Aeon Global Health Corp. - Quarter Report: 2004 September (Form 10-Q)

     We also issued warrants to purchase an aggregate of 49,400 shares of common stock to certain consultants for services rendered in connection with this transaction which are exercisable at $3.00 per share. The consultants also received a cash fee equal to 6% of the gross proceeds we received.

     Further, on September 22, 2003, we completed the sale of 166,667 shares of common stock to an additional accredited investor pursuant to Section 4(2) of the Securities Act of 1933, as amended, and Regulation D, promulgated thereunder for $500,000. We have been applying these proceeds to working capital and general corporate purposes. In addition, we also issued warrants to purchase an aggregate of 50,000 shares of common stock to the investor in this transaction. The per share purchase price of the common stock and the per share exercise price of the warrants is $3.00. The investor also agreed to a twelve-month “lock-up” provision restricting the resale of the securities. We also issued warrants to purchase an aggregate of 10,000 shares of our common stock to a consultant for services rendered in connection with this transaction which are exercisable at $3.00 per share. The consultants also received a cash fee equal to 6% of the gross proceeds we received.

     In February 2004, we completed private offerings of our common stock to certain accredited investors pursuant to Section 4(2) of the Securities Act of 1933, as amended and Regulation D, promulgated thereunder. We sold a total of 5,360,370 common shares at a price of $13.75 per share and realized gross proceeds of $73,705,000. After payment of offering expenses and broker commissions we realized approximately $69.1 million in net proceeds. We will use the proceeds to strengthen our balance sheet, develop a back-up data center for Authentidate Inc. as well as for sales and marketing activities and general corporate purposes.

     The securities sold in each of the foregoing transactions were restricted securities under the terms of Regulation D and may not be transferred or resold for a period of one year, except pursuant to registration under the Securities Act or an exemption thereunder. Pursuant to registration rights agreements entered into with the investors in these financings, registration statements were filed with and declared effective by the Securities and Exchange Commission registering the shares of common stock sold in or issuable pursuant to these transactions.

     Other Matters

     The events and contingencies described below have or may have impacted our liquidity and capital resources.

     During the quarter ended December 31, 2003, we exercised our right to require the holders of an aggregate amount of $8,895,300 of convertible debentures to convert the entire outstanding principal amount of their debentures into shares of our common stock. The conversion of these debentures has resulted in our issuance of an aggregate amount of 3,351,527 shares of our common stock to the holders of the debentures. The specific debentures subject to this conversion requirement are an aggregate principal amount of $3,700,000 of convertible debentures issued in October 2002, an aggregate principal amount of $2,725,300 of convertible debentures issued in May 2003 and an aggregate principal amount of $2,470,000 of convertible debentures issued in September 2003. We expensed the debt discount as interest expense related to these debenture issues during the quarter ended December 31, 2003. During the year ended June 30, 2004 and prior to the conversions, we recognized approximately $300,000 of amortization expense related to the beneficial conversion feature and debt discount. During the year ended June 30, 2004, upon conversion, we expensed the entire balance of unamortized beneficial conversion feature and debt discount and charged approximately $5.1 million to interest expense, all of which is a non cash interest charge. In addition, we expensed all unamortized deferred financing costs related to these three debenture issues during the year ended June 30, 2004, in the amount of approximately $500,000 as interest expense. We will save approximately $623,000 in interest payments annually as a result of these conversions.

     Presently, 28,000 shares of our Series B Preferred Stock, originally issued in a private financing in October 1999, remain outstanding. As of October 1, 2004, our right to redeem the outstanding 28,000 shares of Series B Preferred Stock is vested. Accordingly, we have the right to repurchase such shares at a redemption price equal to $25.00 per share, plus accrued and unpaid dividends. The holder, however, has the right to convert these shares of preferred stock into an aggregate of 500,000 shares of our common stock at a conversion rate of $1.40. In the event we elect to redeem these securities, the holder will be able to exercise its conversion right subsequent to the date that we issue a notice of redemption but prior to the deemed redemption date as would be set forth in such notice.

