10-Q Q2 2017

AUXILIO INC
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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 June 30, 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
incorporation or organization)

(I.R.S. Employer
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 oAccelerated filer o

Non-accelerated filer oSmaller reporting company þ

Emerging growth company  ¨

Indicate by check mark whether the registrant is a shell company (as defined by Section 12b-2 of the Exchange Act).  Yes oNo þ.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standard provided pursuant to Section 13(a) of the Exchange Act.

The number of shares of the issuer’s common stock, $0.001 par value, outstanding as of August 9, 2017 was 9,501,760.



AUXILIO, INC.

FORM 10-Q

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements

Condensed Consolidated Balance Sheets as of June 30, 2017 (unaudited) and December 31, 2016

3

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2017 and 2016 (unaudited)

4

Condensed Consolidated Statement of Stockholders’ Equity for the Six Months Ended June 30, 2017 (unaudited)

5

Condensed Consolidated Statements of Cash Flowsfor the Six Months Ended June 30, 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

20

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

27

Item 4.

Controls and Procedures

28

PART –II – OTHER INFORMATION

Item 1a.

Risk Factors

28

Item 6.

Exhibits

29

Signatures

30


2



PART I – FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS.

AUXILIO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

June 30, 2017

December 31, 2016

(unaudited)

ASSETS

Current assets:

 Cash and cash equivalents

$2,834,859

$6,090,844

 Accounts receivable

11,286,721

9,614,486

 Supplies

1,073,091

1,087,318

 Prepaid and other current assets

1,514,589

438,140

   Total current assets

16,709,260

17,230,788

Property and equipment, net

940,906

689,418

Deposits

87,376

41,522

Deferred income taxes

5,282,531

5,282,531

Intangible assets, net

12,121,709

1,112,395

Goodwill

18,525,206

2,109,143

   Total assets

$53,666,988

$26,465,797

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

 Accounts payable and accrued expenses

$9,647,313 

$7,736,207 

 Accrued compensation and benefits

2,890,213 

2,495,156 

 Deferred revenue

1,653,904 

562,679 

 Current portion of long-term liabilities

4,022,339 

606,686 

   Total current liabilities

18,213,769 

11,400,728 

Long-term liabilities:

 Term loan, less current portion

10,628,333 

750,000 

 Promissory notes to related parties, less current portion

7,500,000 

 Capital lease obligations, less current portion

187,091 

199,644 

   Total long-term liabilities

18,315,424 

949,644 

   Total liabilities

36,529,193 

12,350,372 

Commitments and contingencies

Stockholders’ equity:

 Common stock, par value at $0.001, 33,333,333 shares authorized,

 9,499,016 and 8,185,936 shares issued and outstanding at June 30, 2017

 and December 31, 2016

9,499 

8,186 

 Additional paid-in capital

30,926,034 

27,985,448 

 Accumulated deficit

(13,797,738)

(13,878,209)

   Total stockholders’ equity

17,137,795 

14,115,425 

   Total liabilities and stockholders’ equity

$53,666,988 

$26,465,797 

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


3



AUXILIO, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

Three Months

Six Months

Ended June30,

Ended June30,

2017

2016

2017

2016

Revenues   

$ 16,798,912   

$ 15,162,070   

$ 35,053,601   

$ 29,677,709   

Cost of revenues   

12,435,758   

12,070,163   

26,103,300   

24,276,490   

Gross profit   

4,363,154   

3,091,907   

8,950,301   

5,401,219   

Operating expenses:   

 Sales and marketing   

1,371,847   

730,149   

2,740,855   

1,401,496   

 General and administrative expenses   

2,472,576   

1,649,006   

5,258,577   

3,412,027   

   Total operating expenses   

3,844,423   

2,379,155   

7,999,432   

4,813,523   

   Income from operations   

518,731   

712,752   

950,869   

587,696   

Other income (expense):   

 Other income   

3   

–   

22   

–   

 Interest expense   

(376,547)  

(23,554)  

(788,881)  

(49,254)  

   Total other income (expense)  

(376,544   

(23,554)  

(788,859)  

(49,254)  

Income before provision for income taxes   

142,187   

689,198   

162,010   

538,442   

Income tax expense   

(68,000)  

(41,600)  

(81,539)  

(44,000)  

Net income   

$ 74,187   

$ 647,598   

$ 80,471   

$ 494,442   

Net income per share:   

 Basic   

$ 0.01   

$ 0.08   

$ 0.01   

$ 0.06   

 Diluted   

$ 0.01   

$ 0.08   

$ 0.01   

$ 0.06   

Number of weighted average shares:   

 Basic   

9,438,990   

8,170,328   

9,328,759   

8,160,457   

 Diluted   

10,281,042   

8,270,914   

10,038,271   

8,302,490   

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


4



AUXILIO, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

SIX MONTHS ENDED JUNE 30, 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

-

-

59,265 

59,265

Stock compensation expense for restricted stock units granted to employees

-

-

44,183 

44,183

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

1,166,666

1,166

2,770,833 

2,771,999

Stock options and warrants exercised

146,204

31

66,421 

66,452

Reverse stock split round-up shares issued

210

116

(116)

-

Net income

-

-

80,471 

80,471

Balance at June 30, 2017

9,499,016

$9,499

$30,926,034 

$(13,797,738)

$17,137,795

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

.


5



AUXILIO, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

Six Months Ended June 30,

2017

2016

Cash flows from operating activities:

 

 

 

 Net income

$80,471 

$494,442 

Adjustments to reconcile net income to net cash used for operating activities:

 Depreciation

190,159 

101,854 

 Amortization of intangible assets

1,040,686 

270,833 

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

59,265 

102,192 

 Stock compensation expense for restricted stock units granted to employees

44,183 

Changes in operating assets and liabilities:

 Accounts receivable

54,163 

(1,314,263)

 Supplies

14,227 

131,845 

 Prepaid and other current assets

(730,009)

135,374 

 Deposits

(45,854)

16,596 

 Accounts payable and accrued expenses

(1,104,097)

(550,036)

 Accrued compensation and benefits

(640,465)

(689,213)

 Deferred revenue

(287,087)

(314,332)

 Net cash used for operating activities

(1,324,358)

(1,614,708)

Cash flows from investing activities:

 Purchases of property and equipment

(220,126)

(128,184)

 Amount paid to purchase CynergisTek, net of cash received

(13,448,522)

 Net cash used for investing activities

(13,668,648)

(128,184)

Cash flows from financing activities:

 Proceeds from term loan

14,000,000 

 Payments on term loans

(2,241,667)

(250,000)

 Payments on capital leases

(87,764)

(54,978)

 Proceeds from issuance of common stock through stock options

66,452 

60,151 

Net cash provided by (used for) financing activities

11,737,021 

(244,827)

Net decrease in cash and cash equivalents

(3,255,985)

(1,987,719)

Cash and cash equivalents, beginning of period

6,090,844 

6,436,732 

Cash and cash equivalents, end of period

$2,834,859 

$4,449,013 

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


6



AUXILIO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(UNAUDITED)

Six Months Ended June 30,

2017

2016

Supplemental disclosure of cash flow information:

 

 

Interest paid

$547,672

$49,254

Income taxes paid

$178,950

$71,703

Non-cash investing and financing activities:

Property and equipment acquired through capital leases

$110,864

$22,170

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

$2,772,000

$-

Promissory note sissued in connection with the acquisition of Cynergis Tek,Inc.   

$9,000,000

$-

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

$2,356,000

$-

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


7



 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SIX MONTHS ENDED JUNE 30, 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. While the Company is in the process of evaluating the impact of the new guidance, primarily by analyzing our revenue streams, currently we do not expect that this standard will have a material impact on the Company’s consolidated financial statements.

 


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In March 2016, the FASB issued a new accounting standard regarding stock compensation: improvements to employee share-based payment accounting, that simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new standard was effective for fiscal years beginning after December 15, 2016, including interim periods within those annual years, and early adoption was permitted. We adopted the new standard prospectively in 2017. The adoption of the new standard did not have a material effect on our consolidated financial statements for the three months and six months ended June 30, 2017, and we do not expect that the adoption of the new standard will have a material effect on our consolidated financial statements for the year ended December 31, 2017.

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 of adopting this guidance and we are preparing for the changes to be made to our consolidated financial statements. We expect the adoption of these accounting changes will materially increase our assets and liabilities, but will not have a material impact on our net income or equity.

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 our financial position, results of operations and cash flows.

 

3.OPTIONS, WARRANTS AND RESTRICTED STOCK UNITS

 

Below is a summary of stock option, warrant and restricted stock activity during the six month period ended June 30, 2017:

Options

Shares

Weighted Average Exercise Price

Weighted Average Remaining Term in Years

Aggregate Intrinsic Value

Outstanding at December 31, 2016

1,454,241

$2.87

 Granted

25,000

3.06

 Exercised

(103,198)

2.24

 Cancelled

(150,398)

2.32