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Authentidate: Big Bet On A Small Company

The following commentary about health stocks was written by Ankit Gupta, who blogs about investing at Selected Financials.

Authentidate (ADAT - Get Report) is a New Jersey based company providing IT solutions for the Healthcare markets. Specifically, they handle electronic medical/health records.

On Tuesday, Authentidate announced $3.4M of capital being raised through the issuance of common stock and warrants, underwritten by Rodman & Renshaw (RODM) .

The warrants are only good for 90 days, though, and exercisable at $1, with the stock recently trading right at $1. There is a clear bet from the investors that something will happen in the next 3 months, causing the stock price to go significantly above $1, making those warrants actually worth something. If the stock stays at its current level, these warrants could be worthless.

In the last quarterly report, we saw inventory for telehealth devices increase. These are sold through ExpressMD. The data in the following table image comes directly from their quarterly report. For a company that has such little cash, had to raise $3.4 million, get emergency financing for $3 million from a board member's family member, this is a significant move.

Inventory (in thousands)
   Sept. 30, 2009
 June 30, 2009
 Purchased Components
 $749  $312
 Finished Goods
 $181  --
 Total Inventory
 $930  $312

                                                                         Source: Authentidate quarterly report.

With investors putting money on the line for 90 day warrants, and Authentidate increasing inventory of a proprietary device, let's take a look at some other signs pointing to something coming up:

First, they have a telemonitoring device with FDA approval that competes with Intel (INTC - Get Report) and Phillips (PHG - Get Report) . They're in a market that does not yet have an established leader, so they're competing directly with larger established companies. For Authentidate to be in this market alone is very valuable and should result in significant sales.

In the most recent conference call, management talked about hiring somewhere around 20 employees to support the rollout of these devices. With their limited amounts of cash, this is only going to happen if there is immediate work that is the result of a contract they have been awarded. The fact that they're talking about it is a strong sign.

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