Authentidate (ADAT): Remote Patient Monitoring Presents Significant Opportunity

Authentidate Holding Corp (ncm: ADAT) $0.27- Authentidate is attractively positioned to benefit from the expected flood of spending aimed at modernizing healthcare IT. Remote patient monitoring, also known as telehealth, is one area where Authentidate stands to capitalize due to its unique and superior product solution. Patient home monitoring is expected to be a $12 billion industry by 2012. ADAT will earn $120M in revenue if it achieves just 1% penetration. This compares to $6M in revenue Authentidate earned last fiscal year. There are a decent number of patient monitoring devices deployed currently, yet very few have actual “telemedicine” functionality, whereby a patient’s vitals are electronically transmitted to the healthcare provider coupled with any patient instructions subsequently relayed back to the patient. According to an InMedica study, there were less than 1 million telehealth subscribers in 2008, yet that number is expected to climb to over 55 million by 2016. 

ADAT has 37 cents per share in cash, yet it is not currently profitable. Management expects to achieve cash flow breakeven in the near-term. Although ADAT has been putting up double-digit revenue growth, the slow pace of industry modernization has made achieving Authentidate’s potential elusive. I believe the new telehealth business aspect coupled with government spending and reform will accelerate the pace of revenue traction. My previous ADAT articles are here.

Company Description: (from ADAT 10-k):

Authentidate Holding Corp. (Authentidate or the company) is a worldwide provider of secure workflow management software and web- based services. Authentidate and its subsidiaries provide software applications and web-based services that address a variety of business needs for our customers, including increasing revenues, reducing costs, raising service levels, improving productivity, providing automated audit trails, enhancing compliance with regulatory requirements and reducing paper based processes. Our scalable offerings are primarily targeted at enterprises and office professionals and incorporate security technologies such as rules based electronic forms, intelligent routing and transaction management, electronic signing, content authentication, identity credentialing and verification and web and fax-based communication capabilities to electronically facilitate secure and trusted workflows. Authentidate currently operates its business in the United States and Germany with technology and service offerings that address emerging growth opportunities based on the regulatory and legal requirements specific to each market. In the United States the business is engaged in the development and sale of web-based services largely based on our Inscrybe™ platform and related capabilities. In the United States, we offer our patent pending content authentication technology in the form of the United States Postal Service ® Electronic Postmark ® (EPM). In Germany the business is engaged in the development and sale of software applications that provide electronic signature and time stamping capabilities for a variety of corporate processes including electronic billing and archiving solutions. Our web-based services and software applications are compliant with applicable digital signature rules and guidelines. We sell our web-based services and software applications through a direct sales effort and reseller arrangements. See USPS EPM.

Company & Industry Background:
Authentidate has struggled to gain revenue traction primarily due to the glacial pace of modernizing the IT infrastructure within the healthcare industry. The industry can be characterized as one with excessive “paper pushing” which swells the overall cost of healthcare. Evolving to an electronic document workflow paradigm would significantly reduce costs, errors, and turn-around times. The reason that healthcare has slow to move away from paper records and postal delivery is because the primary players haven’t been appropriately incentivized. HMOs experience the greatest benefits by reducing labor costs and working capital needs, yet those savings hinge on physicians converting to e-document platforms. Doctors have been hesitant to implement technology since the benefits to physicians haven’t been adequately communicated. In addition, physician thinking tends to be revenue-oriented, as opposed to cost oriented, generally solving high or increasing overhead costs with higher billings. Essentially, the thinking focuses on boosting revenue by “how do I charge more,” instead or focusing on boosting the bottom line by reducing expenses. Since patients, or rather customers, only pay a very small portion of their medical bills coupled with the absence fee comparisons and the inelastic nature of demand for healthcare treatment, medical practitioners have considerable pricing power. An individual’s cost for healthcare is pushed off on HMOs, insurance companies, and Medicare, which in turn spread those costs among its base of participants.

Instead of increasing efficiency and eliminating unnecessary costs, doctors can maintain profits with higher and/or additional fees that ultimately raise everyone’s cost of healthcare. As a result, HMOs and insurers have implemented fee caps for certain services and treatments, which essentially eliminates pricing power. However, some medical practitioners will choose not to accept specific types of medical coverage (or insurers chose not to cover specific physicians), or physicians will abandon treatments/services with unfavorable fee reimbursement caps. Even with restrictive fee caps, a physician could increase his/her bottom line from greater cost efficiency/productivity by migrating to an electronic document platform. Not only can overhead costs be reduced, time and other resources can be freed up and deployed for new revenue opportunities. Some doctors spend considerable time attending to office visits based primarily on paperwork issues for approvals and signatures, etc.

In my opinion, the catalyst for widespread migration to modern information technology is the Obama administration. For years, the government has been encouraging electronic medical records and electronic form remittals, but progress has been slow due to the reasons I outlined earlier. However, Mr. Obama’s goal is to have all medical records digitized in five years. According to the NE Journal of Medicine, only 4% of physicians use electronic health-records systems. The economic stimulus bill includes $20B for healthcare IT alone. Authentidate isn’t directly engaged indigitizing health records as it focuses more on the secure processing of electronic medical forms and signatures. However, as the industry migrates towards e-health records, it will become substantially easier for Authentidate to market its IT solutions. Mr. Obama understands the importance of technology and the benefits it provides; one has to look no further than President Obama’s fight to keep his Blackberry as evidence to his commitment to technology. Mr. Obama is also aware of the potential cost savings healthcare IT can deliver, and his ambition to make healthcare more affordable and available to all will require implementing IT solutions such as the ones offered by Authentidate.

