Aeon Global Health Corp. - Quarter Report: 2018 March (Form 10-Q)

 

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2018

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______ to _______

 

Commission File Number: 000-20190

 

AEON GLOBAL HEALTH CORP.

(Exact name of registrant as specified in its charter)

 

Delaware	14-1673067
(State or other jurisdiction	( I.R.S. Employer
of incorporation or organization)	Identification No.)
2225 Centennial Drive	30504
Gainesville, GA 30504	(zip code)
(Address of principal executive offices)

 

1-888-661-0225 (Registrant's telephone number, including area code)

 

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 whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☐ (Do not check if a smaller reporting company)	Smaller reporting company ☒
	Emerging growth company ☐

                                              

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

As of April 30, 2018, there were 7,249,370 shares of common stock, $0.001 par value per share, outstanding.

 

 

 

		Page
PART I FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS
	Condensed Consolidated Balance Sheets at March 31, 2018 (Unaudited) and June 30, 2017	2
	Condensed Consolidated Statements of Income (unaudited)	3
	Condensed Consolidated Statements of Cash Flows (unaudited)	4
	Notes to Unaudited Condensed Consolidated Financial Statements (unaudited)	5
ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	22
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	32
ITEM 4.	CONTROLS AND PROCEDURES	32
PART II OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	34
ITEM 1A.	RISK FACTORS	34
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	37
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	37
ITEM 4.	MINE SAFETY DISCLOSURES	37
ITEM 5.	OTHER INFORMATION	37
ITEM 6.	EXHIBITS	38
SIGNATURES		39

 

 

 

		March 31,				June 30,
		2018				2017
		(Unaudited)
Assets
Current assets
Cash and cash equivalents		$	469,727			$	1,121,763
Restricted cash			-				120,695
Accounts receivable, net			2,665,907				1,020,988
Inventory, net			396,477				347,750
Prepaid expenses and other current assets			92,794				58,711
Total current assets			3,624,905				2,669,907
Property and equipment, net			1,575,192				2,203,543
Other assets
Security deposits			10,211				10,211
Deferred tax asset			7,357,436				11,848,017
Total assets		$	12,567,744			$	16,731,678
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable		$	1,360,633			$	2,177,722
Accrued expenses			2,144,413				2,168,090
Accrued commissions			602,857				427,627
Accrued dividends			902,076				644,979
Deferred rent			184,808				141,833
Related party notes payable and related party accrued interest			3,171,660				2,545,199
Derivative liabilities			1,471,018				551,040
Total current liabilities			9,837,465				8,656,490
Deferred rent			112,500				45,000
Total liabilities			9,949,965				8,701,490
Commitments and contingencies
Shareholders’ equity
Preferred stock, $.10 par value; 5,000,000 shares authorized, Series D, 605,000 shares and Series E 25,000 shares issued and outstanding at March 31, 2018 , and June 30, 2017, respectively			63,000				63,000
Common stock, $.001 par value; 190,000,000 shares authorized, 7,249,370 shares issued and outstanding on March 31, 2018, and June 30, 2017 , respectively			25,579				8,938
Additional paid-in capital			44,958,427				44,307,479
(Accumulated deficit)			(42,429,227	)			(36,349,229	)
Total shareholders’ equity			2,617,779				8,030,188
Total liabilities and shareholders’ equity		$	12,567,744			$	16,731,678

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		Three Months Ended								Nine Months Ended
		March 31,								March 31,
		(Unaudited)								(Unaudited)
		2018				2017				2018				2017
						(Restated)								(Restated)
Net revenues
Fees for services		$	3,811,444			$	5,212,634			$	12,199,868			$	15,469,366
Hosted software services			239,535				314,812				731,085				973,417
Telehealth products and services			4,600				4,364				13,900				25,916
Total net revenues			4,055,579				5,531,810				12,944,853				16,468,699
Operating expenses
Cost of revenues			958,113				897,590				2,975,231				2,855,754
Write down of inventory			-				-				-				237,674
Selling, general and administrative			3,221,658				3,748,403				9,426,754				11,624,267
Depreciation and amortization			204,931				393,510				628,351				1,196,435
Total operating expenses			4,384,702				5,039,503				13,030,336				15,914,130
Operating income (loss)			(329,123	)			492,307				(85,483)				554,569
Other income (expense)
Interest			(44,614	)			(73,017	)			(108,976	)			(443,785	)
Change in fair value of derivative liabilities			(1,285,842)				256,806				(919,978	)			392,407
Loss on extinguishment of debt			-				(258,037	)			-				(258,037	)
Other			(49,831	)			-				(212,125	)			-
			(1,380,287	)			(74,248	)			(1,241,079	)			(309,415	)
Income (loss) before provision for income taxes			(1,709,410	)			418,059				(1,326,562	)			245,154
Provision for income taxes			(3,102	)			-				(4,496,341	)			-
Net income (loss)		$	(1,712,512	)		$	418,059			$	(5,822,903	)		$	245,154
Less: preferred dividends		$	(85,699	)		$	(74,863	)		$	(257,095	)		$	(276,111	)
Net income (loss) available to common shareholders		$	(1,798,211	)		$	343,196			$	(6,079,998	)		$	(30,957	)
Income (loss) per share:
Basic income (loss) per common share		$	(0.25	)		$	0.05			$	(0.84	)		$	0.00
Diluted income (loss) per common share		$	(0.25	)		$	0.04			$	(0.84	)		$	0.00
Weighted average number of common shares outstanding:
Basic			7,249,370				7,168,329				7,249,370				6,312,344
Diluted			7,249,370				8,765,657				7,249,370				6,312,344

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		Nine Months Ended
		March 31,
		(Unaudited)
		2018				2017
						(Restated)
Cash flows from operating activities
Net income (loss)		$	(5,822,903	)		$	245,154
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
Impairment of deferred tax asset			4,490,581				-
Change in fair value of derivative liabilities			919,978				(392,407	)
Write off of inventory			-				237,674
Loss on debt extinguishment			-				258,037
Depreciation and amortization			628,351				1,196,435
Share based compensation			650,948				186,753
Changes in assets and liabilities
Restricted cash			120,695				-
Accounts receivable			(1,644,919	)			410,655
Inventory			(48,727	)			(294,378	)
Prepaid expenses and other current assets			(34,083	)			46,011
Accounts payable			(559,992	)			(1,454,907	)
Accrued expenses			(25,170)				(59,229	)
Accrued commissions			175,230				182,054
Deferred rent			(2,025	)			8,629
Net cash provided by (used in) operating activities			(1,152,036	)			570,481
Cash flows from investing activities
Purchases of property and equipment			-				(22,103	)
Net cash (used in) investing activities			-				(22,103	)
Cash flows from financing activities
Proceeds from note payable - related party			500,000				250,000
Repayments of notes payable			-				(1,057,811	)
Net cash provided by (used in) financing activities			500,000				(807,811	)
Net decrease in cash			(652,036	)			(259,433	)
Cash beginning of period			1,121,763				1,414,706
Cash end of period		$	469,727			$	1,155,273
Supplemental disclosure of cash paid for:
Interest paid		$	-			$	-
Income taxes paid		$	108,998			$	-
Non-cash investing and financing activities
Non-cash preferred dividends		$	257,097			$	276,111
Earn-out common dividends paid in stock		$	-			$	5,472,598
Conversion of accrued interest to notes payable		$	4,452			$	375,199
Derivative liability resulting from issuance of convertible notes		$	792,724			$	328,422

