face value of $2,725,300 to institutional investors and warrants to purchase 419,279 shares of common stock (Note 19). The debentures are convertible into shares of the Company’s common stock at an initial conversion price of $2.60 per share. The debentures are due three years from the date of issuance and accrue interest at the rate of 7% per annum, payable quarterly in arrears. At the option of the Company, the interest may be paid in either cash or additional shares of common stock. The warrants are exercisable for a period of five years from the date of issuance and 50% of the warrants are initially exercisable at $2.60 per share and the remaining 50% of the warrants are initially exercisable at $2.86 per share. The conversion price of the debentures and the exercise price of the warrants are subject to adjustment in the event the Company issues common stock or securities convertible into common stock at a price per share of common stock less than the conversion price or exercise price on the basis of a weighted average formula. In addition, the conversion price of the debentures and the exercise price of the warrants are subject to adjustment at any time as the result of any subdivision, stock split, combination of shares or recapitalization. At June 30, 2003, the convertible debentures are convertible into 1,048,192 shares of common stock. |
In October 2002, the Company sold convertible debentures with a face value of $3,700,000 to institutional investors and warrants to purchase 444,000 shares of common stock. The debentures are convertible into shares of the Company’s common stock at an initial conversion price of $2.50 per share. At June 30, 2003, the convertible debentures are convertible into 1,480,000 shares of common stock. The debentures are due three years from the date of issuance and accrue interest at the rate of 7% per annum, payable in quarterly in arrears. At the option of the Company, the interest may be paid in either cash or additional shares of common stock. The warrants are exercisable for a period of four years from the date of issuance and are initially exercisable at $2.50 per share. The conversion price of the debentures and the exercise price of the warrants are subject to adjustment in the event the Company issues common stock or securities convertible into common stock at a price per share of common stock less than the conversion price or exercise price on the basis of a weighted average formula. In addition, the conversion price of the debentures and the exercise price of the warrants are subject to adjustment at any time as the result of any subdivision, stock split, combination of shares or recapitalization. The Company has an option, but not a requirement, to sell another $2,470,000 of convertible debentures to the same investors provided the Company’s common stock maintains a trading price at or above $3.00 per share for the 15 trading days preceding an election to sell additional debentures. This option is in effect for 12 months following the effective date of the registration statement covering the shares underlying the debentures. In September 2003, the Company exercised its option and sold $2,470,000 of convertible debentures to the same group of investors (Note 22). |
F-27
Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001
Under generally accepted accounting principles, the Company is required to record the value of the beneficial conversion feature of these convertible debentures as debt discount. In addition, the value of the warrants using the Black Scholes method is also recorded as debt discount. The total debt discount recorded on the two convertible debenture sales during fiscal 2003 was approximately $3,598,000. This debt discount will be amortized and charged to interest expense over a period of 36 months. In the event the investors convert the debentures prior to the end of 36 months then generally accepted accounting principles require the Company to expense the unamortized balance of the debt discount in full. |
Through June 30, 2003, $489,000 has been recorded as noncash interest expense on the Company’s income statement relative to the amortization of debt discount on these convertible debentures. Going forward, the Company will incur a noncash interest expense of approximately $1,200,000 per year. |
In July 2002, the Company sold 660,077 shares of its common stock at $3.03 per share in a private transaction. The Company received gross proceeds of approximately $2.0 million before expenses. The Company also issued 132,015 common stock purchase warrants to the buyers which have an exercise price of $3.26 per share and have a five-year life. |