Telehealth Monitoring:
According to a SUNY Fredonia 2008 study, the patient monitoring industry is expected to reach $12 billion by 2012. Authentidate entered into a joint venture with EncounterCare forming ExpressMD, which uses EncounterCare’s Electronic House Call patient monitoring appliance with Authentidate’s Inscrybe web-based software platform. The combination allows physicians to remotely monitor their patients’ vitals and adjust treatment accordingly. The benefits are immense. The patient receives higher quality care since the increased amount of data available provides better diagnosis and treatment. In addition, the monetary savings are substantial due to the reduction in doctor office/emergency room visits. Several studies have suggested telehealth monitoring can reduce healthcare related costs by at least 50%.

Patients visit their physician several times a month, or even a week, just to have their vitals taken. HMOs cap physicians billing at $137/month for this type of service. Thus, no matter how many times any one individual visits his/her physician’s office to have vitals taken, the attending doctor will take in no more than $137. This results in these types of visits using a disproportionate amount of a physician’s resources that aren’t proportionally monetarily compensated. In addition, it is estimated that the average monthly transportation billing for these types of patients is $527. Telehealth home monitoring reduces transportation costs by 80%. Due to the transportation cost savings, as well as other associated expense reductions, HMOs permit physicians to bill at $199/month if patient is on a telehealth home monitoring program.

Incentives for adopting remote patient monitoring exist for all major parties- patients, physicians, and insurance providers. Doctors can take in more revenue with less office visits. This frees up office space, time, and other resources for treating other patients, hence increased revenue opportunities. Thus, it’s not just the extra $62/month that doctors can generate with telehealth, it’s also the opportunity cost of lost revenue from office visits that can be recaptured with home monitoring.

Telehealth Monitoring Business Economics:
According to my sources familiar with the JV agreement, EncounterCare and Authentidate split the $30/month revenue (per device) 50-50. Authentidate earns an additional $8/month for services provided through its Inscrybe platform. This brings Authentidate’s revenue to $23/month. Yet, Authentidate can charge $50/month to third parties, such as pharmaceutical and medical research companies for access to data reporting. According to a source, a research group in Florida has implemented 2000 units thus far. Drug companies and researchers can measure the efficacy of their products being used in treatment, since patient vitals data can show the response to such treatment.

ExpressMD™ Solution (from company website):

The complete ExpressMD solution combines Electronic House Call™, an advanced in-home patient vital signs monitoring system with a web application that streamlines the practitioner’s job anywhere they have Internet or a Windows mobile communication device. The in-home portion includes the latest in simple-to-use monitor devices for unassisted patient vital signs measurement as well as question-and-answer mode for manual input. The self-contained home unit is perfectly suited for patients that require repeated assessment and reminders of their care plan schedule while practitioners can easily monitor patient progress remotely. Patients can review their own vital statistics history or even view and order products specific to their condition that support their care plan.

This proven system improves overall care outcomes for patients with chronic illnesses such as COPD, CHF and Diabetes. It delivers better continuity of care for elderly or special needs patients, as well as many others with chronic illnesses such as chronically ill pediatric patients. Patients using the ExpressMD in-home monitoring system have shown dramatic improvements in medication and therapy compliance. The overall effect produces significant reductions in the overall number of physician office visits, emergency room visits and hospital readmissions.

It provides intelligent routing to alert on-duty caregivers whenever patient vital signs are outside of the practitioner pre-set ranges. Parameters are set to automatically route to caregivers based on patient specific needs, payer preference and location. In addition, care providers can remotely access the system from Windows communications devices, delivering true portability of care management.

Some of the additional services available to the ExpressMD solution by adding Inscrybe™ Healthcare are: verification of physician and practitioner credentials allowing online input, review, update and electronic signature of medical documentation such as prior authorizations, care plans and physician orders. With this option, practitioners can customize a care plan for each patient based on their vital signs history that optimizes therapy results and improves patient quality of life. There is an online diagnosis and treatment library for physicians or practitioners. Additional services for physicians like the Care Plan Oversight module to support allowable reimbursement reporting and online entry of physician orders are also available.

ExpressMD Joint Venture Press Release (June 10, 2008):

The joint venture called ExpressMDTM Solutions will provide in-home patient vital signs monitoring systems and services to improve care for patients with chronic illnesses and reduce cost of care by delivering results to their health care providers via the Internet. ExpressMD Solutions will combine EncounterCare's Electronic House CallTM patient vital signs monitoring appliances with a specially designed web-based management and monitoring software module based on Authentidate's InscrybeTM Healthcare platform. ExpressMD Solutions will enable unattended measurement of patients' vital signs and related health information. Patients' data will then be securely sent electronically to each patient's health care provider for review. ExpressMD Solutions will be designed to aid wellness and preventative care, and deliver better continuity of care to specific patient segments such as the elderly, special needs or pediatric patients with chronic illnesses who require regular monitoring of serious medical conditions.

