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Authentidate Holding's Merger With A Profitable Clinical Laboratory Implies A Value Of At Least $1 Per Share 3 comments

Authentidate Holding Corp. (NASDAQ:ADAT) announced a non-binding letter of intent for the acquisition of all of the outstanding membership interests of AEON Clinical Laboratories, a profitable testing facility that provides health care practitioners with medical toxicology, pharmacogenomics, cancer genetic testing, and molecular biology tests. The deal was well-received by the market as the stock price rose 140% on 6 million shares traded on August 25. The positive reaction is merited as it helps an unprofitable company running out of cash like ADAT rise from the ashes but I believe this deal should value ADAT at a minimum of $1 based on the new-found profitability and synergies between the two combined companies. AEON is prompted to accept this merger as it allows for an immediate public listing and it has growth targets, where if met, allows it to take over the majority of the company it what turns out to be a reverse takeover.

The details of the proposed merger filed with the SEC are as follows:

The Letter of Intent contemplates the AEON members will be issued such number of Series E Shares as shall be convertible into 19.9% of the outstanding shares of the Company's Common Stock on the date of the closing of the merger transaction, and an additional 5% of the outstanding shares of the Company's Common Stock upon approval of the merger transaction by the shareholders of the Company. Additional Series E Shares will be issued to AEON members in 2016 and 2020 if AEON achieves certain financial results. The additional 2016 Series E Shares will be convertible into 24% of the outstanding shares of the Company's Common Stock on the date of the closing and will be issued to the AEON members provided AEON achieves $16 million of EBITDA in calendar year 2015. The AEON members will be issued another tranche of Series E Shares in 2020 which, including the previously issued Series E Shares, will be convertible into 85% of the outstanding shares of the Company's Common Stock (on a partially diluted basis) provided AEON achieves $65.9 million in EBITDA, in the aggregate, in calendar years 2017 and 2018, or $99 million in EBITDA, in the aggregate, for calendar years 2016, 2017 and 2018. The Letter of Intent also provides for the issuance of Series E Shares as bonus shares for the achievement of $117 million in net income for the four fiscal years ending December 31, 2019, convertible into 5% of the outstanding shares of the Company's Common Stock (on a partially diluted basis). The holders of the Series E Shares will have certain preferential rights, including the right to vote separately as a class to nominate and elect one director for each 10% of the outstanding shares of Authentidate's Common Stock into which the outstanding Series E Shares shall be convertible.

Upon closure of the deal, AEON...


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