     We are the defendant in a third party complaint filed by Shore Venture Group, LLC 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.

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     We have also been advised of a claim by Shore Venture Group concerning additional shares of the common stock of our subsidiary, Authentidate, Inc. and one of our patent applications. We are continuing to conduct settlement negotiations with Shore Venture in an effort to resolve all claims between the parties. If the settlement results in our purchase of Shore Venture’s interest in Authentidate in excess of the then fair value of the Authentidate shares, such excess may be recorded as a charge to operations. 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.

Contractual Commitments          

     Following is a summary of the contractual commitments associated with our debt and lease obligations, as well as our purchase commitments as of September 30, 2004:

		Total			Less than 1 year			1-3 years		3-5 years			More than 5 years
Long term debt obligations	$	138,000		$	90,000		$	48,000
Operating leases		861,686			463,448			398,238
Capital leases (1)		78,361			50,549			27,812
Purchase commitments
Total	$	1,078,047		$	603,997		$	474,050		—			—

(1) Capital lease payments exclude interest of $8,608

Off-Balance Sheet Arrangements

     We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating parts of our business that are not consolidated into our financial statements. We do not have any arrangements or relationships with entities that are not consolidated into our financial statements that are reasonably likely to materially affect our liquidity or the availability of our capital resources. We have entered into various agreements by which we may be obligated to indemnify the other party with respect to certain matters. Generally, these indemnification provisions are included in contracts arising in the normal course of business under which we customarily agree to hold the indemnified party harmless against losses arising from a breach of representations related to such matters as intellectual property rights. Payments by us under such indemnification clauses are generally conditioned on the other party making a claim. Such claims are generally subject to challenge by us and to dispute resolution procedures specified in the particular contract. Further, our obligations under these arrangements may be limited in terms of time and/or amount and, in some instances, we may have recourse against third parties for certain payments made by us. It is not possible to predict the maximum potential amount of future payments under these indemnification agreements due to the conditional nature of our obligations and the unique facts of each particular agreement. Historically, the Company has not made any payments under these agreements that have been material individually or in the aggregate. As of September 30, 2004, we were not aware of any obligations under such indemnification agreements that would require material payments.

Effects of Inflation and Changing Prices

     The impact of general inflation on our operations has not been significant to date and we believe inflation will continue to have an insignificant impact on us. However, price deflation in the major categories of components we purchase for DocStar has been substantial and is anticipated to continue through fiscal 2005. Typically, new components such as new generations of microprocessors and new optical disk drive technologies etc. are introduced at premium prices, by its vendors. During this period, we earn lower margins on our products. As the life cycle progresses competitive pressures could force vendor prices down and thus improve our profit margins. We do not believe that competitive pressures will require us to lower our DocStar selling price. Because much of DJS’s business is service-related, price deflation has less of an impact on DJS’s profits. We do not believe that the impact of inflation will have a significant impact on our Authentidate business lines.

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Present Accounting Standards Not Yet Adopted

          There have been no new accounting standards issued during fiscal year 2004 or 2005 to date that have required adoption by the Company.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     We have approximately $70 million invested in high quality, short term investments as of September 30, 2004. We do not believe that any of our financial instruments have significant risk associated with market sensitivity. We are not exposed to significant financial market risks from changes in foreign currency exchange rates and are only minimally impacted by changes in interest rates. However, in the future, we may enter into transactions denominated in non-U.S. currencies or increase the level of our borrowings, which could increase our exposure to these market risks. We have not used, and currently do not contemplate using, any derivative financial instruments.                              

Interest Rate Risk

     At any time, fluctuations in interest rates could affect interest earnings on our cash and cash equivalents. We believe that the effect, if any, of reasonably possible near term changes in interest rates on our financial position, results of operations, and cash flows would not be material. Currently, we do not hedge these interest rate exposures. The primary objective of our investment activities is to preserve capital. We have not used derivative financial instruments in our investment portfolio.