According to a January 2008 research study conducted at the State University of New York at Fredonia, the demand for patient monitoring systems in the primary healthcare sector in the United States is forecast to increase 5.9 percent per year to an estimated $12 billion market by 2012 based on expected contributions to positive therapeutic outcomes and efficiencies. Additionally, the study indicates that the market for self-monitoring activities will also expand as treatment for chronic care patients, especially patients with asthma, diabetes and heart disorders focuses on preventative care.

Using ExpressMD Solution's offerings health care providers will be able to easily view their specific patient's vital statistics and make adjustments to the patient's care plans via the Internet. ExpressMD Solution's easy to use patient monitoring system is intended to provide patients with increased peace of mind and improved condition outcomes through a combination of care plan schedule reminders and comprehensive disease management education on their in-home communication unit. The service will provide intelligent routing to alert on-duty caregivers whenever a patient's vital signs are outside of the practitioner's pre-set ranges.

Health care providers and health insurers also are expected to benefit by having additional tools to improve patient care, and reduce overall in-person and emergency room patient visits. "EncounterCare's expertise with in-home patient monitoring technologies and Authentidate's expertise in online healthcare systems and securely managing patients' documents has allowed us to shorten the development cycle and ready this solution for delivery in record time," said Ron Mills, CEO of EncounterCare Solutions, Inc.
"The ExpressMD Solutions joint venture will allow Authentidate and EncounterCare to leverage existing portions of our respective healthcare products as well as existing healthcare industry relationships from both companies," said Ben Benjamin, President of Authentidate Holding Corp. "The telemedicine market is a large market that we believe will benefit from our document management capabilities. By entering this market through a joint venture, we will be able to strongly penetrate an emerging market, while expanding the use of our platform within the health care community.

ExpressMD Signs First Contract with Cyntrist:
On July 8th 2008, it was announced that Authentidate and EncounterCare had signed their first user contract with Cyntrist, for use in remote monitoring of Diabetes patients located through out the Southeastern U.S. The opportunity in the Diabetes space is colossal. In a recent study, the CDC reported that 24 million Americans (8% of population) are afflicted by Diabetes, a number which has increased by more than 3 million in just two years. The ExpressMD solution provides physicians with the ability to remotely monitor patients’ glucose levels, weight, etc. on a daily basis and adjust treatment as needed. Not only does this enhance the quality of patient care, it reduces the need for regular office visits, thus reducing the cost of medical care. The advantages are compelling, and with such a large addressable market, ADAT may benefit substantially.

Authentidate Outlook:
Using a conservative projection of the industry  achieving $6B in 2012, Authentidate stands to capture at least 3%. This equates to roughly $200 million in annual revenue. Assuming 70% margins, EPS would be slightly less than $4.00 given the $105M+ tax-loss carry forward. Due to the degree of operating leverage in the revenue model, profit margins could be considerably higher, and expand with volume due to increasing returns to scale. Using the same margin assumptions, but a $12B market with 5% capture, ADAT would earn over $9.50 per share. The potential is staggering. However, just assuming a 1% capture of a $6B market would produce EPS of $1.00. Assigning a 15X multiple gives a $15.00 share price, or 55X current share price.

Conclusion:
The reason that ADAT shares trade at such a low price, below cash, is due to the lack of investor awareness of the massive revenue opportunities. As evidenced by the scant daily trading volume, and the lack of participation in online discussion forums and conference calls, very few investors follow ADAT. Many that did, abandoned ADAT years ago when the company was rapidly burning though cash without much promise of increasing revenues. Authentidate has been bringing its cash burn under control, down to $1.5M last quarter compared to cash burn of $4-5M per quarter in earlier periods. In the last two quarters, revenue growth for the U.S. business has averaged more than 50%. As the speed of IT adoption in the healthcare industry accelerates, revenue growth could increase to 5000%. As I have said in earlier articles, the Authentidate’s primary challenge has been the industry’s slow pace to modernize. The new administration along with increased spending and reform, will expedite this transformation. Health benefit providers are beginning to incentivize doctors to adopt cost saving solutions such as the ones offered by Authentidate. I believe it won’t be long before Authentidate’s offering gain meaningful traction.

Disclosure: Long ADAT

Authentidate (ADAT): Exploding Demand for Shares

Authentidate Holding Corp. (Nasdaq: ADAT) $0.78- Authentidate has been on a tear recently with shares up 189% from an all-time low of $0.27 reached on July 7. In May, I wrote about ADAT when it was trading at $0.43 and recommended the stock since I believed it was undervalued.   Since its trading low, daily volume has averaged 108k for the subsequent 14 trading sessions. For the 14 sessions prior to its low, ADAT’s average daily volume was 17k. Hence, there has been strong demand for ADAT shares. This trend bodes well for continued share price appreciation.

I think there are a couple factors responsible for the recent rally. First, ADAT is a good value with $0.53 cash/share and is expected to reach cash flow breakeven in the next 2-3 quarters. Second, ADAT recently announced a new joint venture with EncounterCare Solutions, Inc. (OTC PK: ECSL that represents its entry into a new market vertical. This new segment offers a significant opportunity for revenue growth and profitability.

