CYNERGISTEK, INC - Quarter Report: 2016 June (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2016

 

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)

 

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 ☑ No ☐

 

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 (Sec. 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 ☑ No ☐

 

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.

 

 

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

 

The number of shares of the issuer's common stock, $0.001 par value, outstanding as of August 5, 2016 was 24,557,224.

 

AUXILIO, INC.

FORM 10-Q

TABLE OF CONTENTS

 

 

 

PART I – FINANCIAL INFORMATION	Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2016 (unaudited) and December 31, 2015	3
Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2016 and 2015 (unaudited)	4
Condensed Consolidated Statement of Stockholders' Equity for the Six Months Ended June 30, 2016 (unaudited)	5
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015 (unaudited)	6
Notes to Unaudited Condensed Consolidated Financial Statements	8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3. Quantitative and Qualitative Disclosures about Market Risk	21
Item 4. Controls and Procedures	22
PART –II - OTHER INFORMATION	22
Item 1a. Risk Factors	22
Item 5. Other Information	23
Item 6. Exhibits	24
Signatures	25

 

 

 

AUXILIO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

		JUNE 30, 2016				DECEMBER 31, 2015
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	4,449,013			$	6,436,732
Accounts receivable, net			8,712,220				7,397,957
Supplies			1,326,764				1,458,609
Prepaid and other current assets			490,432				625,806
Total current assets			14,978,429				15,919,104
Property and equipment, net			543,824				495,324
Deposits			41,522				58,118
Intangible assets, net			2,460,417				2,731,250
Goodwill			3,665,656				3,665,656
Total assets		$	21,689,848			$	22,869,452
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses		$	7,756,823			$	8,306,860
Accrued compensation and benefits			2,166,952				2,856,165
Deferred revenue			599,346				913,677
Current portion of long-term liabilities			609,125				598,750
Total current liabilities			11,132,246				12,675,452
Long-term liabilities:
Term loan, less current portion			1,000,000				1,250,000
Capital lease obligations less current portion			82,313				125,496
Total long-term liabilities			1,082,313				1,375,496
Commitments and contingencies
Stockholders' equity:
Common stock, par value at $0.001, 33,333,333 shares authorized, 24,557,224 and 24,452,085 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively			24,559				24,453
Additional paid-in capital			27,844,298				27,682,061
Accumulated deficit			(18,393,568	)			(18,888,010	)
Total stockholders' equity			9,475,289				8,818,504
Total liabilities and stockholders' equity		$	21,689,848			$	22,869,452

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

AUXILIO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

 

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

 

AUXILIO, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

SIX MONTHS ENDED JUNE 30, 2016

(UNAUDITED)

 

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

AUXILIO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

		Six Months Ended June 30,
		2016				2015
Cash flows from operating activities:
Net income (loss)		$	494,442			$	(682,279	)
Adjustments to reconcile net income (loss) to net cash (used for) provided by operating activities:
Depreciation			101,854				71,830
Amortization of intangible assets			270,833				196,250
Stock compensation expense for warrants and options issued to employees and directors			102,192				184,000
Stock compensation expense for restricted stock issued to key employee			-				40,613
Interest expense related to accretion of debt discount costs			-				27,182
Changes in operating assets and liabilities:
Accounts receivable, net			(1,314,263	)			(1,159,186	)
Supplies			131,845				(69,402	)
Prepaid and other current assets			135,374				(624,637	)
Deposits			16,596				(71,420	)
Accounts payable and accrued expenses			(550,036	)			2,010,470
Accrued compensation and benefits			(689,213	)			609,283
Deferred revenue			(314,332	)			4,279
Net cash (used for) provided by operating activities			(1,614,708	)			536,983
Cash flows from investing activities:
Purchases of property and equipment			(128,184	)			(12,010	)
Payment for purchase of Redspin			-				(1,876,966	)
Net cash used for investing activities			(128,184	)			(1,888,976	)
Cash flows from financing activities:
Net repayments on line of credit agreement			-				(200,000	)
Proceeds from term loan			-				2,000,000
Payments on term loan			(250,000	)			-
Proceeds from issuance of common stock through warrants			60,151				-
Payments on notes payable to related party			-				(52,944	)
Payments on capital leases			(54,978	)			(49,835	)
Net cash (used for) provided by financing activities			(244,827	)			1,697,221
Net (decrease) increase in cash and cash equivalents			(1,987,719	)			345,228
Cash and cash equivalents, beginning of period			6,436,732				4,743,395
Cash and cash equivalents, end of period		$	4,449,013			$	5,088,623