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1.	Description of Business, Reverse Merger and Liquidity

 

 

Business

 

AEON Global Health Corp. ("AGHC" or the "Company") and its subsidiaries primarily provides an array of clinical testing services to health care professionals through its wholly-owned subsidiary, Peachstate Health Management, LLC d/b/a AEON Clinical Laboratories ("AEON"). AGHC also continues to provide its legacy secure web-based revenue cycle management applications and telehealth products and services that enable healthcare organizations to increase revenues, improve productivity, reduce costs, coordinate care for patients and enhance related administrative and clinical workflows and compliance with regulatory requirements. Web-based services are delivered as Software as a Service (SaaS) to customers interfacing seamlessly with billing, information and records management systems.

 

Reverse Merger

 

On January 27, 2016, AEON merged into a newly formed acquisition subsidiary of AGHC (formerly, Authentidate Holding Corp.) pursuant to a definitive Amended and Restated Agreement and Plan of Merger dated January 26, 2016, as amended on May 31, 2016 and December 15, 2016 (collectively the "Merger Agreement") (the "AEON Acquisition"). The merger certificate was filed with the Secretary of State of Georgia on January 27, 2016. AEON survived the merger as a wholly-owned subsidiary of AGHC (collectively the "Company"). AEON contracts with health care professionals to provide urine and oral fluid testing to patients. The four primary tests provided by AEON are Medical Toxicology, Pharmacogenomics, Cancer Genetic Testing and Molecular Biology. Following the completion of the reverse merger, the business conducted by AEON became primarily the business conducted by the Company.

 

Under accounting principles generally accepted in the United States of America ("U.S. GAAP"), the merger is treated as a "reverse merger" under the purchase method of accounting. The condensed consolidated financial statements reflect the historical results of AEON prior to the completion of the reverse merger since it was determined to be the accounting acquirer, and do not include historical results of the Company prior to the completion of the merger.

 

Going Concern

 

As of the filing date of this Quarterly Report on Form 10-Q, there is outstanding an aggregate principal amount of $3,049,651 of senior secured convertible notes with a maturity date of March 20, 2019 and a secured note subordinated to the interests of the existing senior lenders in the principal amount of $180,000 with a maturity date of June 15, 2018 and is included in accrued expenses on the condensed consolidated balance sheet. We expect existing resources, revenues generated from operations, and proceeds received from other transactions we are considering to satisfy working capital requirements for at least the next twelve months; however, no assurances can be given, that we will be able to generate sufficient cash flow from operations or complete other transactions to satisfy our other obligations. The accompanying condensed consolidated financial statements do not include any adjustments to the recoverability and classification of assets carrying amounts or the amounts and classifications of liabilities that might result from the outcome of these uncertainties. Accordingly, the Company needs to raise additional capital and are exploring potential transactions to improve our capital position. Unless we can increase revenues substantially or generate additional capital from other transactions, our current cash resources will only satisfy our working capital needs for a limited period of time.

 

The Company's capital requirements have been and will continue to be significant and it is expending significant amounts of capital to develop, promote and market its services. The Company's available cash and cash equivalents as of March 31, 2018 totaled approximately $470,000 and the Company's working capital deficit was approximately $6,217,000. Nevertheless, our available cash and cash equivalents as of the filing date of this Quarterly Report on Form 10-Q is approximately $1,011,000 and our estimated monthly cash requirement is approximately $1,200,000.

 

The Company does not have a bank line of credit or other fixed source of capital reserves. We are exploring potential transactions to improve our capital position to ensure we can meet our financing and working capital requirements. We would expect to raise additional funds through obtaining a credit facility from an institutional lender or undertaking private debt financings. Raising additional funds by issuing equity or convertible debt securities may cause our stockholders to experience substantial dilution in their ownership interests and new investors may have rights superior to the rights of our other stockholders. Raising additional funds through debt financing or preferred stock, if available, may involve covenants that restrict our business activities and options and such additional securities may have powers, designations, preferences or rights senior to our currently outstanding securities. We may also enter into financing transactions which involve the granting of liens on our assets or which grant preferences of payment from our revenue streams, all of which could adversely impact our ability to rely on our revenue from operations to support our ongoing operating costs. Alternatively, we may seek to obtain new financing from existing security holders, which may include reducing the exercise or conversion prices of outstanding securities, or the issuance of additional equity securities. Currently, we do not have any definitive agreements with any third-parties for such transactions and there can be no assurance; however, that we will be successful in raising additional capital or securing financing when needed or on terms satisfactory to the company. If we are unable to raise additional capital when required, or on acceptable terms, we will need to reduce costs and operations substantially or potentially suspend operations, any of which would have a material adverse effect on our business, financial condition and results of operations.

 

 

Management has concluded that due to the conditions described above, there is substantial doubt about the entity's ability to continue as a going concern. We have evaluated the significance of the conditions in relation to our ability to meet our obligations and believe that our current cash balance will provide sufficient capital to continue operations through fiscal 2018. In addition to our efforts to improve our capital position through commercial operations and/or product partnering opportunities, we are considering capital raising alternatives, including credit lines from external financial sources. We cannot assure you that financing will be available on acceptable terms. If we are not successful in generating or raising additional capital, we will risk defaulting under the terms of our existing loans. Additionally, if additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities would result in dilution to our existing stockholders. Furthermore, despite our optimism regarding the future of the Company, even if the Company is adequately funded, there is no guarantee that any of our services will perform as hoped or that such services can be successfully commercialized.

 

 

 

2.	Summary of Significant Accounting Policies

 

Basis of Presentation

 

The Company's condensed consolidated financial statements have been prepared in accordance with U.S. GAAP and following the requirements of the Securities and Exchange Commission ("SEC") for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP can be condensed or omitted. These interim financial statements have been prepared on the same basis as the Company's annual financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair statement of the Company's financial information. These interim results are not necessarily indicative of the results to be expected for the year ending June 30, 2018 or any other interim period or for any other future year. These unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and the notes thereto for the year ended June 30, 2017, included in the Company's 2017 Annual Report on Form 10-K filed with the SEC.

 

The balance sheet as of June 30, 2017 has been derived from audited financial statements at that date but does not include all of the information required by U.S. GAAP for complete financial statements.