ExpressMD Joint Venture Press Release (June 10, 2008):

The joint venture called ExpressMD^TM Solutions will provide in-home patient vital signs monitoring systems and services to improve care for patients with chronic illnesses and reduce cost of care by delivering results to their health care providers via the Internet. ExpressMD Solutions will combine EncounterCare's Electronic House Call^TM patient vital signs monitoring appliances with a specially designed web-based management and monitoring software module based on Authentidate's Inscrybe^TM Healthcare platform. ExpressMD Solutions will enable unattended measurement of patients' vital signs and related health information.  Patients' data will then be securely sent electronically to each patient's health care provider for review. ExpressMD Solutions will be designed to aid wellness and preventative care, and deliver better continuity of care to specific patient segments such as the elderly, special needs or pediatric patients with chronic illnesses who require regular monitoring of serious medical conditions.

According to a January 2008 research study conducted at the State University of New York at Fredonia, the demand for patient monitoring systems in the primary healthcare sector in the United States is forecast to increase 5.9 percent per year to an estimated $12 billion market by 2012 based on expected contributions to positive therapeutic outcomes and efficiencies. Additionally, the study indicates that the market for self-monitoring activities will also expand as treatment for chronic care patients, especially patients with asthma, diabetes and heart disorders focuses on preventative care.

Using ExpressMD Solution's offerings health care providers will be able to easily view their specific patient's vital statistics and make adjustments to the patient's care plans via the Internet. ExpressMD Solution's easy to use patient monitoring system is intended to provide patients with increased peace of mind and improved condition outcomes through a combination of care plan schedule reminders and comprehensive disease management education on their in-home communication unit. The service will provide intelligent routing to alert on-duty caregivers whenever a patient's vital signs are outside of the practitioner's pre-set ranges.

Health care providers and health insurers also are expected to benefit by having additional tools to improve patient care, and reduce overall in-person and emergency room patient visits.

"EncounterCare's expertise with in-home patient monitoring technologies and Authentidate's expertise in online healthcare systems and securely managing patients' documents has allowed us to shorten the development cycle and ready this solution for delivery in record time," said Ron Mills, CEO of EncounterCare Solutions, Inc.

"The ExpressMD Solutions joint venture will allow Authentidate and EncounterCare to leverage existing portions of our respective healthcare products as well as existing healthcare industry relationships from both companies," said Ben Benjamin, President of Authentidate Holding Corp. "The telemedicine market is a large market that we believe will benefit from our document management capabilities.  By entering this market through a joint venture, we will be able to strongly penetrate an emerging market, while expanding the use of our platform within the health care community.

ExpressMD Signs First Contract with Cyntrist:

On July 8^th, it was announced that Authentidate and EncounterCare had signed their first user contract with Cyntrist, for use in remote monitoring of Diabetes patients located through out the Southeastern U.S.  The opportunity in the Diabetes space is colossal. In a recent study, the CDC reported that 24 million Americans (8% of population) are afflicted by Diabetes, a number which has increased by more than 3 million in just two years. The ExpressMD solution provides physicians with the ability to remotely monitor patients’ glucose levels, weight, etc. on a daily basis and adjust treatment as needed. Not only does this enhance the quality of patient care, it reduces the need for regular office visits, thus reducing the cost of medical care. The advantages are compelling, and with such a large addressable market, ADAT may benefit substantially.

Conclusion:

The recent news comes after Authentidate management had stated that they believed cash flow break-even could be attained by CQ1 2009. The implication was that existing business was likely sufficient to attain that goal, for it was an issue of customers ramping up implementation. Now, with these recent developments regarding the ExpressMD joint venture, Authentidate’s prospects have become even brighter.

Authentidate (ADAT) Remains Undervalued

Authentidate Holding Corp (nasd:ADAT)- $.43-This is an update to previous notes (1.CF Break-Even 12 months 2. Traction in Germany 3. Attractive Speculative Play). I remain optimistic towards ADAT given management’s forecast of cash-flow break-even in the December or March quarter. ADAT announced this intention earlier this year, and has continued to reiterate its guidance. I truly believe management would not provide this guidance unless they were very confident that it could be accomplished.

ADAT is trading for less than its $.53 cash/share and $.90 book value/share- and it has no debt. Thus, ADAT’s share price reflects the expectation that it will soon burn through its cash and close its doors. Management believes they can reverse the burn rate well before cash dries up. There is little doubt that significant revenue potential exists, rather doubt has been cast on its timing. The key issue facing investors is whether ADAT will run out of cash before revenues amass to a break-even level. In short, Management believes (so do I) that break-even will be achieved with cash to spare. When ADAT becomes cash-flow positive, I think we could easily be looking at a $2-$3 stock.

The business model is promising, but has been slow to gain traction. The introduction of the Inscrybe platform has accelerated adoption and generated impressive revenue growth. Due to the ~70% gross margins and amount of leverage in the model, there is considerable upside potential in profitability. After attaining sufficient revenue volume to cover fixed expenses, a very large portion of incremental revenue falls to the bottom line.

In my opinion, Authentidate is undervalued. Granted, there are significant risks, but the share price doesn’t reflect ADAT’s true value. Authentidate is unknown to many investors, and its low share price and trading volume make it difficult for institutions (and individuals) to invest. On average, 50k shares, or 25k in dollar volume, change hands daily.

