How to Trust but Verify in the Digital Age

By Michael Brush
April 06, 2006

One of the safest ways to go bottom fishing for troubled companies that could spring back is to look for businesses with a treasure trove of cash.

This cash – assuming there’s enough – can serve as a cushion to protect you from a sharp move down in the stock. Meanwhile, it gives the company some breathing room while it digs its way out of its hole.

That’s exactly what you find with a little Berkeley Heights, NJ-based business called Authentidate Holding (ADAT).

First, the cash: Authentidate had $52 million at the end of last year, which works out to $1.50 per share. The stock recently traded for $3.50.

Now for the potential rebound. Authentidate has three lines of business, but its new chief executive is counting on one to take off and make this company soar again. The ticket out: Software-based products that help companies confirm that important business documents were sent and received – and not altered if the details of a transaction have to be verified later.

“If you have a business process, especially one that spans across organizations, then very often one organization needs to prove to itself or someone else like a regulator that it has processed a certain type of content in a specific way,” says chief executive Surendra Pai.

That’s where Authentidate comes in.

Home medical equipment

The company achieved a coup of sorts last December when it signed up American HomePatient – a large provider of home medical equipment like oxygen tanks and wheel chairs. American HomePatient is using Authentidate’s software to streamline the paper flow with doctors and Medicare or insurance companies. The system also creates an “audit trail” in case there is trouble down the road.

Authentidate has a version of this product ready for companies that want to do everything electronically. But since doctors are still hopelessly stuck in the stone-age world of paper-based transactions, Authentidate had to tweak its offering to accommodate these digital laggards. In the system used by American HomePatient, doctors can still manage their side of the paperwork via fax – as they are accustomed.

But fully electronic versions of Authentidate’s offering will probably make it to the market, too. Pai thinks this foray into the medical equipment field is just the beginning. He also sees applications for document verification in law. Authentidate is testing products in law firms in South Carolina. The service could also be applied in other professions like finance, or even to verify electronic voting.

Only about 25% of Authentidate’s revenue comes from this more promising line of business. But that could change if recent growth trends are any indication. Revenue in this segment grew 13% in the last quarter of 2005 compared to the prior quarter. It came in at $1.25 million. The company also handles the technology behind the U.S. Postal Service’s electronic postmark offering. And it has a systems integration and a document imaging line.

Some clouds

To be sure, Authentidate has several clouds over it. Authentidate saw its finance chief leave at the end of January – not a comforting sign for many investors. And revenue is in decline. That’s just part of the shift from lower margin lines to the more profitable authentication software sales, says Pai.

Not even that cash hoard is safe, as plenty of sharks are circling to try to sink their teeth into it. While the stock took a sickening plunge to $2 at the end of last year from $18 in early 2004, several law firms sued Authentidate. Some are claiming that the Authentidate’s secondary offering in early 2004 – the one that raked in all the dough – was only successful because the stock was artificially high due to “misleading” comments about the company’s prospects.

These kinds of suits often go nowhere, but they are a distraction in the meantime.

The bottom line: The good news is that three insiders – including the chief executive – stepped up and purchased a healthy $200,000 worth of the company’s stock at prices between $2.76 and $3.40 in March, according to Thomson Financial. That’s not much below where you can buy it now. Since the first quarter – to be reported in the coming weeks -- may show signs of the beginnings of a turnaround, I’d buy right here. Given the recent volatility in the stock, you can probably improve your entry point with the judicious use of limit orders.

Disclaimer

At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.

For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.