 

Principles of Consolidation

 

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

 The most sensitive accounting estimates affecting the financial statements are revenue recognition, the allowance for doubtful accounts, depreciation of long-lived assets, fair value of intangible assets and goodwill, amortization of intangible assets, income taxes and associated deferrals and valuation allowances, commitments and contingencies and measurement of derivative liabilities.

 

Accounts Receivable, Net

 

Accounts receivable represent customer obligations due under normal trade terms, net of allowance for doubtful accounts. The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based on known troubled accounts, historical experience and other currently available evidence. The allowance for doubtful accounts was approximately $1,090,000 and $923,000 as of March 31, 2018 and June 30, 2017, respectively.

 

Fair Value Measurements

 

The Company follows ASC 820-10, "Fair Value Measurements and Disclosures", of the FASB to measure the fair value of its financial statements and disclosures about fair value of its financial instruments. ASC 820-10 establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (U.S. GAAP), and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, ASC 820-10 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The three levels of fair value hierarchy defined by ASC 820-10 are described below:

 

	Level 1	-	Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
	Level 2	-	Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
	Level 3	-	Pricing inputs that are generally unobservable input and not corroborated by market data.

 

 

The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lower priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument. The Company's warrant liabilities and certain conversion features underlying the convertible debt are categorized as Level 3.

 

Revenue Recognition

 

The Company provides laboratory testing services, web-based hosted software services, telehealth products and post contract customer support services.

 

In accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") ASC-605 "Revenue Recognition", the Company recognizes revenues when there is a persuasive evidence of an arrangement, title and risk of loss have passed, product is shipped or services have been rendered, sales price is fixed or determinable and collection of the related receivable is reasonably assured. Billings for laboratory testing services are reimbursed by third-party payors net of allowances for differences between amounts billed and the cash receipts.

 

Revenue from laboratory testing services are recognized at the time test results are delivered, net of estimated contractual allowances. Third-party reimbursement revenue is estimated based on cash received over a 12-month period.

  

Revenue for hosted software services, telehealth products, and customer support services are recognized when persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed and collectability is reasonably assured. Multiple-element arrangements are assessed to determine whether they can be separated into more than one unit of accounting. A multiple-element arrangement is separated into more than one unit of accounting if all the following criteria are met: (i) the delivered item has value to the customer on a standalone basis; (ii) there is objective and reliable evidence of the fair value of the undelivered items in the arrangement; (iii) if the arrangement includes a general right of return relative to the delivered items; (iv) and delivery or performance of the undelivered item is considered probable and substantially in the Company's control. If these criteria are not met, then revenue is deferred until such criteria are met or until the period over which the last undelivered element is delivered, which is typically the life of the contract agreement. If these criteria are met, we allocate total revenue among the elements based on the sales price of each element when sold separately which is referred to as vendor specific objective evidence or VSOE.

 

Concentrations of Credit Risk

 

The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. Accounts are guaranteed by the Federal Deposit Insurance Corporation (FDIC) up to certain limits. At March 31, 2018 and June 30, 2017, the Company had approximately $223,000 and $871,000 in excess of FDIC-insured limits. The Company has not experienced any losses in such accounts.

 

At March 31, 2018, one customer had an accounts receivable balance of approximately $1,491,000. This customer had a minimal balance at June 30, 2017. This customer’s accounts receivable balance comprises 39% of gross accounts receivable at March 31, 2018.

 

Income Taxes

 

The Company accounts for income taxes under an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, the Company generally considers all expected future events other than enactments of changes in tax laws or rates. The effect on deferred tax assets and liabilities of a change in tax rates will be recognized as income or expense in the period that includes the enactment date. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.

 

Management considers the likelihood of changes by taxing authorities in its filed income tax returns and recognizes a liability for or discloses potential changes that management believes are more likely than not to occur upon examination by tax authorities. Management has not identified any uncertain tax positions that require recognition or disclosure in the accompanying consolidated financial statements.

 

Reclassification

 

Certain prior year amounts have been reclassified to conform to the current year presentation.

 

 

Recent Accounting Pronouncements

 

In May 2014, the FASB issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers" (Topic 606) ("ASU 2014-09"). This new accounting standard outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers. This standard supersedes existing revenue recognition requirements and eliminates most industry specific guidance from GAAP. The core principle of the revenue recognition standard is to require an entity to recognize as revenue the amount that reflects the consideration to which it expects to be entitled in exchange for goods or services as it transfers control to its customers. As a result of this standard, the amounts not reimbursed will now be considered an implicit price concession in determining net revenue as opposed to recording as bad debt expense or another selling, general or administrative expense. Accordingly, the Company will report uncollectible balances associated with customer responsibility as a reduction of the transaction price and a reduction in net revenues. In addition, the adoption of this new accounting standard will result in increased disclosure, including qualitative and quantitative disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company expects to adopt this ASU effective July 1, 2018.

 

In August 2014, the FASB issued ASU No. 2014-15, "Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern". The amendments in this update state that regarding preparing financial statements for each annual and interim reporting period, an entity's management should evaluate whether there are conditions or events that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued, when applicable). The amendments in this update are effective for the annual reporting period beginning after December 15, 2016 and for annual periods and interim periods thereafter. Early application is permitted. The Company has adopted ASU 2014-15 and has made the necessary disclosures in the "Going Concern" sections of this Quarterly Report on Form 10-Q.

 

In July 2015, the FASB issued ASU 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory". ASU 2015-11 requires inventory measured using any method other than last-in, first-out ("LIFO") or the retail inventory method to be subsequently measured at the lower of cost or net realizable value, rather than at the lower of cost or market. Under this ASU, subsequent measurement of inventory using the LIFO and retail inventory method is unchanged. ASU 2015-11 is effective prospectively for fiscal years, and for interim periods within those years, beginning after December 15, 2016. Early application is permitted. The Company has determined that the ASU has no material impact on its consolidated financial statements and related disclosures since it does not sell inventory on a stand-alone basis at net realizable value.

 

In February 2016, the FASB issued ASU No. 2016-02, "Leases", which establish a right-of-use (ROU) model that requires a lessee to record an ROU asset and lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classifications affecting the pattern of expense recognition in the income statement. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. ASU 2016-02 requires modified retrospective adoption for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The Company is currently evaluating the effect of adoption of this ASU on July 1, 2019.

 

In March 2016, the FASB issued ASU No. 2016-09, "Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting", which makes several modifications to the accounting for employee share-based payment transactions, including the requirement to recognize the income tax effects of awards that vest or settle as income tax expense. This guidance also clarifies the presentation of certain components of share-based awards in the statement of cash flows. This guidance is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those annual periods, and early adoption is permitted. The Company has adopted this standard with no material impact on the financial statements.