Without analyst coverage, investors look to ADAT for company news. Management has been hesitant in providing details on business. Back in 2003-04, ADAT shot up to $20/share, and when expected sales traction failed to occur, the share price plummeted. Of course, this invited every ambulance-chasing law firm on Wall Street to file class action lawsuits. Even though those suits never materialized, it drained Authentidate’s strategic focus and checkbook. I believe this has led management to be more guarded in its statements to investors. The irony is that ADAT is claiming cash flow break-even in CY08. Given ADAT’s history of not providing much guidance, logic suggests that management would not make such a claim unless it was highly certain it will be achieved. The company also hinted that once progress begins to appear in the financial statements, that it will be much more involved with the investing public. In essence, the share price is not a product of broad based opinion, rather transactions of a few, thus ADAT is inefficiently priced.

About Authentidate:
Taken from Authentidate’s Press Release
Authentidate Holding Corp. is a worldwide provider of secure workflow management software and web-based services. The company's automated and trusted workflow solutions enable enterprises and office professionals to employ rules-based electronic forms, intelligent routing and transaction management, electronic signing, content authentication, identity credentialing and verification and web and fax based communication capabilities. Customer benefits from the company's offerings include reduced costs, improved productivity and service levels, automated audit trails, enhanced compliance with regulatory requirements and the reduction of paper-based processes. The company has offices in the United States and Germany. In the United States we offer our patent pending content authentication technology in the form of the United States Postal Service® Electronic Postmark® (EPM). See USPS EPM

ADAT plans to achieve break-even through cost reduction and revenue acceleration.

Revenue Growth:
Authentidate will need a run-rate of 4 million-plus per quarter for cash flow break-even. Revenue in the March quarter was 1.7 million with US segment revenue (Inscrybe) increasing 18% sequentially. Growth Yr/Yr was 33%, thus accelerated in the recent quarter. Most of Authentidate’s customers are still in the initial – intermediate stage of implementation, thus revenues will continue to increase just from roll-out.

My thinking is that the current customer base is likely sufficient to generate the required level of sales for break-even. My theory is this is why ADAT is comfortable with stating its goal of break-even in the coming quarters. If they know a customer’s billing is (x) amount at (y)% implementation, then that ratio should hold as implementation nears 100%.

The major customers are Apria, American Home Patient, Lincare, Liberty Medical, and several others. These healthcare providers’ business models are largely driven on working-capital management. There is a long delay from the time services/products rendered to patients until reimbursement from Medicare/other insurers. Much of this delay stems from extensive paperwork and physician signatures that must be completed and collected before these agencies can be reimbursed. Authentidate’s services aid in drastically reducing days sales outstanding (DSO), hence working capital requirements.

Home medical equipment providers, such as Apria and American Home Patient, benefit significantly from using Inscrybe, in turn, they persuade physicians to sign-up. Some physicians using Inscrybe have then turned to agencies not using Inscrybe, and have recommended that they start using Authentidate’s platform. That illustrates a powerful, viral process in which adoption can easily and rapidly spread. (see MD interview).

Doug Guy, SVP at American Home Patient commented about incorporating Authentidate’s solution (ADAT PR 4/23/2007) "We are realizing significant operational efficiencies as a result of deploying the Inscrybe eCMN capabilities in our billing centers and branch locations. Over the past 12 months, we have seen a 65% reduction in turnaround time of documents processed by physician offices through Inscrybe, a significant reduction in unbilled dollars, and a marked improvement in internal document processing throughput. Besides a direct impact on our bottom line, it has improved the service experience for our physician and patient communities."


Market Potential:
The market potential is massive. Enormous. The state of Indiana has been using Authentidate’s technology for DMV and court-related documents. In Germany, firms are authenticating electronic invoices for VAT tax compliance standards. The legal, financial, real estate, medical, and likely almost every other industry could benefit from using ADAT’s document security solutions.

The core issue is developing a critical mass of users, since adoption spreads virally. Hence, a user wanting to send documents requires the counterparty to use the technology as well. Think of a fax machine. The first fax machine was useless since it requires another fax machine to receive. Yet, as fax usage increased, more and more people purchased fax machines so they could correspond with those already using fax machines. Thus, adoption rates begin at a slow pace but accelerate quickly resulting in exponential growth.

Authentidate is expanding its addressable market. Over $500 billion are spent annually administering healthcare. $10’s of billions are spent handling business and legal documents. Document-intensive industries are stuck in a paper-based world, however, Authentidate provides solutions for migrating to a more efficient, electronic based environment. The following table is from Authentidate’s May 2008 shareholder meeting. It highlights the potential markets and revenue streams available to Authentidate.



Cost Reduction:
Operating expenses have been averaging $5-6 million per quarter, but have been trending down. Costs should continue to fall as ADAT recently cut 20% of its workforce, mostly mid-senior level positions. In addition, severance costs and legal fees will soon go away, further decreasing Authentidate’s expenses. Management is highly focused on cost control, and it should be able to continue to make progress in this area.

Operating Performance History:

Authentidate sold its DocStar and DJS marketing group to focus solely on security solutions. Looking at historical financial statements doesn’t represent an accurate picture of Authentidate’s current operations. For example, income statement found on Yahoo Finance shows sales of $17.5m-2005, $16.5m-2006, and $5m-2007. These figures include revenue from discontinued business segments. Revenues from continuing operations only, are illustrated below.