In 2001, the Company, in two separate transactions closed on the sale of $5,500,000 of its securities to two foreign institutions pursuant to Regulation S, promulgated under the Securities Act of 1933, as amended. In the transactions, the Company sold 5,500 of its Series C Convertible Preferred Stock, with a dividend rate of 4%, payable in either cash or Company Common Stock to the foreign institutions convertible at $4.845 per share and five year warrants to purchase 114,000 shares of Common Stock exercisable at $4.845 per share. The conversion price is not subject to resets or adjustments for changes in the market price of the Company’s common stock. The right of conversion incorporated into the Series C Preferred Stock constitutes a beneficial conversion feature which was determined to have a value of approximately $1,464,002. The beneficial conversion feature was amortized as a preferred stock dividend over a one-year period commencing July 1, 2001 using the effective interest method. The Company received net proceeds of approximately $5,200,000 from the transaction after paying commissions and expenses. The securities sold in this offering are restricted securities under the terms of Regulation S and may not be transferred or resold in the United States for a period of one year, except pursuant to registration under the Securities Act or an exemption thereunder. During the fiscal year ended June 30, 2003 and 2002, 400 Series C preferred shares and 1,500 Series C preferred shares were converted into 82,560 common stock shares and 309,598 common stock shares, respectively. |
F-28
Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001
During fiscal 2000, the Company closed three concurrent private offerings. In the first offering, the Company sold 740,000 units at an aggregate offering price of $740,000, each unit consisting of two shares of common stock and two Series B common stock purchase warrants (the “Series B Warrants”). The Series B Warrants entitle the holder to purchase one share of common stock at an exercise price of $1.375 per share during the offering period commencing on the date of issuance and terminating five years thereafter. The Series B warrants are redeemable at any time commencing one year after issuance at the option of the Company with not less than 30 nor more than 60 days written notice to the registered holders at a redemption price of $.05 per warrant provided; (i) The public sale of the shares of common stock issuable upon exercise of the Series B warrants are covered by a tentative registration statement; and (ii) During each of the immediately preceding 20 consecutive trading days ending within 10 days of the date of the notice of redemption, the closing bid price of the Company’s common stock is at least $3.25 per share. As of June 30, 2003, 400,000 Series B warrants are outstanding. |
In the second offering, the Company sold 50,000 shares of a newly created class of Series B convertible cumulative preferred stock (the “Series B Preferred Stock”). The Series B preferred stock was sold at $25.00 per share for an aggregate offering price of $1,250,000. Dividends on the Series B Preferred Stock are payable at the rate of 10% per annum, semi-annually in cash. Each share of Series B Preferred Stock is convertible into shares of the Company’s common stock or is converted into such number of shares of the common stock as shall equal $25.00 divided by the conversion price of $1.875 per share subject to adjustment under certain circumstances. Commencing three years after the closing, the conversion price shall be the lower of $1.875 per share or the average of the closing bid and asked price of the Company’s common stock for the 10 consecutive trading days immediately ending one trading day prior to the notice of the date of conversion; provided, however, that the holders are not entitled to convert more than 20% of the Series B preferred shares held by such holder on the third anniversary of the date of issuance per month. The Series B Preferred Stock is redeemable at the option of the Company at any time commencing one year after issuance or not less than 30 nor more than 60 days written notice at a redemption price of $25 per share plus accrued and unpaid dividends provided; (i) the public sale of the shares of common stock issuable upon conversion of the Series B preferred Stock (the “Conversion Shares”) are covered by an effective registration statement or are otherwise exempt from registration; and (ii) during the immediately preceding 20 consecutive trading days ending within 10 days of the date of the notice of redemption, the closing bid price of the Company’s Common Stock is not less than $3.75 per share. |
On October 30, 2002, the Company filed a Certificate of Amendment of the Certificate of Designations, Preferences and Rights and Number of Shares of Series B preferred stock with the Secretary of State of the State of Delaware. The amendment provides that the conversion rate applicable to the outstanding shares of Series B preferred stock will be fixed at $1.40. Previously, the conversion rate was equal to the lower of $1.875 and the average of the closing bid and asked prices of our common stock for the immediately preceding ten consecutive trading days ending one day prior to the notice of conversion; provided, however, that the conversion rate would not be below $0.875. Accordingly, the outstanding 28,000 shares of Series B preferred stock are presently convertible into an aggregate of 500,000 shares of the Company’s common stock. Prior to the amendment, the outstanding shares of Series B preferred stock were convertible into a maximum of 800,000 shares of the Company’s common stock. In consideration of obtaining the consent of the holder of the outstanding Series B preferred stock, the Company agreed to defer its ability to redeem those shares for a period of two years. |
F-29
Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001