 

In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments," which clarifies how certain cash receipts and payments are to be presented in the statement of cash flows. The guidance is effective for the Company on July 1, 2018 and early adoption is permitted. The Company is currently evaluating the effect of adoption of this ASU on July 1, 2018.

 

In November 2016, the FASB issued an ASU 2016-18, "Restricted Cash", which clarifies the presentation and classification of restricted cash in the statement of cash flows. The ASU requires that amounts generally described as restricted cash and restricted cash equivalents be presented with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The ASU is effective for the Company in the first quarter of fiscal 2019 (July 1, 2018) with early adoption permitted and must be applied retrospectively to all periods presented. The Company is evaluating the impact this ASU will have on its consolidated financial statements and related disclosures with the fiscal year beginning July 1, 2018.

 

 

In May 2017, the FASB issued ASU 2017-09, "Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting", which amends the scope of modification accounting for share-based payment arrangements, provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. The ASU is effective for annual reporting periods, including interim periods within those annual reporting periods, beginning after December 15, 2017. The Company is evaluating the impact of this ASU and expects to adopt this ASU effective July 1, 2018.

 

In July 2017, the FASB issued ASU 2017-11, "Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815); Part I. Accounting for Certain Financial Instruments with Down Round Features and Part II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception", which states that when determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to the Company's own stock. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. The Company is evaluating the provisions of this ASU and plans to adopt this ASU effective July 1, 2019.

 

In December 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118, which is an application of ASC Topic 740, Income Taxes, in the reporting period that includes December 22, 2017, the date on which the Tax Cuts and Jobs Act (the "Act") was signed into law. The Act changes existing United States tax law and includes numerous provisions that will affect business. Staff Accounting Bulletin No. 118 implies that if a reasonable estimate can be made of the Act's effects on the Company's financial statements, the reasonable estimate should be reported in the period ending after December 22, 2017. The Company has implemented Staff Accounting Bulletin No. 118 is this Form 10-Q ended March 31, 2018 by revaluing its deferred tax asset for the lower tax rates.

 

 

3.	Restatement and Correction of Error

 

As previously reported, the Company has concluded that its results for the quarter ending  March 31, 2017 included errors resulting in the understatement of inventory and the understatement of certain accruals. The financial statements for the quarter have been restated and were presented in the Company's consolidated financial statements included in its Annual Report on Form 10-K for the fiscal year ended June 30, 2017. Management considered the impact to current and past financial statements under the SEC's authoritative guidance on materiality and determined that the error was material, and a restatement of the prior quarter financial statements was the most appropriate recognition of the adjustment so as not to mislead readers of the financial statements. The following sections detail the impact of the error on the previously issued unaudited consolidated financial statements for the prior quarter.

 

 

The following adjustments were made to the March 31, 2017 Restated Statements of Income (Unaudited):

 

 

 

The following adjustments were made to the March 31, 2017 Restated Statement of Cash Flows (Unaudited):

 

 

CONSOLIDATED STATEMENT OF CASH FLOWS

 

 

 

 

4.

Inventory

 

Inventory consists of the following:

 

 

Purchased components of approximately $31,000 and finished goods of $207,000 were written down in the nine months ended March 31, 2017 to net realizable value. No inventory was written down in the nine months ended March 31, 2018.

 

 

 

5.	Income Taxes

 

The Company's effective tax rate for the three and nine months ended March 31, 2018 was (0.2)% and (371.1)%, respectively. The unusually high tax rate for the nine months ended March 31, 2018 was due to a deferred income tax charge of approximately $4,491,000, as explained below. For the three and nine months ended March 31, 2018, the Company calculated income tax expense based upon an annual effective tax rate forecast adjusted for discrete items that specifically relate to the interim period. Changes in tax laws or rates on deferred tax assets and liabilities are recognized as discrete items in the interim period that includes the enactment date. The differences between the effective tax rate and the U.S. federal statutory tax rate of 21% principally resulted from state and local taxes, graduated federal tax rate reductions, changes in the valuation allowance, non-deductible expenses, and discrete items for the interim period.

 

On December 22, 2017, the U.S. President signed the Tax Cuts and Jobs Act of 2017 (the "Act"). Financial Accounting Standards Board ("FASB") Accounting Standards Codification Topic 740, Income Taxes ("ASC 740") requires that the effects of changes in tax laws or tax rates be recognized in the financial statements in the period in which such changes were enacted. During the nine months ended March 31, 2018, the Company incurred a deferred income tax charge of approximately $4,491,000 due to the write-down of deferred tax assets related to the reduction of the corporate income tax rate per the Act.

 

At March 31, 2018, the Company had a net deferred tax asset of approximately $7,357,000. Management has considered the realizability of the deferred tax assets and has concluded that a valuation allowance of approximately $31,291,000 should be recorded, related to net operating loss carryforwards that are not anticipated to be realized. Management determined that a valuation allowance was required with respect to the remaining net deferred tax assets. Realization of these assets is primarily dependent on achieving the forecast of future taxable income, as well as prudent and feasible tax planning strategies.

 

 

 

6.	Related Party Notes Payable

 

 

 

         The principal amount listed above is principal only and does not include accrued interest of approximately $122,000 from March 20, 2017 to March 20, 2018.  This accrued interest is included in the notes payable amount of $3,171,660 on condensed consolidated balance sheet.

 

 

 

Prior Year Exchange Transaction

 

On March 20, 2017, the Company entered into a note exchange agreement with the holders of an aggregate principal amount of $2,170,000 of outstanding promissory notes (the "Original Notes"), which were due and payable, pursuant to which the Company agreed to issue the holders of such notes, in consideration of the cancellation of the Original Notes, new promissory notes in the aggregate principal amount of $2,545,199, which is equal to the sum of the aggregate principal amount of the Original Notes plus the accrued but unpaid interest on the Original Notes (the "New Senior Notes"). The New Senior Notes were convertible into shares of the Company's common stock at an initial conversion price of $2.03 per share. Based on the initial conversion prices, the New Senior Notes were convertible into up to 1,253,792 shares of common stock. If the Company issues or sells shares of its common stock, rights to purchase shares of its common stock, or securities convertible into shares of its common stock for a price per share that is less than the conversion price then in effect, such conversion price will be decreased to equal 85% of such lower price. The foregoing adjustments to the conversion price will not apply to certain exempt issuances, including issuances pursuant to certain employee benefit plans. The conversion price is also subject to adjustment upon stock splits, reverse stock splits, and similar capital changes. These conversion options resulted in a derivative liability valued at $328,422. All the New Senior Notes have a maturity date of one year from the closing date. The New Senior Notes were issued in consideration of the exchange of (i) an aggregate principal amount of $950,000 of Original Notes convertible at a price of $2.25 per share, (ii) an aggregate principal amount of $520,000 of Original Notes convertible at a price of $3.00 per share, and (iii) an aggregate principal amount of $700,000 of unconvertible Original Notes.