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

AUXILIO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(UNAUDITED)

		Six Months Ended June 30,
		2016				2015
Supplemental disclosure of cash flow information:
Interest paid		$	49,254			$	41,215
Income taxes paid		$	71,703			$	135,480
Non-cash investing and financing activities:
Property and equipment acquired through capital leases		$	22,170			$	128,935
Conversion of note payable to related party		$	-			$	257,835
Common stock issued in connection with the acquisition of Redspin		$	-			$	593,000

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SIX MONTHS ENDED JUNE 30, 2016 AND 2015

(UNAUDITED)

 

 

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, 2015, as filed with the Securities and Exchange Commission ("SEC") on March 30, 2016.

 

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 financial statements include the accounts of Auxilio and its wholly-owned subsidiaries.  All intercompany balances and transactions have been eliminated.

 

We have performed an evaluation of subsequent events through the date of filing of our Form 10-Q with the SEC.

 

 

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. In May 2016, the FASB issued ASU No. 2016-12, which provides certain narrow-scope improvements and practical expedients to the guidance. The new revenue standard permits companies to either apply the requirements retrospectively to all prior periods presented or apply the requirements in the year of adoption through a cumulative adjustment. We are currently evaluating our existing revenue recognition policies to determine the types of contracts that are within the scope of this guidance and the impact the adoption of this standard may have on our consolidated financial statements. We have not yet determined if we will apply the full retrospective or the modified retrospective method.

 

In April 2015 and August 2015, the FASB issued guidance which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability consistent with the presentation of debt discounts, however debt issuance costs related to revolving credit agreements may be presented in the balance sheet as an asset. This guidance was effective for us in the first quarter of 2016.

 

In November 2015, the FASB issued guidance related to the presentation of deferred income taxes. The guidance requires that deferred tax assets and liabilities are classified as non-current in a consolidated balance sheet. This guidance is effective for us in the first quarter of 2017 and is not expected to materially impact our financial position or net earnings.

 

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 utilizes a dual model for recognizing expense. This guidance will be effective in the first quarter of 2019 with early adoption permitted. We are evaluating the impact that adopting this guidance will have on our consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, "Improvements to Employee Share-Based Payment Accounting." This ASU simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, forfeitures, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods. Early adoption is permitted. An entity that elects early adoption of the amendment under this ASU must adopt all aspects of the amendment in the same period. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

 

Below is a summary of stock option and warrant activity during the six month period ended June 30, 2016:

 

During the six months ended June 30, 2016, we granted a total of 635,500 options to our employees and directors to purchase shares of our common stock at an exercise price range of $0.85 to $1.02 per share. The exercise price equals the fair value of our stock on the grant date.  The options have graded vesting annually over three years.  The fair value of the options was determined using the Black-Scholes option-pricing model.  The assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate range of 0.08% to 0.12%; (ii) estimated volatility range of 45.95% to 46.29%; (iii) dividend yield of 0.0%; and (iv) expected life of the options of three years.

For the three and six months ended June 30, 2016 and 2015, stock-based compensation expense recognized in the consolidated statements of operations as follows:

 

Basic net 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 loss by the weighted average number of shares of our common stock issued and outstanding during such period. Diluted net 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 loss per share does not include potentially dilutive securities because such inclusion in the computation would be anti-dilutive.

 

For the three months ended June 30, 2016, potentially dilutive securities consisted of options and warrants to purchase 5,976,119 shares of common stock at prices ranging from $0.30 to $2.15 per share. Of these potentially dilutive securities, only 301,759 of the shares to purchase common stock from the options and warrants are included in the computation of diluted earnings per share as their effect would be anti-dilutive.

 

For the six months ended June 30, 2016, potentially dilutive securities consisted of options and warrants to purchase 5,976,119 shares of common stock at prices ranging from $0.30 to $2.15 per share. Of these potentially dilutive securities, only 426,098 of the shares to purchase common stock from the options and warrants are included in the computation of diluted earnings per share as their effect would be anti-dilutive.