As of June 30, 2003, 22,000 Series B preferred shares have been converted leaving 28,000 shares outstanding which are convertible in 500,000 common shares. |
Commencing October 2004, the Series B preferred stock is redeemable at the option of the Company without regard to the closing price of the Company’s common stock. |
As part of this equity offering in fiscal 2000 the Company also created a new subsidiary, Authentidate Inc. In connection with the above offerings, the purchasers were granted the right to purchase 20% of Authentidate for $100,000. The purchasers subsequently exercised this right, however, the Company repurchased this portion in fiscal year 2001 and now own approximately 98% of Authentidate (Note 1). In addition, the Purchasers were issued an aggregate of 999,999 Series C common stock purchase warrants (the “Series C Warrants”). The Series C Warrants were redeemable at any time commencing six months after issuance, on not less than 30 nor more than 60 days written notice to registered holders at a redemption price equal to $.05 per Warrant, provided (i) the public sale of the shares of common stock issuable upon exercise of the Series C Warrants (the “Warrant Shares”) are covered by an effective registration statement or are otherwise exempt from registration; and (ii) during each of the immediately preceding 20 consecutive trading days ending within 10 days of the date of the notice of redemption, the closing bid price of the Company’s common stock is not less than 120% of the current exercise price of the Series C Warrants. |
The Series C Warrants were also divided into three classes (333,333 warrants per class) to provide for varying exercise prices. The exercise price of the Series C Warrants is as follows: |
Class I – $1.50 per share of Common Stock, increasing (i) $.75 per share thirty days after the effective date of the registration statement covering the underlying shares (the “Registration Statement”); (ii) an additional $.75 per share seven months after the effective date of the Registration Statement; and (iii) an additional $.75 per share 13 months after the effective date of the Registration Statement, subject to adjustment for stock splits and corporate reorganizations. |
Class II – $1.50 per share of Common Stock, increasing (i) $.75 per share sixty days after the effective date of the Registration Statement; (ii) an additional $.75 per share seven months after the effective date of the Registration Statement; and (iii) an additional $.75 per share 13 months after the effective date of the Registration Statement, subject to adjustment for stock splits and corporate reorganizations. |
Class III – $1.50 per share of Common Stock, increasing (i) $.75 per share ninety days after the effective date of the Registration Statement; (ii) an additional $.75 per share seven months after the effective date of the Registration Statement; and (iii) an additional $.75 per share 13 months after the effective date of the Registration Statement, subject to adjustment for stock splits and corporate reorganizations. |
All of the Series C warrants had been exercised as of June 30, 2002. |
The Company received gross proceeds of approximately $2,100,000, approximately $1,900,000 after expenses. The Company utilized the proceeds of the three offerings as follows: approximately $600,000 was utilized to repay a portion of the Company’s line of credit; approximately $160,000 was utilized to make a past due interest payment on the Company’s outstanding 8% convertible notes, and the remainder was reserved for working capital. As of June 30, 2003, the 3,600 Series C preferred shares outstanding are convertible into 743,034 shares of common stock. |
F-30
Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001
19. | Related Party Transactions |
The Company entered into certain loan and security arrangements involving Mr. John T. Botti, our Chairman and Chief Executive Officer, principally relating to certain obligations to financial institutions collateralized by Mr. Botti’s stock in AHC. The Company initially established these arrangements in 2001, and agreed to certain modifications in February 2002, as described below. |
In January 2001, the Company made a loan of $317,000 to Mr. Botti so as to enable him to avoid a margin call on the shares of AHC common stock owned by him that were held in a brokerage account as the Board of Directors believed that failing to do so would have a material adverse impact on the market price of its stock (the “2001 Loan”). The 2001 Loan was collateralized by a lien on all of the shares of AHC owned by Mr. Botti, as well as shares issuable to Mr. Botti upon the exercise of stock options granted to him. On February 14, 2002, the Company agreed to loan an additional amount of $203,159 to Mr. Botti, which loan was also collateralized by a lien on all of shares of AHC owned by Mr. Botti or issuable to him (the “2002 Loan”). The 2001 Loan bore interest at the rate of 9% per annum. The 2002 Loan bore interest at the rate of 6% per annum. These loans were paid in full in June 2003 as the result of Mr. Bolt selling his 100 shares of Series A preferred stock to the Company for $850,000. The Series A preferred stock had been appraised at $1,100,000 by an independent nationally recognized appraisal and valuation firm. |