 

The New Senior Notes bear interest at the rate of 5% per annum with interest payable upon maturity, the conversion of the New Senior Notes or on any earlier redemption date.  Beginning one month after the Company's common stock is listed for trading on a national securities exchange, and the Company will have the right to redeem all or any portion of the outstanding principal balance of the New Senior Notes, plus all accrued but unpaid interest at a price equal to 110% of such amount.  The holders of the New Senior Notes shall have the right to convert any or the entire amount to be redeemed into common stock prior to redemption.  Subject to certain exceptions, the New Senior Notes are senior to existing and future indebtedness of the Company and are secured by a first priority lien on all the Company’s assets to the extent and as provided in a Security Agreement entered into between the Company and the holders. The New Senior Notes contain customary covenants against incurring additional indebtedness and granting additional liens and contain customary event default.  Upon the occurrence of an event of default under the New Senior Notes, the holders may require the Company to repay all or a portion of the note in cash, at a price equal to 110% of the principal, plus accrued and unpaid interest.

 

During the year ended June 30, 2017, in connection with the exchange of the Original Notes for the New Senior Notes, the Company also agreed with the holder of all outstanding shares of Series B Convertible Preferred Stock (the “Series B Preferred Stock") to exchange all of its outstanding shares of Series B Preferred Stock for shares of a new series of convertible preferred stock designated as Series E Convertible Preferred Stock (the "Series E Preferred Stock").  Accordingly, on March 20, 2017, the Company also entered into a separate exchange agreement with the holder of the shares of Series B Preferred Stock, to exchange such shares for a total of 25,000 shares of Series E Preferred Stock.  Each share of Series E Preferred Stock will have a stated value of $30.00 per share.  Pursuant to this exchange agreement, the holder of the shares of Series B Preferred Stock agreed to waive all unpaid dividends that had accrued on the shares of Series B Preferred Stock.  The shares of Series E Preferred Stock are initially convertible by the holder into an aggregate of 187,500 shares of common stock at the initial conversion rate of $4.00 per share.  The conversion price of the new preferred stock is subject to adjustment solely in the event of stock dividends, combinations, splits, recapitalizations, and similar corporate events.  The right of holders of Series E Preferred Stock to convert these securities into common stock is subject to a 4.99% beneficial ownership limitation, which beneficial ownership limitation may be increased by a holder to a greater percentage not more than 9.99% after providing notice to the Company.   

 

Prior Year Loss on Extinguishment of Debt

 

In accordance with ASC 470-50, "Debt - Modifications and Extinguishments", the Company's note exchange agreement was tested to determine whether a debt modification or debt extinguishment had occurred. Based on management's review, debt extinguishment accounting applied. A loss on extinguishment of $258,037 resulted from the exchange, and was recorded in fiscal year 2017. The loss consists of the resulting derivative liability of $328,422 from embedded conversion options in the New Senior Notes and the additional value of $50,000 of the Series E Preferred Stock compared to the Series B Preferred Stock, offset by the waiving of the unpaid Preferred Series B dividends of $120,385.

 

Current Year Exchange Transaction

 

On March 27, 2018, the Company entered into an agreement with the holders of outstanding senior secured convertible notes to amend certain terms of such notes as described below ("Note Amendment Transaction").  Contemporaneously with the Note Amendment Transaction, the Company entered into an agreement with its Chief Executive Officer, who held a separate promissory note in the aggregate principal amount of $500,000, to exchange such note for an additional new senior note (the “Additional Senior Note”) on terms substantially the same as the senior secured convertible notes in the Note Amendment Transaction (the “Note Exchange Transaction").

 

 

Note Amendment Transaction

 

In the Note Amendment Transaction, the holders (the "Senior Holders") of the outstanding principal amount of $2,545,199 of New Senior Notes entered into a consent and amendment agreement with the Company (the "Consent Agreement"), pursuant to which the New Senior Notes were amended to extend the maturity date for a period of twelve months, to March 20, 2019 and in consideration thereof, the conversion rate of the New Senior Notes was reduced to $1.20 per share.  Based on the adjusted conversion price, the principal amount of the New Senior Notes will be convertible into up to 2,120,999 shares of common stock.  The other material terms and conditions of the New Senior Notes were not amended.  Certain holders of the New Senior Notes are affiliated with the Company as follows: (1) an aggregate principal amount of $255,417 of New Senior Notes are held by Hanif A. Roshan, the Chairman and Chief Executive Officer of the Company and (ii) an aggregate principal amount of $591,613 of New Senior Notes are held by Optimum Ventures, LLC, a party affiliated by ownership with the former owners of Peachstate Health Management, LLC, our subsidiary.  Due to the adjustment of the conversion price of the New Senior Notes, the exercise price of outstanding warrants to purchase an aggregate of 825,144 shares of common stock has been adjusted from $2.07 to $1.22 per share. Unpaid interest on the New Senior Notes as of March 31, 2018 was approximately $122,000, which is not incorporated into the principal balance. Accrued interest on the New Senior Note is due on March 20, 2019 or any earlier payment of the New Senior Notes.

 

Note Exchange Transaction

 

In connection with the Note Amendment Transaction, on March 27, 2018, the Company entered into a note exchange agreement (the "Note Exchange Agreement") with its chief executive officer, who also held a promissory note in the aggregate principal amount of $500,000, pursuant to which the Company agreed to issue to him, in consideration of the cancellation of such note, the Additional Senior Note in the aggregate principal amount of $504,452, which is equal to the sum of the aggregate principal amount of the original note plus the accrued but unpaid interest thereon.  The closing of the Note Exchange Transaction occurred on March 27, 2018.

 

The Additional Senior Note is the same, in all material respects, as the New Senior Notes described above in the Note Amendment Transaction and is convertible into shares of the Company's Common Stock at an initial conversion price of $1.20.  Based on the initial conversion price, the Additional Senior Note is convertible into up to 420,376 shares of common stock.  As the Additional Senior Note is the same in all material respects as the New Senior Notes, the conversion price of the Additional Senior Note may be adjusted upon the occurrence of the same events which would result in an adjustment to the conversion price of the New Senior Notes, as described above, including the issuance of securities at a price per share less than the current conversion price.  Similarly, the maturity date, interest rate, events of default, redemption and other terms of the Additional Senior Note are the same as for the New Senior Notes.  The Additional Senior Note is on parity with the New Senior Notes and, subject to certain exceptions, is senior to other existing and future indebtedness of the Company and, together with the New Senior Notes, is secured by a first priority lien on all of the Company's assets to the extent and as provided in the Security Agreement as amended.