     At September 30, 2004, our cash and cash equivalents totaled $71,537,320, most of which was invested in asset backed short term investments and money market accounts. The remainder of our cash was in non-interest bearing checking accounts used to pay operating expenses.          

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

     Our management, under the supervision and with the participation of our chief executive officer and chief financial officer, conducted an evaluation of our “disclosure controls and procedures” (as defined in Securities Exchange Act of 1934 (the "Exchange Act") Rules 13a-14(c)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on their evaluation, the chief executive officer and chief financial officer have concluded that our disclosure controls and procedures are effective to ensure that all material information required to be filed in this Quarterly Report on Form 10-Q has been made known to them in a timely fashion.

Changes in Internal Controls Over Financial Reporting

     We are currently undergoing a comprehensive effort in preparation for compliance with Section 404 of the Sarbanes-Oxley Act of 2002. This effort includes the documentation, testing and review of our internal controls under the direction of senior management. During the course of these activities, senior management has not identified any material weakness but management has identified certain internal control issues which we believe need to be improved. As a result, we have made improvements to our internal controls and will continue to do so. These improvements include further formalization of policies and procedures, improved segregation of duties, and the addition of an internal auditor. No changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act), occurred during the fiscal quarter ended September 30, 2004 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II Other Information
Item 1. Legal Proceedings:

     As described in our report on Form 10-K for the fiscal year ended June 30, 2004, we are involved in the following pending and threatened legal proceedings. We are the defendant in a third party complaint filed by Shore Venture Group, LLC (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.

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     We have also been advised of a claim by Shore Venture concerning additional shares of the common stock of our subsidiary, Authentidate, Inc. and one of our patent applications. The Company is continuing to conduct settlement negotiations with Shore Venture in an effort to resolve all claims between the parties. If the settlement results in the purchase of Shore Venture’s interest in Authentidate in excess of the then fair value of the Authentidate shares, such excess may be recorded as a charge to operations. Based on the settlement negotiations held between the parties to date, management believes that the resolution of all of Shore Venture’s claims will not have a material adverse effect on the Company’s financial condition.

     We are engaged in no other litigation which would be anticipated to have a material adverse effect on our financial condition, results of operations or cash flows.

Item 2. Changes in Securities

(a)      Sales of Unregistered Securities.

     Effective October 4, 2004 we issued an aggregate of 250,000 common stock purchase warrants to a consultant in partial consideration for services to be provided by such person under a consulting agreement entered into with such consultant as of such date. The warrants are exercisable as follows:

Warrant No.		Number of Shares		Exercise Price			Exercisable as of		Expiration Date
1		100,000		$	15.00		October 4, 2004		October 4, 2008
2		30,000		$	16.00		November 4, 2004		October 4, 2008
3		30,000		$	17.00		December 4, 2004		October 4, 2008
4		30,000		$	18.00		January 4, 2005		October 4, 2008
5		30,000		$	19.00		February 4, 2005		October 4, 2008
6		30,000		$	20.00		March 4, 2005		October 4, 2008

     The holder was also granted demand and piggyback registration rights for the shares of common stock issuable upon exercise of the warrants. The issuance of these warrants was exempt from registration under the Securities Act of 1933, as amended, under Section 4(2) thereof.

(b)      Not applicable.

(c)      Repurchase of Equity Securities.

     We did not repurchase any of our equity securities during the fiscal quarter ended September 30, 2004.

Item 3. Defaults Upon Senior Securities:

None

Item 4. Submission of Matters to a Vote of Securities Holders:

None     

Item 5. Other Information:

     Effective July 8, 2004, Mr. John J. Waters joined our Board of Directors. Subsequently, Mr. Waters was appointed to serve as our Executive Vice President-Chief Administrative Officer.   On September 20, 2004, we entered into a two year employment agreement with Mr. Waters, regarding his service as our Executive Vice President – Chief Administrative Officer and a director. The Agreement is effective as of August 6, 2004. The terms and conditions of Mr. Waters’ employment agreement were described in a Current Report on Form 8-K filed on September 23, 2004.