On May 29, 2003, the Company completed the sale of a private financing in the amount of $2,725,300 of securities to certain investors pursuant to Section 4(2) of the Securities Act of 1933, as amended and Regulation D, promulgated thereunder (Note 18). In the transaction, the Company sold $2,725,300 of convertible debentures and warrants to purchase an aggregate of 419,279 shares of common stock. A non-executive member of our Board of Directors participated in this financing and purchased $250,000 aggregate principal amount of convertible debentures and received 38,462 common stock purchase warrants. Further, an entity affiliated with a non-executive member of our Board of Directors, purchased $250,000 aggregate principal amount of convertible debentures and received 38,462 common stock purchase warrants in this financing. In addition, an entity that is currently a beneficial owner of in excess of 5% of our common stock participated in this financing, purchasing $250,000 aggregate principal amount of convertible debentures and receiving 38,462 common stock purchase warrants purchased. The convertible debentures, which are payable in full in May 2006, bear interest at 7% annum, payable quarterly in arrears. |
20. | Private Financing |
In February 2002, the Company offered the holders of its Series B common stock warrants the opportunity to receive new warrants upon the exercise of the Series B warrants for cash. The exercise price of these warrants was $1.375 per common stock warrant. The warrant holders would receive a new warrant exercisable at $2.00 per common stock warrant, which was slightly above the market price of the Company’s common stock on February 19, 2002, the date the Board approved the transaction. 1,080,000 warrants were exercised and the Company received $1,485,000 in cash, in addition 1,080,000 new warrants were issued. The new warrants expire October 1, 2004 and have no registration rights. |
F-31
Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001
21. | Interest/Other Income and Interest Expense |
Interest and other income at June 30 consist of: | |
2003 | 2002 | 2001 | ||||||||
Interest income, from financial institutions | $ | 76,606 | $ | 140,393 | $ | 381,990 | ||||
Proceeds from “9/11 Fund” | 163,465 | — | — | |||||||
Proceeds from insurance company related to 9/11 attack | 275,489 | — | — | |||||||
Miscellaneous income | 56,921 | 39,967 | 18,006 | |||||||
Total interest and other income | $ | 572,481 | $ | 180,360 | $ | 399,996 | ||||
Interest expense at June 30 consists of: | |
2003 | 2002 | 2001 | ||||||||
Interest paid to financial institutions | $ | 211,573 | $ | 124,824 | $ | 124,816 | ||||
Interest paid in stock | 143,666 | — | — | |||||||
Accrued non-cash interest related to discount on convertible debt | 489,414 | — | — | |||||||
Interest paid on convertible debt | 27,203 | — | — | |||||||
Total interest expense | $ | 871,856 | $ | 124,824 | $ | 124,816 | ||||
22. | Subsequent Events |
On September 12, 2003, we completed the sale of $2,470,000 of convertible debentures which mature in September 2006 and bear interest at 7% payable quarterly in cash or stock at the Company’s option. Included in the sale were warrants to purchase an aggregate of 247,000 shares, having an exercise price of $3.00 per share and expire in four years. The portion of the sale price allocated to the fair value of the warrants (approximately $800,000) and the beneficial conversion feature value (approximately $1,500,000) will be recorded as a debt discount and amortized as interest expense over the term of the debt. In addition to this financing, on September 22, 2003, the Company sold 166,667 shares of common stock and warrants to purchase 50,000 shares of Company common stock to an investor who participated in the May 2003 financing. The shares were sold for $3.00 per share and the investor agreed to a one- year lock-up during which he will be unable to sell or otherwise transfer the securities purchased in this sale. 50,000 warrants were also issued to this investor which have an exercise price of $3.00 and expire in four years. The underlying shares of these warrants are also subject to a one-year lock-up. The Company also issued five year warrants to purchase an aggregate of 59,400 shares of Company common stock to certain consultants for services rendered in connection with these transactions which are exercisable at $3.00 per share. The consultants also received a cash fee equal to 6% of the gross proceeds that the Company received. |
F-32
Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001
23. | Quarterly Data Financial (Unaudited) |
First | Second | Third | Fourth | ||||||||||
Quarter | Quarter | Quarter | Quarter | ||||||||||
Fiscal year ended June 30, 2003 | |||||||||||||
Net sales | $ | 5,464,576 | $ | 5,920,575 | $ | 8,105,870 | $ | 5,795,450 | |||||
Gross profit | 1,299,933 | 1,773,383 | 1,453,173 | 1,590,146 | |||||||||
Net loss | (1,994,866 | ) | (1,953,555 | ) | (3,009,758 | ) | (2,881,130 | ) | |||||
Loss per share | (.10 | ) | (.10 | ) | (.15 | ) | (.14 | ) | |||||
Fiscal year ended June 30, 2002 | |||||||||||||
Net sales | $ | 3,263,503 | $ | 4,131,286 | $ | 3,592,159 | $ | 5,655,956 | |||||
Gross profit | 972,142 | 1,191,812 | 1,087,126 | 1,301,289 | |||||||||
Net loss | (2,608,970 | ) | (2,222,955 | ) | (2,533,384 | ) | (2,586,093 | ) | |||||
Loss per share | (.19 | ) | (.16 | ) | (.18 | ) | (.16) |
F-33