 

In accordance with ASC 470-50, "Debt - Modifications and Extinguishments", the Company's note exchange agreement was tested to determine whether a debt modification or debt extinguishment had occurred. Based on management's review, debt extinguishment accounting applied.  As a result of the debt exchange, the Company recorded $247,539 of non-cash expense resulting from the conversion feature of the convertible debt, which was recorded in the current quarter of 2018.  The loss consisted of the resulting derivative liability from the embedded conversion options in the new notes.  In addition, a valuation loss from embedded conversion options in the New Senior Notes of $908,728 was recorded during the current quarter.

 

 

7.

Equity

 

Preferred Stock

 

As of March 31, 2018, there were 25,000 shares of Series E Convertible Preferred Stock outstanding. The shares of Series E Preferred Stock are initially convertible into an aggregate of 187,500 shares of common stock at the initial conversion rate of $4.00 per share. The conversion price of the Series E Preferred Stock will be subject to adjustment solely in the event of stock dividends, combinations, splits, recapitalizations, and similar corporate events and does not provide for general price-based anti-dilution adjustments. Each share of Series E Preferred Stock has a stated value of $30.00 per share and has the following rights and preferences: (I) each holder of the Series E Preferred Stock has the right, at any time, to convert the shares of Series E Preferred Stock into shares of common stock, (ii) the Series E Preferred Stock is redeemable at the Company's option commencing one year after the original issuance date, provided that the Company's common stock is listed on a national securities exchange at such time, and (iii) the Series E Preferred Stock will pay dividends at the rate of 5% per annum in cash. The shares of Series E Preferred Stock were issued in a transaction with the holder of the Company's previously outstanding shares of Series B Preferred Stock to exchange the shares of Series B Preferred Stock for the shares of Series E Preferred Stock. Pursuant to the exchange agreement for the preferred stock, the holder of the shares of Series B Preferred Stock agreed to waive all unpaid dividends that had accrued on the shares of Series B Preferred Stock. At March 31, 2018, the Company has accrued dividends of approximately $39,000 on the Series E Preferred Stock which remain unpaid.

 

 

As of March 31, 2018, there are 605,000 shares of Series D Convertible Preferred Stock outstanding. The Series D Preferred Stock can be converted by the holders into an aggregate of 619,154 shares of common stock at an initial conversion rate of $9.77139 per share. The holders of such shares have the right to convert the preferred shares at any time, although the shares received upon conversion may not be offered or sold except pursuant to an effective registration statement or an applicable exemption from the registration requirements of the Securities Act and applicable state securities laws. The Company has the right to repurchase the outstanding Series D Preferred Stock at a redemption price equal to $10.00 per share, plus accrued and unpaid dividends, and to require holders to convert their Series D Preferred Stock beginning in June 2016. Dividends on the Series D Preferred Stock accrue at a rate of 5% per annum and are payable semi-annually in cash or stock at the Company's option. At March 31, 2018, the Company has accrued dividends in the amount of approximately $863,000 on the Series D Preferred Stock, which remain unpaid. 

 

The Company's preferred stock takes precedence over Common Stock but ranks below debt in the event of liquidation. In addition, the Series D Convertible Preferred Stock ranks above the Series E Convertible Preferred Stock.

 

Earnings per Share

 

FASB ASC Topic 260, Earnings per Share, requires the presentation of basic and diluted earnings per share. Basic earnings per share is calculated based on the weighted-average number of ordinary shares outstanding during the period, while diluted earnings per share is calculated to include any dilutive effects to ordinary shares. For the three and nine months ended March 31, 2018, our ordinary share equivalents consisted of stock options, restricted stock units, convertible debt, preferred stock and warrants.

 

 

 

Common Stock Warrants

 

A schedule of common stock warrant activity for the nine months ended March 31, 2018 is as follows:

  

 

 

Due to the adjustment of the conversion price of the New Senior Notes, the exercise price of outstanding warrants to purchase an aggregate of 825,144 shares of common stock has been adjusted from $2.07 to $1.22 per share.

 

 

8.	Share-Based Compensation

 

Stock option activity under the Company's stock option plans for employees and non-executive directors for the nine months ended March 31, 2018 is as follows:

 

 

 

 

Share based compensation for the three months ended March 31, 2018 and 2017 was approximately $117,000 and $38,000, respectively. Share-based compensation for the nine months ended March 31, 2018 and 2017 was approximately $562,000 and $186,000, respectively.

 

No options were granted to the Company's non-employee directors as of March 31, 2018 as each director that would have received such options as of such date under the Company's Non-Employee Director Compensation Policy waived the receipt of such compensation for the quarter ended March 31, 2018.

 

Restricted stock unit activity under the Company's restricted stock unit plans for employees and non-executive directors for the nine months ended March 31, 2018 is as follows:

 

 

 

 

On March 31, 2018, the Company's Board of Directors approved the grant of 40,724 restricted stock units to Hanif A. Roshan.  In addition, the Board also approved the grant of an aggregate 40,724 restricted stock units to certain other non-executive employees of the Company.  All of the restricted stock units were granted under the Company's 2011 Omnibus Equity Incentive Plan, as amended (the "2011 Plan").  The Board determined that it was appropriate to grant the restricted stock units in consideration of an agreement by Mr. Roshan and the other non-executive employees to accept such compensation in lieu of cash payment of base salary for the five-week period ending March 31, 2018.

 

 

 

9.	Fair Value Measurements and Other Financial Instruments

 

The carrying amounts of the Company's financial assets and liabilities, such as cash, accounts receivable, inventory, prepaid expenses, and other current assets, accounts payable and accrued expenses approximate their fair values because of the short maturity of these instruments.

 

In connection with the issuance of a convertible promissory note as discussed in Note 6, the Company evaluated the note agreement to determine if the agreement contained any embedded components that would qualify the agreement as a derivative. The Company identified certain put features embedded in the convertible note agreement that potentially could result in a settlement in the event of a fundamental transaction, requiring the Company to classify the conversion feature as a derivative liability.

 

The Company's Level 3 financial liabilities consist of the derivative conversion features of underlying convertible debt and warrants issued in 2011 to 2015. The Company valued the conversion features using the Black Scholes model prior to the three months ended September 30, 2016 and the Monte Carlo model for all periods thereafter. These models incorporate transaction details such as the Company's stock price, contractual terms maturity, risk free rates and volatility as of the date of issuance and each balance sheet date. The decrease in the value of the conversion feature of the convertible debt and warrants issued was primarily due to the change in the stock price during 2018 compared with prior years.

 

The Company utilized the following assumptions in valuing the derivative conversion features:

 

 

 

Fair Value of Financial Assets and Liabilities Measured on a Recurring Basis

 

The fair value of AGHC financial instruments, using the fair value hierarchy under U.S. GAAP detailed in "Fair Value Measurements" in Note 2, "Summary of Significant Accounting Policies and Recently Issued Accounting Standards," of the Notes to the Condensed Consolidated Financial Statements are included in the tables below.