 

For the three and six months ended June 30, 2015, potentially dilutive securities consisted of options and warrants to purchase 7,012,061 shares of common stock at prices ranging from $0.30 to $2.15 per share. For the three months and six months ended June 30, 2015, of these potentially dilutive securities, all of the shares to purchase common stock from the options and warrants are excluded from the computation of diluted earnings per share as their effect would be anti-dilutive. The following table sets forth the computation of basic and diluted net loss per share:

 

 

A summary of accounts receivable is as follows:

 

		June 30, 2016				December 31, 2015
Trade receivables		$	8,093,397			$	7,458,022
Unapplied advances and unbilled revenue, net			618,823				(60,065	)
Allowance for doubtful accounts			-				-
Total accounts receivable		$	8,712,220			$	7,397,957

 

Intangible assets are amortized over expected useful lives ranging from 1.5 to 10 years and consist of the following:

 

 

On May 4, 2012, we entered into a Loan and Security Agreement (the "Loan and Security Agreement") with Avidbank Corporate Finance, a Division of Avidbank ("Avidbank").  On April 26, 2013, we amended the Loan and Security Agreement with Avidbank. On April 25, 2014, we again amended the Loan and Security Agreement with Avidbank (the "Second Avidbank Amendment"). Under the Second Avidbank Amendment, the term of the revolving line-of-credit of up to $2.0 million was extended through April 25, 2015, at an interest rate of prime plus 1.0% per annum. This line of credit was further extended through June 25, 2015 under the third amendment to the Loan and Security Agreement. On June 19, 2015, we again amended the Loan and Security Agreement with Avidbank (the "Fourth Avidbank Amendment"). Under the Fourth Avidbank Amendment, the term of the revolving line-of-credit of up to $2.0 million was extended through June 19, 2017, at an interest rate of prime plus 0.75% per annum.  As of June 30, 2016, the interest rate was 4.25%.  There will be no minimum interest payable with respect to any calendar quarter. The amount available to us at any given time is the lesser of (a) $2.0 million, or (b) the amount available under our borrowing base (80% of our eligible accounts, minus (1) accrued client lease payables, and minus (2) accrued equipment pool liability). As of June 30, 2016 and December 31, 2015, no amounts were outstanding under the line of credit.

 

The Fourth Avidbank Amendment also provided for a term loan facility which allowed for advances up to $4,000,000 through June 19, 2016. We made only one draw of $2,000,000 in June 2015. Term loan repayments shall be in 48 equal installments of principal, plus accrued interest at an interest rate of prime plus 1.25% per annum. As of June 30, 2016, outstanding borrowings under the term loan are $1,500,000, of which $500,000 is due within one year. The interest rate is 4.75% as of June 30, 2016.

 

While there are outstanding credit extensions, we are to maintain a liquidity ratio of cash plus accounts receivable divided by all obligations owing to the bank of at least 1.75 to 1.00, measured monthly, and a debt coverage ratio, whereby adjusted EBITDA for the most recent twelve months shall be no less than 1.50 to 1.00 of the sum of the annual principal payments to come due in respect of the term loan advances plus the annualized interest expense of the quarter ending on the measurement date. We were in compliance with all of the Avidbank agreement covenants as of June 30, 2016 and December 31, 2015.

 

The foregoing description is qualified in its entirety by reference to the Fourth Amendment to the Loan and Security Agreement between Avidbank Corporate Finance and Auxilio, Inc., which is found as Exhibit 10.1 of our form 10-Q filed on August 14, 2015.

 

In connection with our entry into the Loan and Security Agreement, we granted Avidbank (a) a general, first-priority security interest in all of our assets, equipment and inventory, and (b) a security interest in all of our intellectual property under an Intellectual Property Security Agreement.  As additional consideration for the Loan and Security Agreement, we issued Avidbank a 5-year warrant to purchase up to 72,098 shares of our common stock at an exercise price of $1.39 per share.  The foregoing descriptions are qualified in their entirety by reference to the respective agreements.  These agreements are found in our Form 8-K filed on May 9, 2012 as Exhibits 10.1, 10.2, 10.3 and 10.4.

 

Interest charges associated with the Avidbank line of credit, including loan origination costs, totaled $0 and $16,347 respectively, for the six months ended June 30, 2016 and 2015, respectively. Interest charges associated with the Avidbank term loan, including loan origination costs, totaled $39,516 and $11,726 for the six months ended June 30, 2016 and 2015, respectively.