2003: 950

2004: 1250

2005: 2822

2006: 3870

2007: 4998


Sales growth for the past 5 years has averaged 56% per annum. Management declined to give specific guidance, but insinuated that Inscrybe (August release) will accelerate customer adoption and usage rate causing a significant increase in sales growth. Gross margins have historically ranged 60-70%. SGA expenses have been the primary problem, totaling $16.8m fro FY07. For the 3 quarters already reported for FY08, ADAT recored 4.4 million in sales.

Conclusion:
Authentidate is on pace to achieve cash flow break-even in the next 6-9 months, and subsequently become profitable on a GAAP basis. The stock trades for less than cash, hence no value is attributed to ADAT business nor as a going concern. The stock is undervalued because very few know about ADAT and its prospects. The scant trading volume confirms this, thus if more investors knew the facts surrounding ADAT, it would be trading higher, in my opinion. As ADAT moves to profitability, we will see increased interest in ADAT shares accompanied with higher prices.

Disclosure: Long ADAT

Authentidate Expects Cash Flow Break-even in 12m

Authentidate (nasd: ADAT) reported its 2nd quarter financial results last Thursday (Feb 7th) - Revenues increased 66%- to $1.66 million versus $1 million for the year-ago quarter. Sequentially, Sales for the 2nd quarter grew 58%. . ADAT continues to lose money, posting a loss of 29 cents a share. Yet, gross margin was 68% for the period. ADAT ended the quarter with a 23.3 cash position.

The most significant development was management announcing plans to achieve cash flow break-even in 12 months.

ADAT is aggressively cutting costs and reducing headcount by 20%. Management believes increasing revenues and reduced SG&A costs will result in positive cash flow hopefully in 12+ months. In addition, the company believes they will have abundant cash (stilll) when they reach that milestone.

ADAT feels revenue growth should continue to accelerate from the addition of new customers. Many existing customers are in the beginning stages of implementation, and revenue will rise as they ramp up usage.

Last November 15th, I wrote about the attractiveness of ADAT: ADAT- Attractive Speculative Play. My thesis was ADAT is attractive because it trades for less than cash on hand, and it’s growing the top-line as well. It doesn’t make sense for a company to sell for less than cash unless it’s heading straight for bankruptcy and/or has significant outstanding litigation. That was a real possibility for ADAT, but now it's looking like ADAT has cleaned up its legal issues and has embarked on a plan to reverse its cash bleed.

Fixed costs and one-time expenses are the primary factors impeding profitability. Gross margins are about 70%, which should improve with volume. ADAT’s core risk was not prospective growth materializing; moreover, it was whether ADAT cold remain afloat long enough for the adoption to take hold.

Heavy year-end tax selling coupled with general lack of interest have knocked down ADAT shares lately, leading to undervaluation. Authentidate’s had a strong balance sheet due to piles of cash and no debt. Income statement should shape up as the company continues to grow and cut costs. The catalyst for significant price appreciation hinges on achieving CF break-even. In the meantime, I believe ADAT shares are worth are least $1.

Businesses are often reluctant to implement new IT when current processes aren’t broken. The attempt to capture cost savings entails a risk of creating costly, unforeseen problems. Often, the hurdle is reaching critical mass- tested and proven among multiple firms. No firm is eager to be the guinea pig; but once several are on board, others are quick to sign up. In US, ADAT is in the stage of building a foundational user base; the initial customers are the most difficult to attract, Signing up customers will become easier with every new customer addition because a large user base legitimizes the product/service. Existing customers, in a way are vouching for the ADAT's e-doc solution.

Authentidate’s traction has been much slower than expected, but recent signs are pointing to a ramp-up in customer adoption. In a recent article:ADAT- Gaining Traction, I highlighted Authentidate’s recent contract developments.

BULLet Points:

1) Cash Holdings > Market Value
2) Book Value per Share- $ .97
3) Revenue Growth- TTM: 45% MRQ: 66%
4) SGA expense expected to decline significantly + high GM =>Operating Leverage


ADAT shares rose 30%, to 61 cents in Friday (2/8) trading, pushing its market cap up to 21m. The stock spent the morning session trading below the open, before gaining momentum to end the day up 14 cents & accompanied with strong volume.

Disclosure: Long ADAT

Authentidate (ADAT)- Gaining Traction in Germany

I wrote about Authentidate (nasd:ADAT-$0.92) several weeks ago claiming that it may be an attractive speculative play(article) given its potential upside coupled with a limited downside. My thesis was that ADAT’s new Inscrybe web platform might accelerate adoption of its products, which has immense market potential. I felt that the stock price should find support around current levels due to the cash on the balance sheet and the decrease of selling pressure. I wanted to discuss some recent developments in light of my previous opinion on Authentidate.

Authentidate recently announced a deal with The Bosch Group that comes on the heels of an October 12th announcement of an alliance with Lufthansa Revenue Services.

Authentidate announced November 28th that The Bosch Group domiciled in Germany is employing electronic signatures in its credit memo process with vendors effective immediately. Costly paper processes can be replaced with electronic forms compliant with the law.

Here is a simple overview of the process: Bosch sends out a credit memo to its vendors to purchase materials and then the vendors fill the order and return an invoice for the shipment. Both the credit memo and invoice can be signed electronically and archived with Authentidate’s eBilling Signature Server. Hence, not only will Bosch being using ADAT’s solution, all its suppliers will be as well. Authentidate’s solution satisfies the requirements stipulated by the German VAT Act and EU Invoicing Directive.