 

The Company uses Level 3 of the fair value hierarchy to measure the fair value of the derivative liabilities and revalues its derivative liabilities at every reporting period and recognizes gains and losses in the statement of operations that are attributable to the change in the fair value of the derivative liabilities. Changes in the observable input values would likely cause material changes in the fair value of the Company's Level 3 financial instruments.  The significant unobservable input (probability of a down round event) used in the fair value measurement is the estimation of the likelihood of the occurrence of a change in the contractual terms of the financial instruments.  A significant increase (decrease) in this likelihood or in the volatility assumptions would result in a higher (lower) fair value measurement.

 

The following tables provide a summary of the changes in fair value, including net transfers in and/or out, of all financial assets / (liabilities) measured at the fair value on a recurring basis using significant unobservable inputs during the nine months ended March 31, 2018.

 

 

 

 

Derivative Instruments

 

For the three and nine months ended  March 31, 2018 and 2017, the Company recorded non-cash (expense) income of approximately ($1,286,000) and ($920,000), compared to income of $257,000 and $392,000 for the prior year periods in other (expense) income for the changes in fair value of the derivative liabilities.

 

 

 

10.	Commitments and Contingencies

 

A complaint was filed by a former independent contractor in the State of Louisiana who was involved in the sales and marketing of the Company's products and services. The caption of the case is Medlogic, LLC and Malena F. Badon v. Peachstate Health Management, LLC., et al. Plaintiff alleges certain commissions had not been paid in full. The Company believes the contractor was overpaid and has asserted a counter claim for reimbursement of such overpayments. The Company intends to vigorously defend the claim and pursue the counter claim. The parties have completed initial discovery and the matter remains pending. The Company believes the resolution of this matter will not have a material effect on its financial statements.

 

Regarding the termination of the Company's employment relationship with certain executives, including the former Chief Executive Officer ("CEO") of Authentidate Holding Corp., O’Connell Benjamin, the Company has been reviewing its severance obligations to them and the vesting of other post-termination provisions. The Company believes that it has accrued all related severance costs as of  March 31, 2018 related to the past terminations. The former CEO commenced an arbitration proceeding before the American Arbitration Association ("AAA") on or about June 22, 2016 requesting payment of severance compensation of $341,620 and other benefits, including the vesting of certain stock option awards, pursuant to an employment agreement. The parties opted to pursue mediation in their attempt to resolve the matter, and a mediation session was held on October 30, 2017, but no resolution was reached. The Company believes that it has valid defenses to Mr. Benjamin's claims and intends to defend this matter accordingly as the arbitration process ensues.

 

 

On May 3, 2017, the Company received notice from the Office for Civil Rights ("OCR") of the U.S. Department of Health and Human Services ("DHHS") informing the Company that the OCR is conducting a review of the Company's compliance with applicable Federal Standards for Privacy of Individually Identifiable Health Information and/or Security Standards for the Protection of Electronic Protected Health Information (“ePHI”). The OCR is the division of DHHS charged with enforcing the Health Insurance Portability and Accountability Act of 1996, as amended ("HIPAA"), and its privacy, security and data breach rules ("HIPAA Rules"). The OCR compliance review covers both the Company's telehealth business and its clinical laboratory operations. The OCR reviewed the Company's premises and conducted interviews on May 23, 2017 and the Company continues to work on a resolution with the OCR. The OCR may, among other things, require a corrective action, issue penalties, or reach a monetary settlement. The Company does not expect a material adverse determination on its consolidated financial position, results of operations and cash flows.

   

The Company is the plaintiff in a case captioned Peachstate Health Management, LLC d/b/a Aeon Clinical Laboratories v. Radius Foundation, Inc. and William Bramlett, Ph.D., filed on June 13, 2017 in the State Court of Hall County, State of Georgia Case No. 2017-SV-312-Z. Judgement in the amount of $116,865 was awarded by the court on March 29, 2018, against the corporate defendant. The Company continues to pursue its claims against the individual co-defendant.

 

The Company is the plaintiff in a case captioned Peachstate Health Management, LLC d/b/a Aeon Clinical Laboratories v. Trimana, LLC d/b/a Via Medical Center Case No. 2016-SV-246D filed on April 29, 2016 in the State Court of Hall County, State of Georgia. Judgement in the amount of $104,652 was awarded by the Court on March 12, 2018.

 

The Company is a defendant in an action captioned Cogmedix, Inc. v. Authentidate Holding Corp. in the Superior Court of Worcester County, Commonwealth of Massachusetts, Case No. 1685CV013188. Suit was filed on September 6, 2016, based upon a purchase order dated December 6, 2013, alleging the principal amount of $227,061, and accumulating interest and attorney fees. On February 15, 2018, a default judgment for the amount of $320,638 was awarded. The Company is evaluating this decision and considering its alternatives.

 

The Company, along with its chief executive officer and certain unnamed persons, are defendants in a case captioned Carlotta Miraflor v. Peachstate Health Management, LLC d/b/a Aeon Global Health, et al., filed on October 4, 2017 in the United States District Court for the Central District of California Case No. 5:17-CV-02046-DSF-SP. Service of the Summons and Complaint was made on January 3, 2018 and an Answer denying liability has been timely filed with the Court Clerk. The plaintiff is a principal of an independent contractor which provided marketing services to the Company pursuant to a services agreement. The lawsuit was preceded by a Dismissal and Notice of Rights by the U.S. Equal Employment Opportunity Commission in July 2017 on the basis that the plaintiff has been identified as an independent contractor, notwithstanding that the plaintiff alleged that the Company was the employer of the plaintiff. Nonetheless, the plaintiff has initiated suit alleging wrongful termination, retaliation, harassment, and other claims. The lawsuit seeks an injunction enjoining the Company from classifying its sales and marketing personnel as independent contractors and unspecified compensatory damages for plaintiff's alleged loss of earnings, emotional distress, punitive damages, and attorneys' fees and costs. The Company believes that it has strong defenses to plaintiff's allegations and intends to vigorously defend the claim. Management is unable to determine at this time whether this claim will have a material adverse impact on the Company’s financial condition, results of operations or cash flow.

 

            The Company has a lease for its offices in New Jersey, which has a term of six years following the occupancy date and annual rentals ranging from approximately $135,000 in the first year to $148,000 in the final year. The lease also provides AGHC with a one-time option to renew the lease for a term of five years at the then-current market rate and, provided AGHC pays an early termination fee, allows AGHC an early termination option on each of the 18-month, 27-month and 36-month anniversary dates of the effective date of the amendment. As part of the lease agreement, AGHC reduced its letter of credit securing its lease payments to approximately $121,000, which was collected by the landlord in the first quarter of fiscal year 2018. The Company is currently in negotiations to terminate this lease obligation and although not guaranteed, expects to be successful during fiscal year 2018.