 

 

Effective January 1, 2014, we entered into an employment agreement with Joseph J. Flynn, our President and Chief Executive Officer ("CEO") since 2009 (the "Flynn Agreement"). The Flynn Agreement provides that Mr. Flynn will continue his employment as our President and CEO. The Flynn Agreement has a term of two years, provides for an annual base salary of $275,000.  Mr. Flynn also receives the customary employee benefits available to our employees. Mr. Flynn is also entitled to receive a bonus of up to $150,000 per year, the achievement of which is based on Company performance metrics. Further, the Flynn Agreement revised the vesting schedule of warrants granted to Mr. Flynn in January 2013. The revision spreads the vesting date of the remaining 300,000 unvested shares from 150,000 on January 1, 2015 and 150,000 on January 1, 2016 to 100,000 on January 1, 2015, 100,000 on January 1, 2016 and 100,000 on January 1, 2017. The warrants will vest contingent with the achievement of certain financial performance metrics of the Company for calendar years 2015 and 2016. The calendar year 2014 performance metrics were not met and as such, they did not vest. The calendar year 2015 performance metrics were met.  We may terminate Mr. Flynn's employment under the Flynn Agreement without cause at any time on thirty days advance written notice, at which time Mr. Flynn would receive severance pay for twelve months and be fully vested in all options and warrants granted to date. The foregoing summary of the Flynn Agreement is qualified in its entirety by reference to the full context of the employment agreement which is found as Exhibit 10.2 to our 10-Q filing on May 14, 2014.

 

Effective January 1, 2016, we entered into an employment agreement with Mr. Flynn (the "2016 Flynn Agreement"). The 2016 Flynn Agreement provides that Mr. Flynn will continue his employment as our President and CEO. The 2016 Flynn Agreement has a term of two years, provides for an annual base salary of $300,000, and will automatically renew for subsequent twelve (12) month terms unless either party provides advance written notice to the other that such party does not wish to renew the agreement for a subsequent twelve (12) months.  Mr. Flynn also receives the customary employee benefits available to our employees. Mr. Flynn is also entitled to receive a bonus of up to $180,000 per year, the achievement of which is based on Company performance metrics.  We may terminate Mr. Flynn's employment under the Flynn Agreement without cause at any time on thirty (30) days advance written notice, at which time Mr. Flynn would receive severance pay for twelve months and be fully vested in all options and warrants granted to date.  The foregoing summary of the 2016 Flynn Agreement is qualified in its entirety by reference to the full context of the employment agreement, which is found as Exhibit 10.31 to this Form 10-K filed on March 30, 2016.

 

Effective January 1, 2014, we entered into an employment agreement with Paul T. Anthony, our Chief Financial Officer ("CFO") since 2004 (the "Anthony Agreement"). The Anthony Agreement provides that Mr. Anthony will continue to serve as our EVP and CFO. The Anthony Agreement has a term of two years, and provides for an annual base salary of $225,000. Mr. Anthony also receives the customary employee benefits available to our employees. Mr. Anthony is also entitled to receive a bonus of up to $108,000 per year, the achievement of which is based on Company performance metrics.  Further, the Anthony Agreement revised the vesting schedule of warrants granted to Mr. Anthony in January 2013. The revision spreads the vesting date of the remaining 200,000 unvested shares from 100,000 on January 1, 2015 and 100,000 on January 1, 2016 to 66,667 on January 1, 2015, 66,667 on January 1, 2016 and 66,666 on January 1, 2017. The warrants will vest contingent with the achievement of certain financial performance metrics of the Company for calendar years 2015 and 2016. The calendar year 2014 performance metrics were not met and as such, they did not vest. The calendar year 2015 performance metrics were met.  We may terminate Mr. Anthony's employment under the Anthony Agreement without cause at any time on thirty days advance written notice, at which time Mr. Anthony would receive severance pay for twelve months and be fully vested in all options and warrants granted to date. The foregoing summary of the Anthony Agreement is qualified in its entirety by reference to the full context of the employment agreement which is found as Exhibit 10.3 to our 10-Q filing on May 14, 2014.