     On October 27, 2004, we issued a press release announcing that Mr. Surendra Pai has been named as our President and Chief Executive Officer, effective November 15, 2004. John T. Botti, who has served as our Chief Executive Officer, President and Chairman will remain as Chairman. Effective October 27, 2004, Mr. Pai was also appointed to our Board of Directors. We entered into a two-year employment agreement with Mr. Pai, dated October 27, 2004 and effective November 15, 2004, pursuant to which Mr. Pai will serve as our Chief Executive Officer and President. The terms and conditions of Mr. Pai’s employment agreement were disclosed in our Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 1, 2004.

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     On October 27, 2004, our Board of Directors also determined to change our fiscal year from December 31 back to June 30 commencing with the fiscal year ending June 30, 2005. In light of the fact that we have historically reported our financial statements on the basis of a June 30 fiscal year and filed an Annual Report on Form 10-K for the fiscal year ended June 30, 2004 on September 13, 2004, we will continue to file all periodic reports under the Securities and Exchange Act of 1934, as amended, on the basis of a June 30 fiscal year end.

     Pursuant to Section 10A(i)(2) of the Securities Exchange Act of 1934, we are responsible for listing the non-audit services approved in the first quarter of 2004 by our Audit Committee to be performed by PricewaterhouseCoopers LLP, our external auditor. Each of the permitted non-audit services has been pre-approved by the Audit Committee or the Audit Committee’s Chairman pursuant to delegated authority by the Audit Committee. During the first quarter of 2004, the Audit Committee pre-approved the following non-audit services anticipated to be performed by PricewaterhouseCoopers LLP: tax consulting in connection with certain corporate initiatives, including structuring a joint venture and in determining state and local tax treatments for revenues derived from electronic postmark and CareCert transactions.

Item 6. Exhibits:

(a) Exhibits

The exhibits designated with an asterisk (*) are filed herewith. All other exhibits have been previously filed with the Commission and, pursuant 17 C.F.R. § 230.411, are incorporated by reference to the document referenced in brackets following the description of such exhibits.

	Exhibit No.
	10.1	Employment Agreement between Authentidate Holding Corp. and John J. Waters (Filed as Exhibit 10.1 to Current Report on Form 8-K dated September 23, 2004)
	10.2	Employment Agreement between Authentidate Holding Corp. and Surendra Pai (Filed as Exhibit 10.1 to Current Report on Form 8-K dated October 27, 2004)
	*31.1	Certificate of Chief Executive Officer
	*31.2	Certificate of Chief Financial Officer
	*32.1	Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SAFE HARBOR STATEMENT

     Certain statements in this Form 10-Q, including information set forth under Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the Act). We desire to avail ourself of certain “safe harbor” provisions of the Act and is therefore including this special note to enable us to do so. Forward-looking statements in this Form 10-Q or hereafter included in other publicly available documents filed with the Securities and Exchange Commission, reports to our stockholders and other publicly available statements issued or released by us involving known and unknown risks, uncertainties and other factors which could cause our actual results, performance (financial or operating) or achievements to differ from the future results, performance (financial or operating) or achievements expressed or implied by such forward-looking statements. Such future results are based upon our management’s best estimates based upon current conditions and the most recent results of operations. These risks include, but are not limited to risks associated with the market acceptance of the DocStar, Authentidate and related product lines, competition, pricing, technological changes, technological implementation of the Authentidate business plan and other risks as discussed in our filings with the Securities and Exchange Commission, in particular our Annual Report on Form 10-K for the year ended June 30, 2004 and registration statements we have filed and which have been declared effective by the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended, all of which risk factors could adversely affect our business and the accuracy of the forward-looking statements contained herein.                    

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     SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	AUTHENTIDATE HOLDING CORP.
November 4, 2004	/s/ John T. Botti
DATE	JOHN T. BOTTI
	PRESIDENT & CHIEF EXECUTIVE OFFICER
	/s/ Dennis H. Bunt
	DENNIS H. BUNT
	CHIEF FINANCIAL OFFICER

 

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