This is a significant development for several reasons.

1) Bosch Group is a large company employing 260,000 in 50 countries, and generated sales of 43.7 billion Euros in 2006. At its core, Bosch is a procurement and logistics firm supporting its R&D and manufacturing operations. Thus, Authentidate’s service should be an integral part of Bosch’s IT processes representing the potential for significant revenue.

2) Bosch’s decision to go with Authentidate demonstrates the trust and confidence it has in ADAT’s offering. Ostensibly, a firm such as Bosch, chooses partners carefully and with due diligence.

3) Adoption by a major industry player opens the door for further adoption by its peers and competitors. Bosch’s choice can lead to Authentidate becoming the de facto “industry standard” from achieving legitimacy in the eyes of IT directors industry-wide.

It’s hard to predict the revenue impact from the Bosch agreement, but it suspect it should be significant. If Bosch revenue is approx $65 billion, then 1/100 of 1% is 6.5 million, which may be the high-end with $650k at the low-end of the range. That’s purely a guess, but with the little information to go on, that’s my logic and would expect revenues closer to the low end of the range.

The spill over effects could be significant due to the publicity associated with a company of Bosch’s stature. I expect to see 3 or more new announcements in the next 3 months resulting from the Bosch decision. Granted, these are likely to come from much smaller players, yet I expect momentum to accelerate as ADAT’s solutions achieve critical mass (Bosch & Lufthansa).

Additionally, Authentidate is hosting Signature Day in February, which is a conference that explains and promotes the use of its technology. The Lufthansa and Bosch developments should provide momentum and create interest leading up to the conference. This should attract more participants and ultimately more customers.

As I said in my previous article, the next couple quarters will be a key indication whether ADAT’s offerings are gaining traction. The stock price has stabilized, yet for it to move higher adoption must come to fruition. If that does not occur, ultimately Authentidate will run out of cash in three years.

Disclosure: I am long ADAT

Authentidate (ADAT)- Attractive Speculative Play

Authentidate (nasd:ADAT) is an attractive,speculative play offering massive upside potential with little downside risk. ADAT trades @ near cash with a price / book multiple of 0.8x and has zero debt on its balance sheet. Optimistic expectations stemming from the USPS choosing Authentidate as the sole provider of the electronic postmark (EPM), drove ADAT’s shares to nearly $20 in 2004. As customer adoption has been much slower than expected, revenue traction has been soft causing shares to sink to all-time low price of $0.85. The concept of Authentidate’s product/service offerings has always been solid value proposition, yet support for customer implementation has been rather weak.

Authentidate restructured the company and adopted a new strategy resulting in the August release of its Inscrybe™ web-based platform. Inscrybe simplifies the implementation process, which will lead to increasing customer adoption and a dramatic acceleration in revenue growth. The prospects of accelerating revenue growth coupled with high gross margins make ADAT worth considering as a speculative holding given limited risk for further price deterioration.

Company Description: (from ADAT 10-k)
Authentidate Holding Corp. is a worldwide provider of software and web-based services that enable enterprises and individuals to exchange information securely and conduct trusted business transactions. Our offerings are targeted at enterprises and office professionals, and incorporate security technologies such as electronic signing, identity management, and content authentication to electronically facilitate secure and trusted transactions. In the United States, we also offer our proprietary and patent pending content authentication technology as a web-based service in the form of the United States Postal Service® Electronic Postmark. See USPS EPM.

New Product: Inscrybe Office
Taken from company press release 8/15/2007-
Inscrybe Office is based on Authentidate's proven Inscrybe suite of capabilities serving the document exchange needs of large enterprises today. The new web-based service combines powerful features, such as electronic signatures, content authentication and trusted time stamps using the United States Postal Service® (USPS) Electronic Postmark (EPM) seal, along with a host of other features that simplify the online exchange of critical and time-sensitive documents. Inscrybe Office is available to anyone with web access, via MyInscrybe.com, a new self-serve portal designed to provide individual users personalized access to Authentidate offerings.

Inscrybe Office, is a user-friendly service designed for business or personal use, to securely and conveniently sign, seal and confirm receipt of important documents over the web. In addition to supporting multiple electronic signatures on the same document, the new service offers senders and recipients the benefits of secure and verifiable online document exchange, with optional features such as acknowledgment of receipt, verification of recipient identity, and audit trails. A user may employ any combination of these optional features to legitimize a document transaction.

Inscrybe Office is ideal for legally binding or compliance-dependent transactions such as business or personal contracts, agreements, closing documents, transcripts, offer letters, prescriptions, authorizations and much more. Inscrybe Office has appeal for professionals and enterprises across a diverse range of industries such as education, financial services, healthcare, legal and real estate.

Business Model:
Authentidate provides security solutions for electronic documents so that legally binding contracts can be signed electronically. Authentidate’s technology verifies each party’s identity, timestamps the documents, and archives them at a 3rd-party retention facility. A “paperless” world falls short due to the requirements for signed, original documents, yet Congress passed the E-sign act in 2000 making electronic signatures legally binding given the specific security requirements are fulfilled.

Here is an example of the advantages to Authentidate’s offerings. To execute a contract, a physical signature must be obtained for an original document. This involves the need to print out a paper copy, sign it, and fed-ex the documents ($30 overnight) to the counterparty. The counterparty then receives the documents, goes to have their signature notarized, and then fed-exs the documents back to the originator In total, the transaction probably takes 2-3 days, several labor hours, and around $60 of shipping overhead.

