10-Q Q1 2017


AUXILIO INC – Form 10-Q SEC filing

AUXILIO INC
0001011432
10-Q
2017-03-31
–12-31
auxo
Smaller Reporting Company
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2017

[   ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission file number 000-27507

AUXILIO, INC.

(Exact name of registrant as specified in its charter)

         Nevada      880350448

(State or other jurisdiction of    (I.R.S. Employer

incorporation or organization)    Identification No.)

27271 Las Ramblas, Suite 200

Mission Viejo, California  92691

(Address of principal executive offices, zip code)

(949) 614-0700

(Issuer’s telephone number)

N/A
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ  No o.

Indicated by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes þ No o.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

o

Accelerated filer

o

Non-accelerated filer

o

Smaller reporting company

þ

Indicate by check mark whether the registrant is a shell company (as defined by Section 12b-2 of the Exchange Act). Yes o  No þ.

The number of shares of the issuer’s common stock, $0.001 par value, outstanding as of May 8, 2017 was 9,388,767.


1


AUXILIO, INC.

FORM 10-Q

 

TABLE OF CONTENTS

 

 

PART I – FINANCIAL INFORMATION

Page

Item 1

Financial Statements:

Condensed Consolidated Balance Sheets

as of March 31, 2017, (unaudited) and December 31, 2016

3

Condensed Consolidated Statements of Operations

for the Three Months Ended March 31, 2017 and 2016 (unaudited)

4

Condensed Consolidated Statement of Stockholders’ Equity

for the Three Months Ended March 31, 2017 (unaudited)

5

Condensed Consolidated Statements of Cash Flows

for the Three Months Ended March 31, 2017 and 2016 (unaudited)

6

Notes to Unaudited Condensed Consolidated Financial Statements

8

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

Item 3

Quantitative and Qualitative Disclosure about Market Risk

27

Item 4

Controls and Procedures

27

PART II – OTHER INFORMATION

Item 1A

Risk Factors

28

Item 6

Exhibits

28

Signatures

29

 

 


2


 

Table of Contents


PART I – FINANCIAL INFORMATION

ITEM 1.                 FINANCIAL STATEMENTS.

 

AUXILIO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

MARCH 31, 2017

DECEMBER 31, 2016

(unaudited)

ASSETS

Current assets:

Cash and cash equivalents

$3,162,399

$6,090,844

Accounts receivable, net

11,974,157

9,614,486

Supplies

1,018,611

1,087,318

Prepaid and other current assets

15,176

438,140

Total current assets

16,170,343

17,230,788

Property and equipment, net

971,891

689,418

Deposits

87,376

41,522

Deferred income taxes

5,282,531

5,282,531

Intangible assets, net

12,642,052

1,112,395

Goodwill

18,525,206

2,109,143

Total assets

$53,679,399

$26,465,797

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable and accrued expenses

$9,720,885 

$7,736,207 

Accrued compensation and benefits

2,236,802 

2,495,156 

Deferred revenue

1,794,043 

562,679 

Current portion of long-term liabilities

3,235,271 

606,686 

Total current liabilities

16,987,001 

11,400,728 

Long-term liabilities:

Term loan, less current portion

11,223,333 

750,000 

Promissory notes to related parties, less current portion

8,250,000 

Capital lease obligations, less current portion

268,033 

199,644 

Total long-term liabilities

19,741,366 

949,644 

Commitments and contingencies

Stockholders’ equity:

Common stock, par value at $0.001, 33,333,333 shares authorized, 9,379,477 and 8,185,936 shares issued and outstanding at March 31, 2017 and December 31, 2016

9,379 

8,186 

Additional paid-in capital

30,813,578 

27,985,448 

Accumulated deficit

(13,871,925)

(13,878,209)

Total stockholders’ equity

16,951,032 

14,115,425 

Total liabilities and stockholders’ equity

$53,679,399 

$26,465,797 

The accompanying notes are an integral part of these condensed consolidated financial statements.


3


 

Table of Contents


 

AUXILIO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

Three Months Ended March 31,

2017

2016

Revenues

$18,254,689 

$14,515,640 

Cost of revenues

13,667,541 

12,206,328 

Gross profit

4,587,148 

2,309,312 

Operating expenses:

 Sales and marketing

1,369,008 

671,347 

 General and administrative expenses

2,786,002 

1,763,021 

  Total operating expenses

4,155,010 

2,434,368 

Income (loss) from operations

432,138 

(125,056)

Other income (expense):

Other income

19 

 Interest expense

(412,334)

(25,700)

  Total other income (expense)

(412,315)

(25,700)

Income (loss) before provision for income taxes

19,823 

(150,756)

Income tax expense

(13,539)

(2,400)

Net income (loss)

$6,284 

$(153,156)

Net income (loss) per share:

  Basic

$0.00

$(0.02)

  Diluted

$0.00

$(0.02)

Number of weighted average shares:

  Basic

9,216,719

8,150,695 

  Diluted

9,615,285

8,150,695 

The accompanying notes are an integral part of these condensed consolidated financial statements.