 

Effective January 1, 2016, we entered into a new employment agreement with Mr. Anthony (the "2016 Anthony Agreement"). The 2016 Anthony Agreement provides that Mr. Anthony will continue to serve as our Executive Vice President ("EVP") and CFO. The 2016 Anthony Agreement has a term of two years, and provides for an annual base salary of $245,000. The 2016 Anthony Agreement will automatically renew for subsequent twelve (12) month terms unless either party provides advance written notice to the other that such party does not wish to renew the agreement for a subsequent twelve (12) months.  Mr. Anthony also receives the customary employee benefits available to our employees. Mr. Anthony is also entitled to receive a bonus of up to $132,000 per year, the achievement of which is based on Company performance metrics.  We may terminate Mr. Anthony's employment under the 2016 Anthony Agreement without cause at any time on thirty (30) days advance written notice, at which time Mr. Anthony would receive severance pay for twelve months and be fully vested in all options and warrants granted to date.  The foregoing summary of the 2016 Anthony Agreement is qualified in its entirety by reference to the full context of the employment agreement, which is found as Exhibit 10.32 to Form 10-K filed on March 30, 2016.

 

 

At times, cash balances held in financial institutions are in excess of federally insured limits.  Management performs periodic evaluations of the relative credit standing of financial institutions and limits the amount of risk by selecting financial institutions with a strong credit standing.

 

Our two largest customers accounted for approximately 49% of our revenues for the six months ended June 30, 2016 and our two largest customers accounted for approximately 35% of our revenues for the six months ended June 30, 2015. Our largest customers had net accounts receivable totaling approximately $4,000,000 and $2,600,000 as of June 30, 2016 and December 31, 2015 respectively.

 

 

We have adopted ASC 280, "Segment Reporting".  Because we operate in one business segment based on our integration and management strategies, segment disclosure has not been presented.

 

 

On March 31, 2015, Auxilio entered into an Asset Purchase Agreement (the "Purchase Agreement") with Redspin,

 

Inc., a California corporation ("Redspin") and certain owners of Redspin, to acquire substantially all of the assets and certain liabilities of Redspin (the "Acquired Assets").  A copy of the Purchase Agreement was filed as an exhibit to the Current Report on Form 8-K filed with the SEC on April 6, 2015.   On April 7, 2015, the Company completed its acquisition of the Acquired Assets in an asset purchase transaction (the "Transaction") pursuant to the terms and conditions of the Purchase Agreement.

 

As a result of the consummation of the Purchase Agreement, on April 7, 2015, in consideration for the Acquired Assets, the Company paid Redspin $2,076,966 in cash, less a holdback of $200,000 to cover any indemnification claims made pursuant to the Transaction, and issued 452,284 shares of the Company's restricted common stock, par value $0.001, which was the number of shares having an aggregate value of $500,000, with the price per share equal to the average of the closing price of Auxilio common stock on the OTC Markets for the 20 most recent trading days prior to the date of the Purchase Agreement, rounded up to the nearest whole number of shares. The Company also agreed to pay a cash Earn-out Payment, as defined in the Purchase Agreement, upon the achievement of certain earnings targets in the first year following the date of the Purchase Agreement. Management assigned the fair value of the contingent consideration to be $0 because the earnings targets were not met. No indemnification claims were made prior to June 30, 2016. As such, in July 2016 the Company released the holdback funds to Redspin. The Company reduced the holdback amount paid by $67,811 which represented unrecorded liabilities of Redspin as of the acquisition date.

 

The Purchase Agreement also provides for the Company to pay employee bonus shares of common stock upon the achievement of the same certain earnings targets and provided they remain with the Company for one year subsequent to the acquisition date. Management previously had considered the $124,000 of fair value of these employee bonus shares to be a component of the acquisition cost.  After completing the analysis of the earn-out provisions, Management has determined that the employee bonus shares would be post-combination compensation. The minimum earnings targets were not be achieved. Accordingly, no related stock compensation expense has been recorded for the year ended December 31, 2015 or the six months ended June 30, 2016..

 

The allocation of the purchase price of the assets acquired and liabilities assumed based on their fair values was as follows: 

 

Purchased identifiable intangible assets are amortized on a straight-line basis over the respective useful lives. Estimated useful lives of the identifiable intangible assets acquired ranges from three to ten years. We also recognized goodwill of $1,192,000. Goodwill is recognized as we expect to be able to realize synergies between the two companies, primarily our ability to provide market and reach for the Redspin products and services to Auxilio's customers.

The Company incurred approximately $70,000 in legal, accounting and other professional fees related to this acquisition, all of which were expensed during the year ended December 31, 2015.

 

In connection with the Purchase Agreement, Auxilio and Daniel Berger ("Berger"), CEO of Redspin, entered into an employment agreement (the "Berger Employment Agreement"), pursuant to which Berger was employed to serve as

Executive Vice President of Auxilio.  The initial term of the Berger Employment Agreement is for two years (unless sooner terminated), and automatically renews for subsequent twelve-month periods unless either party determines to not renew.  Berger's base annual salary will be $250,000, and Berger will be eligible to receive incentive compensation, consistent with that generally offered to executives of the Company.  In addition, Auxilio and John Abraham ("Abraham"), Founder of Redspin, entered into an independent contractor agreement (the "Abraham Agreement"), pursuant to which Abraham was retained to perform the work assigned by the Company.  The term of the Abraham Agreement is for two years (unless sooner terminated).  In consideration for such services, the Company agreed to pay Abraham $11,000 per month.

 

The following supplemental unaudited pro forma information presents the combined operating results of the Company and the acquired business during the three months and six ended June 30, 2016 and 2015, as if the acquisition had occurred at the beginning of each of the periods presented. The pro forma information is based on the historical financial statements of the Company and that of the acquired business. Amounts are not necessarily indicative of the results that may have been attained had the combinations been in effect at the beginning of the periods presented or that may be achieved in the future.

 

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q.  This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Section 27A of the Securities Act, and is subject to the safe harbors created by those sections.  Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," "may," "will" and variations of these words or similar expressions are intended to identify forward-looking statements.  In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements.  These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict.  Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors.  We undertake no obligation to revise or publicly release the results of any revisions to these forward-looking statements.

 

Due to possible uncertainties and risks, readers are cautioned not to place undue reliance on the forward-looking statements contained in this Quarterly Report, which speak only as of the date of this Quarterly Report, or to make predictions about future performance based solely on historical financial performance.  We disclaim any obligation to update forward-looking statements contained in this Quarterly Report.

 

Readers should carefully review the risk factors described below under the heading "Risk Factors"  and in other documents we file from time to time with the SEC, including our Form 10-K for the fiscal year ended December 31, 2015.  Our filings with the SEC, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those filings, pursuant to Sections 13(a) and 15(d) of the Exchange Act, are available free of charge at www.auxilioinc.com, when such reports are available via the EDGAR system maintained by the SEC at www.sec.gov.

 

OVERVIEW

We provide total outsourced document and image management services and related financial and business processes for major healthcare facilities. Our proprietary technologies and unique processes assist hospitals, health plans and health systems with strategic direction and services that reduce document image expenses, increase operational efficiencies and improve the productivity of their staff. Our analysts, consultants and resident hospital teams work with senior hospital financial management and department heads to determine the best possible long term strategy for managing the millions of document images produced by their facilities on an annual basis. Our document image management programs help our clients achieve measurable savings and a fully outsourced document image management process.

Through our acquisitions of Delphiis, Inc. and Redspin, we provide IT Advisory and Managed Services, in addition to IT Risk Management SaaS technology solutions. These services help to ensure enterprise-wide IT security.

Our target market includes medium to large hospitals, health plans and healthcare systems.

Our common stock currently trades on the OTCQB under the stock symbol "AUXO".

Where appropriate, references to "Auxilio," the "Company," "we," "us" or "our" include Auxilio, Inc. and its wholly-owned subsidiaries, Auxilio Solutions, Inc., a California corporation, and Delphiis, Inc., also a California corporation.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities.  We evaluate these estimates on an on-going basis, including those estimates related to customer programs and incentives, bad debts, intangible assets, income taxes, stock-based compensation, contingencies and litigation.  We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances.  The results of these estimates form the basis for our judgments about the carrying values of assets and liabilities which are not readily apparent from other sources.  As a result, actual results may differ from these estimates under different assumptions or conditions.

We consider the following accounting policies to be most important to the portrayal of our financial condition and those that require the most subjective judgment:

The Company, operating under a consolidated strategy and management structure, derives its revenue from four sources: (1) managed print services revenue; (2) equipment revenue; (3) software subscriptions and managed services revenue, which is comprised of subscription fees from customers accessing the Company's enterprise cloud computing services and customers purchasing additional ongoing managed services beyond the standard support that is included in the basic software subscription fees; and (4) cyber security professional services revenue such as penetration testing, cyber security risk assessments and security program strategy development.