With Inscrybe™, documents are sent and electronically signed online, thus taking only minutes to complete the whole process. Depending on volume discounts, an EPM only costs .10 to .80, providing huge cost savings from traditional signature methods. Evolution towards a truly “paperless” world is encumbered by the need for physically signed documents, yet Authentidate’s solution eliminates the need for paper copies allowing documents to reach a fully “paperless” state.

Operating Performance History:
Authentidate sold its DocStar and DJS marketing group to focus solely on security solutions. Looking at historical financial statements doesn’t represent an accurate picture of Authentidate’s current operations. For example, income statement found on Yahoo Finance shows sales of $17.5m-2005, $16.5m-2006, and $5m-2007. This figures include revenue from discontinued business segments. Revenues from continuing operations only are illustrated below.

2003: 950
2004: 1250
2005: 2822
2006: 3870
2007: 4998

Sales growth for the past 5 years has averaged 56% per annum. Management declined to give specific guidance, but insinuated that Inscrybe (August release) will accelerate customer adoption and usage rates causing a significant increase in sales growth. Gross margins have historically ranged 60-70%. SG&A expenses have been the primary problem, totaling $16.8m fro FY07. Ostensibly, sales would probably have to reach an annual run-rate of $25m for ADAT to attain profitability.

Limited Downside:
In my opinion, shares of ADAT shouldn’t fall much further due to multiple factors that should provide a price floor. Just looking at the balance sheet, shares almost trade at the value of cash items on the books. ADAT is debt free; liabilities only consist of accounts payable and deferred revenue. ADAT’s market value is roughly equal to net-tangible assets and lower than $1.13 BVPS. I feel these factors should place a limit to further price declines. Taking account of intangible assets, such as product technology, patents, and the USPS contract, a case can be made that ADAT should trade at a higher multiple to book value.

I think the important aspect to recognize is that ADAT, if needed, could sell itself to a larger company at a price, at least equal, but likely higher, than present value. Given the high gross margins for revenue streams, ADAT’s business model could be very attractive to a firm with a more efficient overhead cost structure. A market value of $29.3m and cash of $28m suggests the business model (incl. EPM) can be purchased for a little more than $1 million. If ADAT is unable to achieve a desired revenue run-rate accompanied with needed overhead cost-reductions, I am confident that another firm, with greater resources, could deliver successful results.

Thus, I feel that, just from value derived from the assets, ADAT shares should encounter a support level around its current price. If investors fail to see Authentidate’s value, it’s likely a firm in the related space will. It would be much more costly for a firm to “start from scratch” in duplicating Authentidate’s offerings than to just buy Authentidate itself.

1) $0.81 cash per share
2) $0.84 tangible book value per share
3) $1.13 book value per share
4) EPM contract with USPS
5) Authentication patents
6) Inscrybe web-based platform (incl. customer book)

Revenue Potential:
In the past, there was considerable interest for Authentidate’s product offering, yet the delivery and implantation aspect was more difficult for the customer which impeding adoption. Healthcare related firms have been the primary adopters thus far due to the benefits of processing medical claim documents electronically. To receive reimbursements, patient care services must submit certificates of medical necessity signed by a physician to Medicare or insurance provider.

Doug Guy, SVP at American Home Patient commented about incorporating Authentidate’s solution (ADAT PR 4/23/2007) "We are realizing significant operational efficiencies as a result of deploying the Inscrybe eCMN capabilities in our billing centers and branch locations. Over the past 12 months, we have seen a 65% reduction in turnaround time of documents processed by physician offices through Inscrybe, a significant reduction in unbilled dollars, and a marked improvement in internal document processing throughput. Besides a direct impact on our bottom line, it has improved the service experience for our physician and patient communities."

The market potential is massive. Enormous. The state of Indiana has been using Authentidate’s technology for DMV and court-related documents. In Germany, firms are authenticating electronic invoices for VAT tax compliance standards. The legal, financial, real estate, medical, and likely almost every other industry could benefit from using ADAT’s document security solutions.

The core issue is developing a critical mass of users, since adoption spreads virally. Hence, a user wanting to send documents requires the counterparty to use the technology as well. Think of a fax machine. The first fax machine was useless since it requires another fax machine to receive. Yet, as fax usage increased, more and more people purchased fax machines so they could correspond with those already using fax machines. Thus, adoption rates begin at a slow pace but accelerate quickly resulting in exponential growth.

Outlook:
The attractiveness of speculating on ADAT is that revenue traction could explode in a short time period. ADAT doesn’t face any direct competition; it’s real challenge is developing product awareness so that a critical mass can be attained. The degree of the operating leverage inherent in ADAT’s model (high gross margins) translates into more dollars falling to the bottom line as revenues increase.

In my mind the question will not be “IF” but rather “WHEN” regarding revenue traction. Since Authentidate is unprofitable, it needs to see significant revenue growth sooner than later. It should be evident over the coming 2-3 quarters whether ADAT’s revised strategy and Inscrybe platform is highly successful. I estimate the company has enough cash to fund operations for the next 2.5-3 years. It’s very uncertain if Authentidate will be successful in accomplishing this objective, yet at the current share price, it’s worth taking a gamble.