4


 

Table of Contents



5


Table of Contents


 

AUXILIO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

THREE MONTHS ENDED MARCH 31, 2017

(UNAUDITED)

Additional

Total

Common Stock

Paid-in

Accumulated

Stockholders’

Shares

Amount

Capital

Deficit

Equity

Balance at December 31, 2016

8,185,936

$8,186

$27,985,448 

$(13,878,209)

$14,115,425

Stock compensation expense for options and warrants granted to employees and directors

-

24,659 

24,659

Common stock issued in connection with the acquisition of CynergisTek, Inc.

1,166,666

1,166

2,770,833 

2,771,999

Stock options exercised

26,665

23

32,642 

32,665

Reverse stock split round-up shares issued

210

4

(4)

-

Net income

-

6,284 

6,284

Balance at March 31, 2017

9,379,477

$9,379

$30,813,578 

$(13,871,925)

$16,951,032

The accompanying notes are an integral part of these condensed consolidated financial statements.


6


 

Table of Contents


AUXILIO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

Three Months Ended March 31,

2017

2016

Cash flows from operating activities:

 

 

 

Net income (loss)

$6,284 

$(153,156)

Adjustments to reconcile net income (loss) to net cash used for operating activities:

 

Depreciation

91,224 

48,982 

Amortization of intangible assets

 

520,343 

135,417 

Stock compensation expense for warrants and options issued to employees and directors

24,659 

45,517 

Changes in operating assets and liabilities:

 

Accounts receivable

(633,273)

206,253 

Supplies

 

68,707 

46,260 

Prepaid and other current assets

769,404 

156,377 

Deposits

 

(45,854)

16,596 

Accounts payable and accrued expenses

(1,030,525)

(327,405)

Accrued compensation and benefits

 

(1,293,876)

(898,609)

Deferred revenue

(146,948)

(125,871)

Net cash used for operating activities

 

(1,669,855)

(849,639)

Cash flows from investing activities:

Purchases of property and equipment

 

(152,177)

(85,611)

Amount paid to purchase CynergisTek, net of cash received

(13,448,521)

Net cash used for investing activities

 

(13,600,698)

(85,611)

Cash flows from financing activities:

Proceeds from term loan

 

14,000,000 

Payments on term loans

(1,646,667)

(125,000)

Payments on capital leases

 

(43,890)

(27,638)

Proceeds from issuance of common stock through stock options

32,665 

Net cash provided by (used for) financing activities

 

12,342,108 

(152,638)

Net decrease in cash and cash equivalents

(2,928,445)

(1,087,888)

Cash and cash equivalents, beginning of period

 

6,090,844 

6,436,732 

Cash and cash equivalents, end of period

$3,162,399 

$5,348,844 

The accompanying notes are an integral part of these condensed consolidated financial statements.


7


Table of Contents


AUXILIO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(UNAUDITED)

Three Months Ended March 31,

2017

2016

Supplemental disclosure of cash flow information:

Interest paid

$198,416

$25,700

Income taxes paid

$1,950

$71,703

Non-cash investing and financing activities:

Property and equipment acquired through capital leases

$110,657

$22,170

Common stock issued in connection with the acquisition of CynergisTek, Inc.

$2,772,000

$-

Promissory notes issued in connection with the acquisition of CynergisTek, Inc.

$9,000,000

$-

Fair value of earn-out liability in connection with the acquisition of CynergisTek, Inc.

$2,356,000

$-

The accompanying notes are an integral part of these condensed consolidated financial statements.


8


Table of Contents


 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2017 AND 2016

(UNAUDITED)

 

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of Auxilio, Inc. and its subsidiaries (the “Company”, “we”, “us” or “Auxilio”) have been prepared in accordance with generally accepted accounting principles of the United States of America (“GAAP”) for interim financial statements pursuant to the rules and regulations of the Securities and Exchange Commission.  Accordingly, these financial statements do not include all of the information and notes required by GAAP for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, as filed with the Securities and Exchange Commission (“SEC”) on March 29, 2017.

The unaudited condensed consolidated financial statements included herein reflect all adjustments (which include only normal, recurring adjustments) that are, in the opinion of management, necessary to state fairly our financial position and results of operations as of and for the periods presented.  The results for such periods are not necessarily indicative of the results to be expected for the full year.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  As a result, actual results could differ from those estimates.

The accompanying unaudited condensed consolidated financial statements include the accounts of Auxilio and its wholly owned subsidiaries.  All intercompany balances and transactions have been eliminated.

Based on our integration and management strategies, we operate in a single business segment. For the periods presented, all revenues were derived from domestic operations.

As described in Note 11, the Company acquired the outstanding shares of CynergisTek, Inc. on January 13, 2017.

We have performed an evaluation of subsequent events through the date of filing these unaudited condensed consolidated financial statements with the SEC.

 

 

2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In November 2015, the FASB issued guidance related to the presentation of deferred income taxes. The guidance requires that deferred tax assets and liabilities be classified as non-current in a consolidated balance sheet. This guidance was adopted early by us and resulted in the Company classifying its deferred tax assets as non-current assets.

In May 2014, the FASB issued guidance which provides a single, comprehensive accounting model for revenue arising from contracts with customers. This guidance supersedes most of the existing revenue recognition guidance, including industry-specific guidance. Under this model, revenue is recognized at an amount that a company expects to be entitled to upon transferring control of goods or services to a customer, as opposed to when risks and rewards transfer to a customer. The new guidance also requires additional disclosures about the nature, timing and uncertainty of revenue and cash flow arising from customer contracts, including significant judgments and changes in judgments. Considering the one-year delay in the required adoption date for the guidance as issued in July 2015, the new guidance is effective for us beginning in 2018 and may be applied retrospectively to all prior periods presented or through a cumulative adjustment to the opening retained earnings balance in the year of adoption. We are in the process of evaluating the impact of the new guidance on our consolidated financial statements.

In February 2016, the FASB issued a new accounting standard on leasing. The new standard will require companies to record most leased assets and liabilities on the balance sheet, and also proposes a dual model for recognizing expense. This guidance will be effective in the first quarter of 2019 with early adoption permitted. We have evaluated the impact that adopting this guidance and we are preparing for the changes to be made to our consolidated financial statements.

 


9


 

Table of Contents


 

In January 2017, the FASB issued a new accounting standard simplifying the test for goodwill impairment. Currently, the fair value of the reporting unit is compared with the carrying value of the reporting unit (identified as “Step 1”). If the fair value of the reporting unit is lower than its carrying amount then, the implied fair value of goodwill is calculated. If the implied fair value of goodwill is lower than the carrying value of goodwill an impairment is recognized (identified as “Step 2”). The new standard eliminates Step 2 from the impairment test; therefore, a goodwill impairment will be recognized as the difference of the fair value and the carrying value. The new standard becomes effective on January 1, 2020 with early adoption permitted. We are currently evaluating the impact that the new standard will have on its financial position, results of operations and cash flows.

 

 

3. OPTIONS AND WARRANTS

 

Below is a summary of Auxilio stock option and warrant activity during the three-month period ended March 31, 2017:

Options

Shares

Weighted Average Exercise Price

Weighted Average Remaining Term in Years

Aggregate

Intrinsic Value

Outstanding at December 31, 2016

1,454,242

$2.87

 Granted

25,000

3.06

 Exercised

(26,665)

1.41

 Cancelled

(66,506)

1.41

Outstanding at March 31, 2017

1,386,071

$2.97

4.44

$1,290,427

Exercisable at March 31, 2017

1,127,807

$2.99

4.44

$1,045,963

 

Warrants

Shares

Weighted Average Exercise Price

Weighted Average Remaining Term in Years

Aggregate

Intrinsic Value

Outstanding at December 31, 2016

326,249

$3.14

 Granted

-

 Exercised

-

 Cancelled

-

Outstanding at March 31, 2017

326,249

$3.14

5.28

$243,700

Exercisable at March 31, 2017

326,249

$3.14

5.28

$243,700

 

 

For the three months ended March 31, 2017 and 2016, stock-based compensation expense recognized in the statement of operations was as follows:

2017

2016

Cost of revenues

$13,955

$9,403

Sales and marketing

182

8,333

General and administrative expenses

10,522

27,781

  Total stock based compensation expense

$24,659

$45,517

 

 

4. NET INCOME (LOSS) PER SHARE

Basic net income (loss) per share is calculated using the weighted average number of shares of our common stock issued and outstanding during a certain period, and is calculated by dividing net income (loss) by the weighted average number of shares of our common stock issued and outstanding during such period. Diluted net income (loss) per share is calculated using the weighted average number of common and potentially dilutive common shares outstanding during the period, using the as-if-converted method for secured convertible notes, and the treasury stock method for options and warrants. Diluted net income (loss) per share does not include potentially dilutive securities because such inclusion in the computation would be anti-dilutive.

 


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The following table sets forth the computation of basic and diluted net income (loss) per share:

Three Months Ended March 31,

2017

2016