 

The Company is also subject to claims and litigation arising in the ordinary course of business. Management considers that any liability from any reasonably foreseeable disposition of such claims and litigation, individually or in the aggregate, would not have a material adverse effect on the consolidated financial position, results of operations or cash flows. 

 

The Company has entered into various agreements by which it may be obligated to indemnify the other party with respect to certain matters. Generally, these indemnification provisions are included in contracts arising in the normal course of business under which we customarily agree to hold the indemnified party harmless against losses arising from a breach of representations related to such matters as intellectual property rights. Payments by the Company under such indemnification clauses are generally conditioned on the other party making a claim. Such claims are generally subject to challenge by the Company and to dispute resolution procedures specified in the particular contract. Further, obligations under these arrangements may be limited in terms of time and/or amount and, the Company may have recourse against third parties for certain payments made by the Company. It is not possible to predict the maximum potential amount of future payments under these indemnification agreements due to their conditional nature and the unique facts of each particular agreement. Historically, the Company has not made any payments under these agreements that have been material individually or in the aggregate. As of  March 31, 2018, the Company is not aware of any obligations under such indemnification agreements that would require material payments.

 

 

 

11.	Related Party Transactions

 

Except as disclosed herein, the Company has not entered into any material transactions or series of similar transactions with any director, executive officer or any security holder owning 5% or more of common stock since July 1, 2017.

 

AEON leases its facilities from Centennial Properties of Georgia, LLC under a lease agreement commencing April 2014, as amended January 20, 2016. The lease provides for a term of 12 years expiring March 2026. The lease payments range from $46,500 to a maximum of $60,000. In connection with the lease agreement, as security for its rent and other obligations under the lease, AEON has provided to the landlord a first priority lien and security interest in substantially all its assets. The landlord under the lease is Centennial Properties of Georgia, LLC a Georgia limited liability company. Centennial is owned by Sonny Roshan, Shawn Desai, Pyarali Roy and Sohail Ali, all of whom were AEON members and received common stock in AGHC as a result of the Acquisition. Mr. Roshan serves as the Chairman and CEO of AGHC. Mr. Desai is the Chief Technology Officer of AEON. Mr. Roy is the Chief Strategy Officer of AEON. Related party rent expense for the three and nine months ending March 31, 2018 and 2017 was approximately $144,000 and $432,000, and $140,000 and $419,000, respectively.

 

The Company holds certain related party notes payable to certain shareholders, its Chief Executive Officer and affiliates of board members of the Company, as detailed in Note 6. Interest expense relating to these notes amounted to approximately $32,000 and $95,000, and $87,000 and $286,000 for the three and nine months ended March 31, 2018 and 2017, respectively.  In the Note Amendment Transaction, the holders (the "Senior Holders") of the outstanding principal amount of $2,545,199 of New Senior Notes entered into a consent and amendment agreement with the Company (the "Consent Agreement"), pursuant to which the New Senior Notes were amended to extend the maturity date for a period of twelve months to March 20, 2019 and in consideration thereof, the conversion rate of the New Senior Notes was reduced to $1.20 per share.  Based on the adjusted conversion price, the principal amount of the New Senior Notes will be convertible into up to 2,120,999 shares of common stock.  The other material terms and conditions of the New Senior Notes were not amended.  Certain holders of the New Senior Notes are affiliated with the Company as follows: (1) an aggregate principal amount of $255,417 of New Senior Notes are held by Hanif A. Roshan, the Chairman and Chief Executive Officer of the Company and (ii) an aggregate principal amount of $591,613 of New Senior Notes are held by Optimum Ventures, LLC, a party affiliated by ownership with the former owners of Peachstate Health Management, LLC, our subsidiary.  Due to the adjustment of the conversion price of the New Senior Notes, the exercise price of outstanding warrants to purchase an aggregate of 825,144 shares of common stock has been adjusted from $2.07 to $1.22 per share.  Unpaid interest on the New Senior Notes as of March 31, 2018 was approximately $122,000, which is not incorporated into the principal balance.  Accrued interest on the New Senior Notes is Due on March 20, 2019 or any earlier payment of the New Senior Notes.

 

    Effective January 23, 2018, Hanif A. Roshan, the Company's Chief Executive Officer and Chairman of the Board made a short-term loan of $500,000 to the Company.  To evidence the loan, the Company issued Mr. Roshan a promissory note (the "Note") in the aggregate principal amount of $500,000.  The Note was an unsecured obligation of the Company, and was not convertible into equity securities of the Company.  The Note was due and payable on April 23, 2018 and interest accrued on the Note at the rate of 5% per annum.  The Note was exchanged for a new secured convertible note in the exchange transaction described above in Note 6 under the caption "Current Year Exchange Transaction".

 

AGHC entered into a lease agreement with Hanif A. ("Sonny") Roshan (the "landlord") for a residential premises at 5455 Golf View Drive, Braselton, Georgia 30517 for a term of one year beginning on January 1, 2018 and ending on December 31, 2018 for a fixed rent in monthly installments of $7,500 due and payable by the first day of each month. The lease is renewable with a 3% increase in rent for each renewal. The tenant is responsible for utilities and insurance with the landlord responsible for maintenance and taxes on the premises. Rent expense was $22,500 and $67,500 for the three and nine months ended March 31, 2018.

 

On January 4, 2018, the Company entered into a Consulting Agreement with Dr. Armando Moncada, M.D. ("Moncada" or the "Consultant") pursuant to which the Company engaged Moncada to act as its Chief Medical Officer - Pathology and to provide certain consulting services in connection with the operation of the Company's pathology laboratory, as specified in the Consulting Agreement.  The Company paid Moncada $40,000 at the execution of the agreement and $25,000 for February 2018, which was Moncada's monthly pay according to the Consulting Agreement.  In addition, pursuant to the Consulting Agreement, Moncada had agreed to transfer and assign to the Company, in his personal capacity as well as in his capacity as a controlling member and/or officer of PCG Molecular, LLC and Pathology Consultants of Georgia, Inc., all right to the intellectual property of such entities.  The completion of the transaction to acquire the foregoing intellectual property rights was subject to the negotiation and execution of definitive assignment agreement and other customary closing conditions.  The Company and Moncada were not able to reach a final agreement on the acquisition terms of intellectual property rights and the Consulting Agreement was therefore terminated on February 21, 2018. 

 

 

12.	Segment Information

 

The Company is operated as two segments: laboratory testing services, and web-based software.  Laboratory testing services includes the testing of an individual's blood, urine or saliva for the presence of drugs or chemicals and the patient's DNA profile. Web-based software provides secure web-based revenue cycle management applications and telehealth products and services that enable healthcare organizations to increase revenues, improve productivity, reduce costs, coordinate care for patients and enhance related administrative and clinical workflows and compliance with regulatory requirements. Management currently runs each segment separately and measures profitability and operational performance based on the financial statements, which are independently maintained.

 

 

Selected financial information related to the Company's segments is presented below: