aeon global health corp. · 2018-09-05  · $1.4 billion u.s. market for genetic testing from 0.2%...

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PLEASE READ DOMESTIC AND FOREIGN DISCLOSURE/risk information beginning on page 25 and Analyst Certification on page 26 September 5, 2018 Outperform Aeon Global Health Corp. (AGHC) Current Price: $0.67 Price Target: $3.90 A Company Below the Radar But Poised for Growth AGHC is a provider of clinical testing services. Currently, the majority of the company’s $18-$20 million annual revenues come from regional toxicology services, but Aeon has new and aggressive management that is in early stages of a major expansion into national and international markets for genetic testing services, a large and rapidly growing segment with a history of successful penetration by smaller niche competitors. We believe Aeon Global Health is poised to deliver record growth in revenues over the next four years from increased sales in its urine and blood testing services in the short-term and from increased U.S. and international market penetration of its multiple, best-in-class genetic testing panels in the long-term. We are forecasting a growth in revenues from about $18 million in FY2018 to over $32 million in FY2019, mostly driven by near-term expansion opportunities in the regional toxicology market. In the longer term, we believe Aeon could increase its share of the $1.4 billion U.S. market for genetic testing from 0.2% to 1% and its share of the $2.6 billion international market for genetic testing from 0% to 0.1% by 2022. These are both rapidly growing market segments and we estimate successful headway here could add $40 to $45 million to Aeon’s revenues in 2022. The company has a mix of experienced and successful diagnostic industry executives and entrepreneurial leadership that has shown a rare level of passion combined with strategic planning. If anyone can remake Aeon into a significant player in the genetic testing market, we think this management team can. We believe that by the end of 2019 Aeon could become sustainably profitable. We forecast potential revenue growth from $18 million now to $60-$65 million in 2022, assuming the company gets the resources needed to make it past 2018-19 and to drive awareness of its genetic testing services. We are initiating coverage of AGHC with an Outperform recommendation and a target price of $3.90. MARKET DATA Last Price $0.67 52–Week High $1.65 52–Week Low $0.07 Market Cap. (millions) $4.9 Shares Out. 7,249,370 3 Month Avg. Daily Vol. 3,626 Estimates: ($ per share) Q1 Q2 Q3 Q4 FY FY-19E 0.17 0.21 0.18 0.19 0.75 FY-18E -0.17A -0.42A -0.25A 0.07E -0.63E FY-17A 0.00 -0.06 0.04 -4.36 -4.51 Valuation: Item Metrics Cash & Equivalents $469,727 TTM avg. Quarterly EBITDA ($821,755) Qtrs. Cash Left 0.6 Working Capital ($6,212,560) Book Value $2,554,779 Source: IFS Securities and SEC filings. Note: Fiscal Year ends June 30, not Dec. 31. Data as of most recent reported quarter. Suitability: Venture Risk (VR) David Bouchey, Ph.D. Managing Director/Senior Analyst 720-662-6508 [email protected] See required disclosures at the end of report.

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  • PLEASE READ DOMESTIC AND FOREIGN DISCLOSURE/risk information beginning on page 25 and Analyst Certification on page 26

    September 5, 2018

    Outperform

    Aeon Global Health Corp. (AGHC) Current Price: $0.67

    Price Target: $3.90

    A Company Below the Radar But Poised for Growth

    • AGHC is a provider of clinical testing services. Currently, the majority of the company’s $18-$20 million annual revenues come

    from regional toxicology services, but Aeon has new and aggressive

    management that is in early stages of a major expansion into national

    and international markets for genetic testing services, a large and

    rapidly growing segment with a history of successful penetration by

    smaller niche competitors.

    • We believe Aeon Global Health is poised to deliver record growth in

    revenues over the next four years from increased sales in its urine and

    blood testing services in the short-term and from increased U.S. and

    international market penetration of its multiple, best-in-class genetic

    testing panels in the long-term.

    • We are forecasting a growth in revenues from about $18 million in FY2018 to over $32 million in FY2019, mostly driven by near-term

    expansion opportunities in the regional toxicology market.

    • In the longer term, we believe Aeon could increase its share of the $1.4 billion U.S. market for genetic testing from 0.2% to 1% and its

    share of the $2.6 billion international market for genetic testing from

    0% to 0.1% by 2022. These are both rapidly growing market

    segments and we estimate successful headway here could add $40 to

    $45 million to Aeon’s revenues in 2022.

    • The company has a mix of experienced and successful diagnostic

    industry executives and entrepreneurial leadership that has shown a

    rare level of passion combined with strategic planning. If anyone can

    remake Aeon into a significant player in the genetic testing market,

    we think this management team can.

    • We believe that by the end of 2019 Aeon could become sustainably

    profitable. We forecast potential revenue growth from $18 million

    now to $60-$65 million in 2022, assuming the company gets the

    resources needed to make it past 2018-19 and to drive awareness of

    its genetic testing services.

    • We are initiating coverage of AGHC with an Outperform

    recommendation and a target price of $3.90.

    MARKET DATA

    Last Price $0.67 52–Week High $1.65 52–Week Low $0.07 Market Cap. (millions) $4.9 Shares Out. 7,249,370 3 Month Avg. Daily Vol. 3,626

    Estimates: ($ per share)

    Q1 Q2 Q3 Q4 FY

    FY-19E 0.17 0.21 0.18 0.19 0.75 FY-18E -0.17A -0.42A -0.25A 0.07E -0.63E FY-17A 0.00 -0.06 0.04 -4.36 -4.51

    Valuation:

    Item Metrics

    Cash & Equivalents $469,727

    TTM avg. Quarterly EBITDA ($821,755)

    Qtrs. Cash Left 0.6 Working Capital ($6,212,560) Book Value $2,554,779 Source: IFS Securities and SEC filings. Note: Fiscal Year ends June 30, not Dec. 31. Data as of most recent reported quarter.

    Suitability:

    Venture Risk (VR)

    David Bouchey, Ph.D. Managing Director/Senior Analyst

    720-662-6508

    [email protected]

    See required disclosures at the end of report.

  • September 5, 2018

    IFS Securities

    Aeon Global Health Corp. Page 2 of 26 David Bouchey Ph.D.

    [email protected]

    Investment Thesis

    Aeon Global Health is emerging from the turmoil of going public via a reverse merger. The company has been able to profit in a newly created reimbursement nightmare for toxicology screening that has sent competitors to bankruptcy. We believe Aeon could fill the void left by the departures of competitors with less well designed cost structures and increase its toxicology screening business over the next several years. Further, Aeon has a superior set of genetic testing panels that we believe could allow the company to dominate some important niche segments and become a global player in the $4 billion worldwide market for genetic testing and analysis and provide impressive long-term growth for investors.

    This opportunity does come with some hair on it. The company has a very small valuation with shares currently priced at $0.67 and a market capitalization of $4.9 million. Shares are not liquid and trade on the Nasdaq OTC bulletin board. We believe this stock is below the radar of most institutional investors. Aeon is low on cash, although the CEO has been willing to support the company using his personal wealth. Insider ownership had been set to increase significantly upon reaching certain EBITDA goals but has just recently been reset to much more reasonable levels of dilution.

    Considerations:

    In early 2018, the Centers for Medicare & Medicaid Services (CMS), the government agency charged with healthcare reimbursement for a significant portion of U.S. citizens, implemented a new reimbursement rate for toxicology screens that was considerably lower. As a result, many providers with high cost structures left the market. This has caused physician groups to seek new providers. Due to the foresight of Aeon’s management and their focus on keeping costs low, Aeon is able to profitably compete for this business. We see growth in the toxicology testing market fueled by new contracts with physician groups looking for new suppliers. If Aeon can add one new contract per year, we estimate the company could increase its revenues from this segment from about $20 million in calendar 2018 to about $60 million in calendar 2022. The company has indicated it has recently added a contract with a 68 physician group, so has already met our goal for this year.

    The global market for genetic testing was valued at $4 billion in 2016 and estimated to grow to $10.5 billion by 2022. Aeon competes in three of the more important segments of this market: cancer risk, pathogen identification in women’s health and pharmacogenomic response determination. Aeon’s products have market leading potential in each of these segments. These are products with significant growth potential in large, rapidly growing markets and with strong gross margins. We compiled a list of companies with comparable but mature product lines. The valuations for these

  • September 5, 2018

    IFS Securities

    Aeon Global Health Corp. Page 3 of 26 David Bouchey Ph.D.

    [email protected]

    companies range from $17 million to $75 million, which indicates the possible upside potential for Aeon (whose market value is about $4.9 million). Although the company has been able to market these tests and did sign a contract to provide these services in some Central and South American markets, Aeon has only just begun to commercialize them. We believe the company may require additional capital to fund the development of a dedicated sales and commercial structure in order to realize the long-term growth we estimate is possible.

    If any management team can make this work, it’s the team already assembled at Aeon Global Health. Management has the mix of entrepreneurial talent, market and product expertise and industry experience necessary to succeed, in our opinion. The co-founder and CEO, Sonny Roshan, is a self-made multi-millionaire who has founded multiple successful businesses and has almost two decades experience running medical services companies. The Chief Operating Officer, David Goldberg, joined in 2017 and brings decades of experience in planning, marketing, sales and business development from premier firms Enzo Biochem., Gallard Schlesinger Chemical Manufacturing Corp. and New England Nuclear. Dr. Richard Mullins, the Lab Director, has more than 25 years of experience directing clinical laboratories. He is the former director of the clinical laboratories at St. Jude Children's Hospital in Memphis, Emory University Hospital and the Children's Hospitals of Atlanta. The CFO, Michael Poelking, joined Aeon in July 2017 and brings over 15 years of senior financial management experience.

    Investment Recommendation

    After considering the good and the bad, we feel Aeon is about to emerge from the turmoil of its merger with Authentidate (ADAT) as a leaner, more focused and more effective entity with both near-term growth opportunities in the urine and blood toxicology and analysis markets and longer-term growth opportunities in the large and rapidly growing global genetic testing markets. We estimate revenues from toxicology testing could grow from $20 million in calendar 2018 to $60 million in 2022 while revenues from genetic testing could grow from $4 million to a range of $21 to $64 million over the same time period. Based on our discounted analysis of EBITDA contribution for FY2018 through FY2021, we arrive at a price target of $3.90. We are initiating coverage of AGHC with an Outperform recommendation.

  • September 5, 2018

    IFS Securities

    Aeon Global Health Corp. Page 4 of 26 David Bouchey Ph.D.

    [email protected]

    Aeon Global Health Corp. - Company Synopsis

    History:

    Aeon Global Health was founded in 2011 and is incorporated in the state of Delaware. It is headquartered at 2225 Centennial Drive, Gainesville,

    Georgia 30504. Its website is http://www.aeonglobalhealth.com/. The company has about 83 full-time employees.

    On January 27, 2017, Aeon Global Health (then called Aeon Clinical Labs, a private company) merged with Authentidate Holding Corp. (ticker ADAT), a publically traded company. Aeon was the surviving entity. On Feb. 1, 2018 the company changed its ticker to AGHC, its current symbol. Shares are traded on the Nasdaq OTC bulletin board.

    The ownership of Aeon is split between the ownership of ADAT and the ownership of Aeon Clinical Labs. The ownership of Aeon Clinical Labs is concentrated in the hands of three partners who formed Peachstate Health Management, LLC. These partners are Sonny Roshan, the CEO, Sohail Ali, Sonny’s brother and business partner and Gulzar Roy, a long-time business associate of Sonny’s and wife of an Aeon employee. Sonny controls about 50% of Peachstate, the other two 25% each. Peachstate controls about 26% of the current shares outstanding of AGHC.

    What does Aeon do?

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

    Management Team:

    • Sonny Roshan, Co-founder and Chair. Sonny is a self-made

    multi-millionaire who has founded multiple successful businesses

    and has almost two decades experience running medical services

    companies. Prior to Aeon, Mr. Roshan served as the Chief

    Executive Officer of Universal Medical Services, LLC. In 2008,

    Mr. Roshan founded a chain of retail primary care clinics. Mr. Roshan

    also co-founded Palms Recovery Corporation, a provider of

    treatment for addiction, alcoholism, and dual diagnosis

    • David Goldberg, Chief Operating Officer. Mr. Goldberg joined in

    2017 and brings decades of experience in planning, marketing, sales

    and business development from premier firms Enzo Biochem.,

    Gallard Schlesinger Chemical Manufacturing Corp. and New

    England Nuclear.

    • Michael Poelking, CFO. Michael Poelking joined Aeon in July 2017

    and brings over 15 years of senior financial management experience.

    • Richard Mullins Ph.D., Lab Director. Dr. Richard E. Mullins has

    more than 25 years of experience directing clinical laboratories. He is

    the former director of the clinical laboratories at St. Jude Children's

    Hospital in Memphis, Emory University Hospital and the Children's

    Hospitals of Atlanta.

    http://www.aeonglobalhealth.com/

  • September 5, 2018

    IFS Securities

    Aeon Global Health Corp. Page 5 of 26 David Bouchey Ph.D.

    [email protected]

    • Shawn Desai, Ph.D., J.D., Chief Technology Officer. Mr. Desai is

    a registered patent lawyer with a Ph.D. in Chemistry from Emory

    University.

    • Paul Suda, Gen. Counsel. Mr. Suda has been practicing law in

    state and federal courts for over 25 years.

    Our analysis:

    • Management has put together a solid strategy and an excellent set of products with impressive revenue generating potential. We think that management has the right mix of entrepreneurial talent, market and product expertise and industry experience necessary to achieve our forecasted revenue growth.

    • The CEO and certain other executives have agreed to accept stock in lieu of salary, which we believe demonstrates clearly their commitment to Aeon and their belief in the upward direction of the company. This is further exemplified by the line of credit recently given the company by the CEO, Sonny Roshan.

  • September 5, 2018

    IFS Securities

    Aeon Global Health Corp. Page 6 of 26 David Bouchey Ph.D.

    [email protected]

    Revenue Analysis

    Sources of Revenue:

    Aeon derives revenues from four product lines. The telehealth and hosted software product lines are left over from the Authentidate side of the 2017 merger and the toxicology and genetic testing lines were developed by Aeon (see flow chart below):

    Authentidate Products:

    When Authentidate was a separate entity, it specialized in commercializing telehealth and hosted software products.

    Hosted software. The hosted software product, called Inscrybe, is a secure and simple interface that allows physicians, nurses, hospital staff, external care facilities or health insurers to send, receive, sign, and track healthcare records, supporting documents, patient discharge orders and referrals or lab results and images on the web or via electronic fax instead of by paper. Inscrybe is designed to streamline clinical and administrative processes, cut costs and simplify work.

    Telehealth. The Telehealth Solutions product line is a web-based application that allows doctors and clinical staff to remotely monitor the health of patients at their homes. This is useful with patients with chronic diseases or that require frequent monitoring of vital signs.

    Our analysis: Since these product lines are not a focus of the company, the company is unlikely to invest resources in keeping them up. We expect flat sales near-term that gradually decline. Combined telehealth and software revenues were only $1.3 million in fiscal 2017 and we expect them to be about $1 million in fiscal 2018.

    TotalRevenues

    AuthentidateProducts

    Aeon Products Toxicology

    GeneticTests

    Telehealth

    HostedSoftware

    Women's Health Panel

    CancerRisk Panel

    Pharmaco-genomic

    Panel

  • September 5, 2018

    IFS Securities

    Aeon Global Health Corp. Page 7 of 26 David Bouchey Ph.D.

    [email protected]

    Aeon Global Products:

    The product lines brought to the merged entity by Aeon Clinical Labs include toxicology testing and a series of genetic testing products.

    Toxicology. Toxicology testing uses HPLC (High Performance Liquid Chromatography) and tandem mass spectroscopy to determine presence and levels of up to 85 different drugs and metabolites. Usually, the testing is done on samples of a patient’s urine. These assays are popular for work-related drug screening as well as determining levels of prescription drugs and their metabolic by-products.

    Aeon reports revenues from toxicology testing and genetic testing together under the line item Service Revenues on the Income Statements included in its quarterly earnings reports filed with the SEC (Securities & Exchange Commission). Currently, toxicology testing makes up about 85% of these revenues.

    The HPLC and mass spectroscopy machines used to perform toxicology tests are expensive but durable and long-lived. Aeon acquired these machines second hand at big discounts and owns them outright, so its cost structure is much lower than many of its competitors. We estimate that the company is achieving gross margins from 75% to 85%, depending on the number of drugs and/or metabolites tested. Doctors can specify which individual agents they want tested or can order panels. Panels vary in number of agents they test for. The more drugs a panel includes, the more Aeon can charge. Reimbursement rates increase with panel size.

    In addition, Aeon has the lab equipment necessary to do wellness testing on blood samples. This tests for such things as cholesterol levels and blood chemistry levels. This capability makes Aeon more of a full service lab and is not generally found in competing providers of toxicology testing. We believe that increasing the customer base for Aeon’s toxicology testing services could also increase demand for its wellness testing.

    Genetic Testing. Aeon is an innovator in the field of genetic testing. Aeon can sequence DNA from patient samples and analyze the resulting genetic data to provide personalized information vital to guiding decisions regarding the prevention, diagnosis, and treatment of multiple diseases.

    The company currently offers genetic testing in three product areas:

    Genetic test for cancer risk. AEON’s cancer genomic testing looks for mutations in a patient’s DNA that are known to increase the risk of certain types of cancer. Aeon offers the analysis of thirty seven genes covering eighteen different cancers. This is the most comprehensive genetic cancer screening profile we have found in the industry. Cancer screening panels from Invitae, Fulgent, GeneDx, Myriad Genetics and Color Genomics all test for either fewer genes or fewer types of cancer.

    Pharmacogenomics testing. This genetic testing profile provides information on the connection between a patient’s unique genetic makeup and their response to certain cardiology, pain and psychiatry medications. For example, certain genetic mutations cause either higher or lower rates of metabolism for many drugs. Doctors can use the pharmacogenomic information to more accurately dose their patients, increasing the

  • September 5, 2018

    IFS Securities

    Aeon Global Health Corp. Page 8 of 26 David Bouchey Ph.D.

    [email protected]

    effectiveness of treatment. Aeon’s profile also can reveal risk factors and possible drug-drug interactions that could lead to side effects and/or reduced effectiveness.

    MDx Advantage® Women’s Health Profile. This panel identifies microorganisms including bacteria, fungi, and viruses through DNA detection. Aeon’s profile delivers a snapshot of a patient’s vaginal micro-environment covering 34 organisms. It uses the accuracy of DNA matching to provide a pin-point ID to the species level. This gives doctors the ability to provide better, data-driven treatment.

    We note that Aeon has the capacity to add new genes to its current testing profiles as well as to add new categories of testing services.

    Our analysis: One of the advantages of the genetic testing market is that DNA is relatively stable and easy to ship. This means that a doctor in Germany or China or Chile or New York can take a patient swab and send it to Aeon’s facility in Georgia without degrading the patient’s DNA, enabling Aeon to compete worldwide for genetic testing business. Aeon can offer the same turn-around time as much larger competitors but with a superior product, better service and a better cost structure which allows Aeon to compete on price in a way that others cannot.

    We believe Aeon offers best in class genetic analysis in each of its three categories. Both the Cancer Genomics and Pharmacogenomics panels are more comprehensive than other available tests we have found. The Women’s Health Profile offers a particularly attractive opportunity, in our opinion. The current standard for diagnosing the cause of most vaginal diseases is microscopic analysis and culturing. These tests can take a long time, are labor intensive and are susceptible to error due to the presence of non-pathogenic micro-organisms that are part of the natural microenvironment. While we have found genetic tests for vaginitis and vaginosis offered at a few medical centers, there is a distinct lack of FDA approved, commercially available genetic tests in this therapeutic market, giving Aeon a clear advantage.

    According to industry research, the global next-generation sequencing genetic testing market is expected to grow from generating $4 billion in revenues in 2016 to generating $10.5 billion by 2022. This is an annual growth rate of about 17%. If Aeon can increase its share of the U.S. market for genetic testing from 0.2% to 1% and its share of the international market for genetic testing from 0% to 0.1% by 2022, we estimate the company could add $40 to $45 million to revenues. We note that success in the genetic testing business may increase the likelihood that Aeon could be acquired for a premium.

    One problem is the lack of awareness that Aeon has these genetic testing panels, both in the medical community and in the general public. We believe that the company may need additional cash to build a sales organization to promote its genetic panels and may need to advertise to increase general public awareness.

  • September 5, 2018

    IFS Securities

    Aeon Global Health Corp. Page 9 of 26 David Bouchey Ph.D.

    [email protected]

    Market Analysis:

    Genetic Testing Markets:

    According to industry research, the market for next-generation sequencing genetic testing in the U.S. was estimated at $1.4 billion in 2016. For markets outside the U.S. (called OUS or international markets), the value was estimated at $2.6 billion. The combined, worldwide value of the genetic testing market in 2016 was estimated at $4 billion. The global genetic testing market is expected to reach $10.5 billion in 2022, with $3.6 billion of that generated in the U.S. This implies an approximate growth rate, using straight line growth, or 17% per year.

    We estimate that Aeon could realize about $3.8 million in revenues from genetic testing services in calendar year 2018. This is about 0.2% of the estimated U.S. market (assuming all of Aeon’s genetic testing is batched as U.S. revenue). We developed a low-end scenario where Aeon was able to increase its U.S. market share from 0.2% to 0.5% by 2022 and its OUS market share from 0% to 0.05% as well as a high-end scenario where Aeon could increase its U.S. market share to 1.5% and its OUS market share to 0.15% and a mid-case scenario where Aeon increases its U.S. market share to 1.0% and its OUS market share to 0.1% by 2022. The resulting revenue estimates are presented below:

    We used the mid-case scenario in our financial model and future estimates for Aeon Global.

    Aeon Global is in-network for major healthcare networks including Blue Cross/Blue Shield, Aetna and United Healthcare.

    Value of Genetic Testing Market (millions, USD)

    2016 2017 2018 2019 2020 2021 2022

    U.S Market $1,400 $1,638 $1,916 $2,242 $2,623 $3,069 $3,591

    Global Market $4,000 $4,696 $5,513 $6,472 $7,599 $8,921 $10,473

    OUS Market $2,600 $3,058 $3,597 $4,230 $4,975 $5,851 $6,882

    Assumes straight line growth

    Share of Genetic Testing Market to Aeon (millions, USD)

    Penetration 2016 2017 2018 2019 2020 2021 2022

    Mid 1.0% U.S Market $4 $7 $13 $23 $36

    Case 0.1% OUS Market $0 $1 $2 $4 $7

    Total GTS sales $4 $8 $16 $27 $43

    Penetration 2016 2017 2018 2019 2020 2021 2022

    Low 0.5% U.S Market $4 $6 $8 $12 $18

    End 0.05% OUS Market $0 $0 $1 $2 $3

    Total GTS sales $4 $6 $9 $14 $21

    Penetration 2016 2017 2018 2019 2020 2021 2022

    Hign 1.5% U.S Market $4 $7 $13 $30.69 $54

    End 0.15% OUS Market $0 $1 $2 $6 $10

    Total GTS sales $4 $8 $16 $37 $64

  • September 5, 2018

    IFS Securities

    Aeon Global Health Corp. Page 10 of 26 David Bouchey Ph.D.

    [email protected]

    Key factors fueling the growth of the molecular diagnostic market:

    • An aging population increasing the demand for accurate, cost-effective testing

    • A diverse biotech industry that has produced a plethora of new tests

    • Faster time to market for new molecular tests that now receive less rigorous oversight from the FDA than pharmaceuticals

    • Higher payment than most lab tests (CMS pays from $1500 to $4,000 for complex gene expression diagnostic panels).

    There are many reasons why the genetic testing market is growing so fast, as highlighted above. Genetic testing is based on DNA sequence analysis which is very accurate and reproducible. The speed at which a DNA sample can be sequenced has dramatically improved while the cost of doing so has fallen sharply. The number and scope of genetic tests available to patients and their doctors has increased over the past five years alone to the point where doctors would be remiss in their practice if they do not use these tests. For example, science has uncovered many new genetic anomalies that are associated with risk of cancer and biotech companies are now responding by developing new and more effective drugs that target these specific anomalies.

    Perhaps most important is that these genetic tests can help identify patients at risk earlier in the disease process, can identify more effective and less toxic treatment regimens and generate better patient outcomes. This saves the healthcare system money. As a consequence, the FDA has established less cumbersome pathways to regulatory approval and CMS has established a reimbursement policy that rewards new and innovative entrants. For example, current genetic testing panels that assess relative risk of different types of cancer range in price from $1500 to $4000 but out of pocket cost to the consumer are typically about $250.

    Competition:

    We rate competition in the Women’s Health genetic testing market segment as almost non-existent. This is obviously good for Aeon Global, but it also means the task of generating market awareness could be much harder.

    We rate competition in the pharmacogenetics testing market segment as strong with companies like Dynamic DNA Laboratories, GeneAlign, OneOme, GENETIConcept, geneleX, Transgenomic, Millennium Health and Pathway Genomics as well as diagnostic industry leaders like LabCorp and Quest Diagnostics. This could limit opportunities for Aeon, although Aeon’s superior cost structure and customer service could be significant competitive assets.

    The cancer risk profile market segment is especially interesting. It is characterized by strong pricing and reimbursement abilities, relatively weaker competition in our view and is experiencing high demand.

  • September 5, 2018

    IFS Securities

    Aeon Global Health Corp. Page 11 of 26 David Bouchey Ph.D.

    [email protected]

    Cancer risk competitors include:

    • The Invitae Common Hereditary Cancers genetic test panel. This panel tests for more genes than Aeon does (46 versus 37) but assesses risk in far fewer cancer types (5 versus 18). Its cost is at the low end at $1500 with out of pocket cost at $250. This test requires 3-5 mls of the patient’s blood be shipped to the company’s processing facility. Turn-around time is about 2 weeks. The need for 3-5 mls of blood and a 2 week turn-around appears standard in each of the competitors listed here. Aeon can use blood, but does not require it. Its turn-around is only slightly shorter at about 1.5 weeks. The Invitae Corp. (ticker NVTA) is a $1 billion market cap company (it was $580 million a month ago).

    • Fulgent’s Hereditary Cancer Test is focused on 29 genes and covers 5 cancer types (although they also offer to screen for 123 genes in a general health risk test). Fulgent is priced at the high end at about $3000 and patient out of pocket costs vary by insurance. Fulgent Genetics (ticker FLGT) is a $70-$75 million market cap company.

    • The GeneDx Common Cancer Management Panel covers 37 genes in 8 cancer types. Founded in 2000 by two NIH scientists (NIH is the National Institutes of Health in Bethesda, Md), GeneDx was bought by BioReference Labs in 2006 for $17 million. It had annual revenues of about $5 million at the time.

    • Myriad Genetic’s myRisk Hereditary Cancer test is a 28 gene panel that covers 8 cancer types. Its cost is the highest at $4000. Myriad Genetis (MYGN) is a $3.5 billion market cap company.

    • Color Genomic’s Hereditary Cancer test covers 30 genes and 8 cancer types. Color Genomics is a privately held company that has raised over $150 million.

    • Others. There are other companies that offer genetic testing for specific genes or specific cancer types that we do not consider as competitors but that investors may be familiar with. An example is 23andMe, a private company well known for its numerous TV commercials. Among its many products, 23andMe offers genetic testing for the BRCA1 and 2 genes that are linked to higher risk of breast and ovarian cancers. 23andMe does not need a prescription to sell this test.

  • September 5, 2018

    IFS Securities

    Aeon Global Health Corp. Page 12 of 26 David Bouchey Ph.D.

    [email protected]

    Market Analysis:

    Toxicology Market:

    The key fact is that clinical diagnostic laboratories like Aeon Global contribute only 2.5% to health care costs but drive 70% of clinical decision-making. As long as medicine remains a data-driven process there will be a need for Aeon’s services.

    Driven by the nation’s epidemic addiction to painkiller medications, regulations requiring drug screening for many types of employment and the liabilities generated by not screening employees, the number of urine drug tests performed has been growing steadily. In 2014, Medicare spent $8.5 billion on urine drug tests. In 2015, Quest Diagnostics alone performed 9.5 million urine drug screens.

    Competition:

    The market for urine drug testing is dominated by the two biggest players, Laboratory Corporation of America (ticker LH) and Quest Diagnostics, Inc. (ticker DGX). However, they are definitely not alone.

    According to the HHS Office of Inspector General there are approximately 7,000 clinical labs in the US. According to the Centers for Medicare & Medicaid Services (CMS), 90 percent of the testing volume reported to it came from 658 independent labs. Other entities submitting data included 1,106 physician office labs, 21 hospital labs, and 157 other kinds of labs. They each reported 7.5 percent, 1.0 percent, and 1.4 percent of the test volume, respectively.

    Key Recent Event: Change in Reimbursement

    Prior to 2018, laboratories were paid about $20 per reported drug for quantitative urine drug tests performed by Liquid Chromatography-Mass Spectroscopy methods (which is what Aeon uses). This meant that a large, physician-specified panel of tests could yield significant reimbursement, often in the $2,000 to $3,000 per panel per patient range. The very high profitability associated with these tests led to aggressive promotion by reference laboratories and the growth of physician office labs which, in turn, led to dramatic overutilization of urine screens. CMS and other payers responded.

    The Protecting Access to Medicare Act (PAMA), was signed into law in 2014. This law gave CMS the authority to change its rules regarding reimbursement for drug testing/urine screens. In 2016, CMS finalized its rules lowering the reimbursement rates by 80% to 90% for drug testing panels. These changes took effect on January 1, 2018.

    One effect of this change in reimbursement was that many toxicology testing labs made large cuts in their workforce or left the business altogether. This has significantly reduced the competition for Aeon Global. Importantly, many providers of clinical testing have sought to shore up profits by cutting customer service. The time it takes to get test results from Lab Corp. or Quest is about 7 days after sample submission. In comparison, the turn-around time at Aeon is only 1.5 days. Aeon Global

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    [email protected]

    offers sample pick up and customer support on a 24/7 basis while many competitors restrict theirs to business hours.

    What does this mean for Aeon? It means there are physicians, clinics and hospitals who still need toxicology testing but have seen their providers disappear or cut back on their business and service levels. Aeon Global can compete for this business and, in our view, win it, providing a source of revenue growth not available to many of its competitors. In our model, if Aeon can add only one new good-sized client per year, it can grow revenues from urine drug testing from $20 million in calendar 2018 to $60 million in calendar 2022. We note that Aeon has already added a new key client this year.

    Management has been very forward thinking in how it set its cost structure. Aeon acquired its testing machines second hand at a big discount and owns its testing facility in Georgia. We believe its cost per panel is generally near to $50 while it can generally bill $200 to $250 per panel (depending on the number of drugs and/or metabolites included in the panel; bigger panels bring higher prices). This cost structure allows Aeon to compete on price when other providers are declaring bankruptcy. Management also puts an emphasis on customer service, which we believe has been an important factor in winning new business in the past and could continue to be a driving factor in the future.

    Our analysis: We believe Aeon Global’s toxicology business is now recovering from the industry-wide shock of the CMS reimbursement cuts and could be a source of significant near-term revenue growth, essentially carrying the company until its genetic testing business takes off.

    Although the company can achieve this without additional resources, we must note that Sonny Roshan has been a virtual one-man show for sales. At some point, we would like to see the company raise capital for the purpose of expanding its sales force both in toxicology and in genetic testing.

    $0

    $1,000,000

    $2,000,000

    $3,000,000

    $4,000,000

    $5,000,000

    $6,000,000

    $7,000,000

    $8,000,000

    Quarterly Sales Growth

    Telehealth Software Toxicology Genetic Tests

  • September 5, 2018

    IFS Securities

    Aeon Global Health Corp. Page 14 of 26 David Bouchey Ph.D.

    [email protected]

    Capital Structure

    How much do the owners own?

    At time of the merger of Authentidate and Aeon Clinical Labs, there were about 4,514,000 shares outstanding in the newly created entity Aeon Global Health. The partnership owning Aeon Clinical Labs, under the name Peachstate Health Management LLC, was awarded 958,038 new shares of stock in the new surviving entity. Peachstate is owned 50% by CEO Sonny Roshan and 25% each by partners Gulzar Roy and Sohail Ali.

    In December 2016, just prior to the closing of the merger, the Aeon partners (Peachstate) were issued 240,711 shares of common stock as a bonus.

    Also in December 2016, the Aeon partners were issued an additional 1,155,415 shares of common stock for hitting the milestone of reaching an EBITDA of at least $16 million for the calendar year ending December 31, 2015.

    At that point, the Aeon partners, led by CEO Sonny Roshan, owned about 2 million shares of the 7,168,329 shares outstanding (basic) reported by the company at end of March 2017.

    An SEC form 14-A filed in October 2017 listed the Peachstate partners as owning 1,936,998 shares or 26.6% of the shares outstanding at that time.

    Potential dilution from Earn-out agreement

    The original merger agreement contained a bonus structure so that if Aeon Global Health achieved an EBITDA of $65.9 million combined for the calendar years (ending December 31) 2016 + 2017 + 2018, the Peachstate owners would get enough new shares to give them 85% of the fully diluted issued and outstanding shares (post issuance). In addition, if the company met the goal of an EBITDA of $100 million for the calendar years 2016, 2017, 2018 and 2019 combined, the Peachstate partners would be awarded shares sufficient to bring them to 90% of the fully diluted shares outstanding (post-issuance). Although we cannot calculate the exact dilution at this time, we can estimate it using backwards calculations. We estimate the current fully diluted share count at about 10.5 million shares. If the Peachstate partners own about 1.9 million shares, then the non-Peachstate owners have about 8.6 million shares (fully diluted). If Peachstate is given enough shares to own 90% of Aeon, then the 8.6 million non-Peachstate shares represent 10% of the share total if all earn-outs are reached. This equates to 86 million shares outstanding, post all earn-outs. This dilution would have been in effect in 3Q2020 and would have required a FY2019 EBITDA of $35 million or more.

    Fortunately, on July 19, 2018 the Earn-out Agreement was modified and simplified. Given that the original agreement was made before CMS dramatically reduced its reimbursement for toxicology screens, Sonny Roshan and his partners wanted more reasonable EBITDA levels for the earn-out while the other owners wanted a reduced dilution potential. Both sides wanted management to be incentivized.

  • September 5, 2018

    IFS Securities

    Aeon Global Health Corp. Page 15 of 26 David Bouchey Ph.D.

    [email protected]

    In SEC 8-K and 13D/A filings made public on the SEC website on July 27, 2018, Aeon Global Health Corp. entered into a Settlement and Restructuring Agreement with Peachstate Health Management. Among other things, the three year EBITDA target needed for the 2018 Earn-out was adjusted from $65.9 million to $21,483,749. If the new 2018 Earn-out target is achieved, then on October 1, 2019, subject to the completion of the audited financial statements for the calendar year ending December 31, 2018, the Company shall issue the Peachstate partners 3,000,000 shares of the Company’s Common Stock. Further, if 75% of the 2018 Earn-out target is reached, then the Peachtree partners get 2,250,000 shares (75% of 3 million shares).

    The four-year EBITDA target for 2019 was reduced from $100 million to $32,600,530. If this EBITDA target is reached, the Peachstate partners would be awarded 4 million shares of stock. If 75% of the EBITDA is reached, then the Peachstate partners earn 75% of the share award, or 3 million shares. If the 2018 EBITDA target is not fully reached but the 2019 target is exceeded, the Peachstate partners have the right to apply the excess to the actual 2018 EBITDA and recompute, possibly bringing the number up to the point where shares could be earned for 2018.

    In any case, the Peachstate partners will be issued 2.5 million shares, although not until Feb. 28, 2019, in consideration for this agreement.

    That’s a lot of numbers. What do they mean? Up until five weeks ago, investors may have expected that a successful Aeon Global Health would come with mandatory, massive dilution. Instead of having to issue 76 million shares (a greater than 7 fold dilution over the current fully diluted share count) upon meeting all EBITDA goals, only 7 million additional shares might be issued to about 20 million shares outstanding, fully diluted, if all EBITDA goals are met. We believe investors do not fully realize that the potential massive dilution is no longer a factor.

    In the same Agreement, the CEO, Sonny Roshan, agreed to open a $2 million line of credit to personally fund the company over the next several months. It should be noted that $1,351,482 of Senior Convertible Notes held by Mr. Roshan and his partners will be rolled into this line of credit such that $584,551 remaining balance would be left. In our opinion, the willingness of Mr. Roshan to use his own money to fund Aeon demonstrates his extensive commitment to the success of the company as well as his belief in its future success. Investors should take at least some comfort in the knowledge that the CEO is willing to defray future cash needs with his personal wealth.

    It should be noted that at this time we do not assume the company will meet either the 2018 or the 2019 Earn-Out EBITDA goals.

    Tax Shielding from Aeon’s large NOL asset

    Tax deferred asset: The Tax Cuts and Jobs Act of 2017 required 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. This changed the way tax credits given to companies with net losses, such as Aeon, are valued. The Net Over-all Loss (NOL) can be used to shield

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    IFS Securities

    Aeon Global Health Corp. Page 16 of 26 David Bouchey Ph.D.

    [email protected]

    future earnings from tax effects, thus is considered a valuable asset. The value of the tax deferred asset for Aeon had to be reduced after the 2017 tax law changes and the company took a write-down in the quarter ending December 31, 2017 of $4,493,000. The Company now values its net deferred tax asset at approximately $7,357,000. This means the company likely will not pay taxes on net income until after it has earned $7,357,000. The actual size of this tax deferred asset could increase until Aeon becomes profitable.

    Notes renegotiated: On March 27, 2018, the company reported that $2,545,199 in senior convertible notes held by David Luce were adjusted to extend the maturity date by 12 months to March 20, 2019 and reduce the conversion rate to $1.20 per share. This demonstrates the commitment of non-Peachstate owners to the well-being of the company.

  • September 5, 2018

    IFS Securities

    Aeon Global Health Corp. Page 17 of 26 David Bouchey Ph.D.

    [email protected]

    Valuation – Methods and Assumptions Our goal is to determine what shares of AGHC could be worth today based on estimates we make for future revenues and their contribution to EBITDA. Wherever possible, we remove bias. For example, we use a discounted cash flow analysis (more accurately an EBITDA flow analysis) rather than applying a purely subjective multiple to estimated earnings.

    In this section, we will present our assumptions and estimates and show the calculations made in determining our price target for Aeon Global Health.

    Revenue streams:

    We have evaluated multiple potential revenue streams for Aeon. These are:

    1. Revenues from toxicology services. This is mostly urine drug screening.

    2. Revenues from Genetic Testing Services.

    3. Revenues from Telehealth Services.

    4. Revenues from Hosted Software Services.

    Revenue Assumptions

    • We assume that Aeon could achieve growth in its toxicology testing services both from organic growth and from adding contracts with new physician groups at the rate of one new contract per year. Our estimates for toxicology revenues are (years are calendar years):

    • We have made estimates for genetic testing revenues based on market penetration rates. We estimate the value of the U.S. and OUS genetic testing markets (table below) based on current industry estimates and growth rates.

    We apply low-end, mid-case and high end estimates of market penetration so that investors can judge the various potentials for themselves. In our valuation calculations, we use the mid-case estimates.

    Estimated Urine & Blood Testing Revenues (USD)

    2017 2018 2019 2020 2021 2022

    $13,240,594 $20,409,727 $29,000,000 $38,000,000 $48,000,000 $60,000,000

    Value of Genetic Testing Market (millions, USD)

    2016 2017 2018 2019 2020 2021 2022

    U.S Market $1,400 $1,638 $1,916 $2,242 $2,623 $3,069 $3,591

    Global Market $4,000 $4,696 $5,513 $6,472 $7,599 $8,921 $10,473

    OUS Market $2,600 $3,058 $3,597 $4,230 $4,975 $5,851 $6,882

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    [email protected]

    • Our estimates for both telehealth and hosted software revenues assume a gradual decline as these are not areas of focus for the company.

    Discount Rate Calculations

    To adjust for the time value of each cash flow, as represented by contribution to EBITDA, we applied a discount rate in each indication’s revenue stream of 9.23%. To calculate the discount rate, we obtained the risk free rate of 3.03% from the U.S. Treasury Department (www.treasury.gov) Daily Treasury Long Term Rates Composite (>10 yrs.) for September 4, 2018. To calculate the beta, we obtained the 5 year beta estimates for three major biotechnology index funds traded on the Nasdaq as quoted on Yahoo Finance: the ishares Nasdaq Biotechnology Index Fund (IBB), the First Trust Amex Biotech Index Fund (FBT) and the SPDR S&P Biotech ETF (XBI) for September 4, 2018. We used the average, 1.23, as our beta. We obtained the risk premium for Sep. 1, 2018 from a website maintained by the New York University’s Stern School of Business. The standard approach to figuring the risk premium is the difference in returns on stocks versus bonds. The NYU site, maintained by Dr. Aswath Damodaran, Professor of Finance, uses trailing twelve month cash yield from stock, bond and real estate markets and normalized for stock buybacks and dividend surges to calculate an implied Equity Risk Premium for each month (www.damodaran.com). For Sep. 1, 2018 that normalized TTM ERP is 5.04%. Plugging in these numbers, the discount rate = risk free rate + (beta * ERP) = 3.03% + (1.23 * 5.04%) = 9.23%.

    Price Target Calculation

    We calculate the sum of the contributions to EBITDA for each revenue stream in our forecast (see Appendix). We then calculate the discounted EBITDA contribution using the above determined discount rate. We sum these discounted values and divide by our estimate of fully diluted shares outstanding assuming the added dilution from the recently renegotiated Earn-Out agreement (13.2 million shares). This gives us a DCF value per share for the estimated revenue streams of $3.94, which we round down to arrive at our price target of $3.90.

    Share of Genetic Testing Market to Aeon (millions, USD)

    Penetration 2016 2017 2018 2019 2020 2021 2022

    Mid 1.0% U.S Market $4 $7 $13 $23 $36

    Case 0.1% OUS Market $0 $1 $2 $4 $7

    Total GTS sales $4 $8 $16 $27 $43

    Penetration 2016 2017 2018 2019 2020 2021 2022

    Low 0.5% U.S Market $4 $6 $8 $12 $18

    End 0.05% OUS Market $0 $0 $1 $2 $3

    Total GTS sales $4 $6 $9 $14 $21

    Penetration 2016 2017 2018 2019 2020 2021 2022

    Hign 1.5% U.S Market $4 $7 $13 $30.69 $54

    End 0.15% OUS Market $0 $1 $2 $6 $10

    Total GTS sales $4 $8 $16 $37 $64

    http://www.treasury.gov/http://www.damodaran.com/

  • September 5, 2018

    IFS Securities

    Aeon Global Health Corp. Page 19 of 26 David Bouchey Ph.D.

    [email protected]

    Summary After considering the good and the bad, we feel Aeon is about to emerge from the turmoil of its reverse merger with Authentidate (ADAT) as a leaner, more focused and more effective entity with both near-term growth opportunities in the urine and blood toxicology and analysis markets and longer-term growth opportunities in the large and rapidly growing global genetic testing markets. We estimate revenues from toxicology testing could grow from $20 million in calendar 2018 to $60 million in 2022 while revenues from genetic testing could grow from $4 million to a range of $21 to $64 million over the same time period. Based on our discounted analysis of EBITDA contribution for FY2018 through FY2021, we arrive at a price target of $3.90. We note that an analysis of comparable companies indicates a value for Aeon Global of between $17 million and $75 million (or about $2 to $8 per fully diluted share), in-line with our price target. We are initiating coverage of AGHC with an Outperform recommendation.

    A Brief Discussion of Risks The opinions and analysis offered here are no guarantee of success. The company referred to in this report should be considered a Speculative or Venture investment.

    The company may fail in any one of its commercial endeavors, new and unforeseen competitors may arise and changes in reimbursement could adversely affect revenues. Aeon is low on cash and may rely in the near-term on funding from its CEO Sonny Roshan. Aeon may not generate the cash necessary to fund operations through onset of profitability and may not be able to raise capital. All investors are encouraged to read the risks set forth in the form 10-K which each public company must file with the SEC (Securities and Exchange Commission).

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    Aeon Global Health Corp. Page 20 of 26 David Bouchey Ph.D.

    [email protected]

    IFS Research’s Chart

    Source: Company reports; IFS estimates

    Aeon Global Health Quarterly and Annual Income Statements and Estimates (USD)

    Quarter 1Q17 2Q17 3Q17 4Q17 FY 2017 1Q18 2Q18 3Q18 4Q18 Est. FY 2018 Est. 1Q19 Est. 2Q19 Est. 3Q19 Est. 4Q19 Est. FY 2019 Est.

    Date Sep. 30, 2016 Dec. 31, 2016 Mar. 31, 2017 Jun. 30, 2017 Jun. 30, 2017 Sep. 30, 2017 Dec. 31, 2017 Mar. 31, 2018 Jun. 30, 2018 Jun. 30, 2018 Sep. 30, 2018 Dec. 31, 2018 Mar. 31, 2019 Jun. 30, 2019 Jun. 30, 2019

    Service revenues $5,691,296 $4,565,435 $5,212,634 $3,442,709 $18,912,074 $3,110,382 $5,278,042 $3,811,444 $5,200,000 $17,399,868 $7,000,000 $8,000,000 $8,250,000 $8,500,000 $31,750,000

    Hosted software revenues $346,934 $311,671 $314,812 $286,534 $1,259,951 $243,020 $248,530 $239,535 $245,000 $976,085 $240,000 $240,000 $240,000 $240,000 $960,000

    Telehealth products & services $11,845 $9,707 $4,364 $830 $26,746 $4,650 $4,650 $4,600 $4,650 $18,550 $4,600 $4,600 $4,550 $4,550 $18,300

    Total Revenues $6,050,075 $4,886,813 $5,531,810 $3,730,073 $20,198,771 $3,358,052 $5,531,222 $4,055,579 $5,449,650 $18,394,503 $7,244,600 $8,244,600 $8,494,550 $8,744,550 $32,728,300

    Cost of revenues $1,244,170 $951,668 $897,590 $869,343 $4,200,445 $1,128,576 $888,541 $958,113 $980,000 $3,955,230 $1,300,000 $1,500,000 $1,550,000 $1,600,000 $5,950,000

    Selling, General & Administrative $3,492,475 $4,204,114 $3,748,403 $2,843,735 $14,288,727 $3,072,428 $3,042,771 $3,221,658 $3,050,000 $12,386,857 $3,100,000 $3,100,000 $3,100,000 $3,100,000 $12,400,000

    Share based compensation $89,526 $89,526 $107,932 $286,984 $68,785 $21,111 $100,000 $189,896 $100,000 $100,000 $100,000 $100,000 $400,000

    Depreciation & Amortization $408,663 $394,484 $393,510 $470,580 $1,667,237 $222,584 $200,837 $204,931 $210,000 $838,352 $250,000 $250,000 $250,000 $250,000 $1,000,000

    Goodwill impairment $3,318,000 $3,318,000

    Intangible asset impairment $1,816,676 $1,816,676

    Total Operating Expenses $5,234,834 $5,639,792 $5,039,503 $8,556,923 $25,578,069 $4,492,373 $4,153,261 $4,384,702 $4,340,000 $17,370,335 $4,750,000 $4,950,000 $5,000,000 $5,050,000 $19,750,000

    Operating Income (loss) $815,241 ($752,979) $492,307 ($4,826,850) ($5,379,298) ($1,134,321) $1,377,961 ($329,123) $1,109,650 $1,024,167 $2,494,600 $3,294,600 $3,494,550 $3,694,550 $12,978,300

    Interest ($278,593) ($92,175) ($73,017) ($12,861) ($456,646) ($27,349) ($37,013) ($44,614) ($38,000) ($146,976) ($38,000) ($39,000) ($39,000) ($39,000) ($155,000)

    Derivative liability, change in value ($486,219) $621,820 $256,806 $435,975 $828,382 $73,291 $292,573 ($1,285,842) ($20,000) ($939,978) ($30,000) ($20,000) ($30,000) ($20,000) ($100,000)

    Loss on extringuished debt ($258,037) $0 ($258,037)

    Other $0 $0 $0 ($160,134) ($160,134) ($38,144) ($124,149) ($49,831) ($40,000) ($252,124) ($50,000) ($50,000) ($50,000) ($50,000) ($200,000)

    Total Other Income (loss) ($764,812) $529,645 ($74,248) $262,980 ($46,435) $7,798 $131,411 ($1,380,287) ($98,000) ($1,339,078) ($118,000) ($109,000) ($119,000) ($109,000) ($455,000)

    EBITDA $459,092 $171,150 $811,569 ($4,093,290) ($3,758,496) ($903,939) $1,710,209 ($1,504,479) $1,221,650 $523,441 $2,626,600 $3,435,600 $3,625,550 $3,835,550 $13,523,300

    Income (loss) before taxes $50,429 ($223,334) $418,059 ($4,563,870) ($5,425,733) ($1,126,523) $1,509,372 ($1,709,410) $1,011,650 ($314,911) $2,376,600 $3,185,600 $3,375,550 $3,585,550 $12,523,300

    Provision for taxes $45,404 ($45,404) $0 ($26,647,781) ($26,647,781) $0 ($4,493,239) ($3,102) ($300,000) ($4,796,341) ($600,000) ($900,000) ($1,000,000) ($1,100,000) ($3,600,000)

    Net Income (Loss) $95,833 ($268,738) $418,059 ($31,211,651) ($32,073,514) ($1,126,523) ($2,983,867) ($1,712,512) $711,650 ($5,111,252) $1,776,600 $2,285,600 $2,375,550 $2,485,550 $8,923,300

    Less: Preferred dividends ($100,624) ($100,624) ($74,863) ($82,721) ($358,832) ($84,550) ($85,699) ($85,699) ($87,000) ($342,948) ($87,000) ($87,000) ($87,000) ($87,000) ($348,000)

    Net Income (loss) to common ($4,791) ($369,362) $343,196 ($31,294,372) ($32,432,346) ($1,211,073) ($3,069,566) ($1,798,211) $624,650 ($5,454,200) $1,689,600 $2,198,600 $2,288,550 $2,398,550 $8,575,300

    Net Income (Loss) per share $0.00 ($0.06) $0.05 ($4.31) ($4.51) ($0.17) ($0.42) ($0.25) $0.10 ($0.70) $0.24 $0.30 $0.24 $0.25 $1.02

    basic

    Net Income (Loss) per share $0.00 ($0.06) $0.04 ($4.31) ($4.51) ($0.17) ($0.42) ($0.25) $0.07 ($0.63) $0.17 $0.21 $0.18 $0.19 $0.75

    diluted

    Shares for basic Net Income 5,772,258 6,015,053 7,168,329 7,240,000 7,188,900 7,249,370 7,249,370 7,249,370 7,350,000 7,274,528 7,500,000 7,500,000 10,000,000 10,000,000 8,750,000

    Shares for diluted Net Income 5,772,258 6,015,053 8,765,657 7,240,000 7,188,900 7,249,370 7,249,370 7,249,370 10,500,000 8,062,028 10,700,000 10,700,000 13,200,000 13,200,000 11,950,000

    Gross Margin (total) 79.4% 80.5% 83.8% 76.7% 79.2% 66.4% 83.9% 76.4% 82.0% 78.5% 82.1% 81.8% 81.8% 81.7% 81.8%

  • September 5, 2018

    IFS Securities

    Aeon Global Health Corp. Page 21 of 26 David Bouchey Ph.D.

    [email protected]

    Aeon Global Health Corp. Quarterly and Annual Balance Sheets (USD)

    Quarter 1Q16 2Q16 3Q16 FY2016 1Q17 2Q17 3Q17 FYQ17 1Q18 2Q18 3Q18

    Date Sep. 30, 2015 Dec. 31, 2015 Mar. 31, 2016 Jun. 30, 2016 Sep. 30, 2016 Dec. 31, 2016 Mar. 31, 2017 Jun. 30, 2017 Sep. 30, 2017 Dec. 31, 2017 Mar. 31, 2018

    Cash & equivalents $282,000 $119,000 $2,763,468 $1,414,706 $600,668 $356,077 $1,155,273 $1,121,763 $733,816 $357,165 $469,727

    Restricted cash $256,000 $121,000 $120,695 $120,695 $120,695 $120,695 $120,695 $120,695 $0 $0 $0

    Accounts receivable, net of reserve $217,000 $197,000 $2,436,724 $2,142,514 $2,567,418 $1,074,660 $1,731,859 $1,020,988 $815,519 $2,467,935 $2,665,907

    Inventory, net $598,000 $356,000 $319,784 $337,907 $84,401 $66,820 $46,861 $347,750 $377,610 $397,569 $396,477

    Deferred tax asset $5,939,000

    Prepaids & other current assets $437,000 $379,000 $407,157 $170,944 $205,324 $121,248 $124,933 $58,711 $86,089 $38,729 $92,794

    Total Current Assets $1,790,000 $1,172,000 $11,986,828 $4,186,766 $3,578,506 $1,739,500 $3,179,621 $2,669,907 $2,013,034 $3,261,398 $3,624,905

    Property & equipment, net $253,000 $208,000 $3,043,432 $3,476,670 $3,182,735 $2,881,518 $2,581,287 $2,203,543 $1,980,959 $1,780,123 $1,575,192

    Intangibles $2,145,000 $2,034,000 $2,263,953 $2,188,682 $2,095,492 $2,002,790 $1,909,733 $0 $0 $0 $0

    Security deposits $0 $10,211 $10,211 $10,211 $10,211 $10,211 $10,211 $10,211 $10,211

    Deferred tax asset $31,855,000 $38,493,000 $38,538,404 $38,493,000 $38,493,000 $11,848,017 $11,848,017 $7,357,436 $7,357,436

    Goodwill $3,318,000 $3,318,000 $3,318,000 $3,318,000 $3,318,000 $0 $0 $0 $0

    Total assets $4,188,000 $3,414,000 $52,467,213 $51,673,329 $50,723,348 $48,445,019 $49,491,852 $16,731,678 $15,852,221 $12,409,168 $12,567,744

    Accounts payable $2,478,000 $3,047,000 $5,286,424 $4,329,187 $4,138,377 $3,198,604 $2,874,281 $2,177,722 $1,660,405 $1,269,454 $1,360,633

    Accrued expenses $1,751,234 $1,209,326 $1,285,818 $956,807 $2,168,090 $2,697,713 $2,493,374 $2,144,413

    Accrued commissions $840,515 $1,106,555 $922,896 $1,034,009 $1,288,609 $427,627 $536,142 $855,424 $602,857

    Accrued dividends $402,000 $5,975,222 $603,248 $557,726 $644,979 $730,678 $816,377 $902,076

    Deferred rent $68,000 $63,000 $57,049 $0 $0 $0 $0 $141,833 $156,158 $170,483 $184,808

    Related party notes payable $3,169,000 $3,683,000 $3,877,811 $2,977,811 $2,452,811 $1,920,000 $2,545,197 $2,545,199 $2,545,199 $2,545,199 $3,171,660

    Derivative liabilities $373,000 $2,690,000 $1,405,686 $1,051,000 $1,537,219 $915,399 $987,015 $551,040 $477,749 $185,176 $1,471,018

    Total Current Liabilities $6,088,000 $9,483,000 $11,467,485 $11,617,787 $16,235,851 $8,957,078 $9,209,635 $8,656,490 $8,804,044 $8,335,487 $9,837,465

    Deferred rent $80,000 $72,000 $114,379 $94,697 $109,505 $123,008 $45,000 $67,500 $90,000 $112,500

    Total Long-Term Liabilities $80,000 $72,000 $0 $114,379 $94,697 $109,505 $123,008 $45,000 $67,500 $90,000 $112,500

    Total Liabilities $6,168,000 $9,555,000 $11,467,485 $11,732,166 $16,330,548 $9,066,583 $9,332,643 $8,701,490 $8,871,544 $8,425,487 $9,949,965

    Preferred stock $69,000 $65,000 $63,300 $63,300 $63,300 $63,300 $63,000 $63,000 $63,000 $63,000 $63,000

    Common stock $42,000 $5,000 $5,772 $5,772 $5,772 $7,168 $7,168 $8,938 $14,402 $20,508 $25,579

    Additional paid-in capital 206,559,000 208,704,000 38,207,874 38,316,376 $38,405,902 $43,936,054 $44,024,631 $44,307,479 $44,463,577 $44,530,041 $44,958,427

    Accumulated deficit (208,650,000) (214,915,000) 2,722,782 1,555,715 ($4,082,174) ($4,628,086) ($3,935,590) ($36,349,229) ($37,560,302) ($40,629,868) ($42,429,227)

    Total Stockholders Equity ($1,980,000) ($6,141,000) $40,999,728 $39,941,163 $34,392,800 $39,378,436 $40,159,209 $8,030,188 $6,980,677 $3,983,681 $2,617,779

    Total Equity & Liabilities $4,188,000 $3,414,000 $52,467,213 $51,673,329 $50,723,348 $48,445,019 $49,491,852 $16,731,678 $15,852,221 $12,409,168 $12,567,744

    Change in cash and securities: ($298,000) $2,644,163 ($1,348,762) ($814,038) ($244,591) $799,196 ($33,510) ($508,642) ($376,651) $112,562

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    Aeon Global Health Corp. Page 22 of 26 David Bouchey Ph.D.

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    Income Model for AGHC

    0 1 2 3

    Fiscal Year (ends June 30) 2017 2018 2019 2020 2021

    Revenue contribution from Toxicology services $16,075,263 $13,543,280 $26,987,500 $34,000,000 $41,000,000

    Revenue contribution from Genetic Testing srvices $2,836,811 $2,389,991 $4,762,500 $8,000,000 $12,000,000

    Revenue contribution from Telehealth services $26,746 $18,600 $18,300 $15,000 $12,000

    Revenue contribution from Hosted Software services $1,259,951 $981,550 $960,000 $850,000 $750,000

    Total Revenues $20,198,771 $16,933,420 $32,728,300 $42,865,000 $53,762,000

    Estimated Operating Expenses $25,578,069 $17,295,633 $19,750,000 $23,000,000 $28,000,000

    Estimated EBITDA ($3,758,496) $3,199,570 $13,523,300 $19,865,000 $25,762,000

    Discounted EBITDA Contribution $3,199,570 $12,380,573 $16,649,634 $19,767,592

    Sum of annual DCF $51,997,370

    DCF per current shares $3.94

    Cash per share $0.06

    Key Model Assumptions

    Discount rate 9.23%

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    IFS Securities

    Aeon Global Health Corp. Page 23 of 26 David Bouchey Ph.D.

    [email protected]

    Important Investor Disclosures:

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  • September 5, 2018

    IFS Securities

    Aeon Global Health Corp. Page 24 of 26 David Bouchey Ph.D.

    [email protected]

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    Ratings and Definitions:

    IFS Securities, Inc. (U.S.) definitions

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    IFS Latin American Rating Definitions

    Strong Buy (SB1) Expected to appreciate and produce a total return of at least 25.0% over the next twelve months.

    Outperform (MO2) Expected to appreciate and produce a total return of between 15.0% and 25.0% over the next twelve

    months.

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    IFS Securities

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    Suitability Categories (SR)

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  • September 5, 2018

    IFS Securities

    Aeon Global Health Corp. Page 26 of 26 David Bouchey Ph.D.

    [email protected]

    ANALYST CERTIFICATION I, David Bouchey Ph.D., hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I

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    RATINGS INFORMATION Rating and Price Target Change History

    Source: IFS Securities Created by: Blue-Compass.net

    3 Year Rating Change History

    3 Year Price Change History

    * Previous Close 9/4/2018

    IFS Stock Ratings and Definitions

    % of Companies

    Under Coverage

    With This Rating

    Investment

    Banking

    Distribution

    Brokerage

    Services

    Distribution

    Strong Buy (SB1): Expected to appreciate, produce a total return of at least 15%, and outperform the S&P 500 over the next six to 12 months. 25.00% 0.00% 0.00%

    Outperform (MO2): Expected to appreciate and produce a total return of between 15.0% and 25.0% over the next twelve months. 56.25% 0.00% 0.00%

    Market Perform (MP3): Expected to perform generally in line with the S&P 500 over

    the next 12 months. 18.75% 0.00% 0.00%

    Underperform (MU4): Expected to underperform the S&P 500 or its sector over

    the next six to 12 months and should be sold. 0.00% 0.00% 0.00%