 

The Company commences revenue recognition when all of the following conditions are satisfied:

 

 

 

Managed Print Services and Equipment Revenue

 

Revenue is recognized pursuant to ASC Topic 605, "Revenue Recognition" (ASC 605).  Monthly service and supply revenue is earned monthly during the term of the contract, as services and supplies are provided. Revenues from equipment sales transactions are earned when there is persuasive evidence of an arrangement, delivery has occurred, the sales price has been determined and collectability has been reasonably assured. For equipment that is to be placed at a customer's location at a future date, revenue is deferred until the placement of such equipment.

 

We enter into arrangements that include multiple deliverables, which typically consist of the sale of Multi-Function Device ("MFD") equipment and a support services contract.  We account for each element within an arrangement with multiple deliverables as separate units of accounting.  Revenue is allocated to each unit of accounting under the guidance of ASC Topic 605-25, Multiple-Deliverable Revenue Arrangements, which provides criteria for separating consideration in multiple-deliverable arrangements by establishing a selling price hierarchy for determining the selling price of a deliverable.  The selling price used for each deliverable is based on vendor-specific objective evidence ("VSOE") if available, third-party evidence if VSOE is not available, or estimated selling price if neither VSOE nor third-party evidence is available.  We are required to determine the best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a standalone basis.  We generally do not separately sell MFD equipment or service on a standalone basis.  Therefore, we do not have VSOE for the selling price of these units. As we purchase the equipment, we have third-party evidence of the cost of this element.  We estimate the proceeds from the arrangement to allocate to the service unit based on historical cost experiences.  Based on the relative costs of each unit to the overall cost of the arrangement, we utilize the same relative percentage to allocate the total arrangement proceeds.

 

The Company's contracts with customers may include provisions that relate to guaranteed savings amounts and shared savings. Such provisions are considered by management during the Company's initial proprietary client assessment and are charged and accrued when deemed by management to be probable. The Company's historical settlement of such amounts has been within management's estimates.

Software Subscriptions and Managed Services Revenue

Software subscriptions and managed services revenue are recognized ratably over the contract terms beginning on the commencement date of each contract, which is the date the Company's service is made available to customers.

 

Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on whether the revenue recognition criteria have been met.

 

The Company's software subscription service arrangements are non-cancelable and do not contain refund-type provisions.

Cyber Security Professional Service Revenue

The majority of the Company's cyber security services contracts are on a time and material basis. When these services are not combined with subscription revenues as a single unit of accounting, these revenues are recognized as the services are rendered for time and material contracts, and when the milestones are achieved and accepted by the customer for fixed price contracts.

We estimate the losses that may result from that portion of our accounts receivable that may not be collectible as a result of the inability of our customers to make required payments. Management specifically analyzes customer concentration, customer credit-worthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. We review past due accounts on a monthly basis and record an allowance for doubtful accounts where we deem appropriate.

We ordinarily incur additional costs to implement our services for new customers.  These costs are comprised primarily of additional labor and support.  These costs are expensed as incurred, and have a negative impact on our statements of operations and cash flows during the implementation phase.

The Company performs an impairment test of goodwill at least annually or on an interim basis if any triggering events occur that would merit another test. The impairment test compares our estimate of our fair value based on its market capitalization to the Company's carrying amount including goodwill. We have not had to perform step 2 of the impairment test because the fair value has exceeded the carrying amount. For other intangible assets with definite lives, when indicators of impairment exist, we compare future undiscounted cash flow forecasts prepared by management to the carrying value of the related intangible asset group to determine if there is impairment.

Under the fair value recognition provisions of the authoritative guidance, stock-based compensation cost granted to employees is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service or performance period, which is the vesting period.  Stock options and warrants issued to consultants and other non-employees as compensation for services to be provided to us are accounted for based upon the fair value of the services provided or the estimated fair value of the option or warrant, whichever can be more clearly determined. We currently use the Black-Scholes option pricing model to determine the fair value of stock options.  The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables.  These variables include our expected stock price volatility over the term of the awards, the expected term of the award, the risk-free interest rate and any expected dividends. Compensation cost associated with grants of restricted stock units are also measured at fair value. We evaluate the assumptions used to value restricted stock units on a quarterly basis. When factors change, including the market price of the stock, share-based compensation expense may differ significantly from what has been recorded in the past. If there are any modifications or cancellations of the underlying unvested securities, we may be required to accelerate, increase or cancel any remaining unearned share-based compensation expense.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial reporting requirements and those imposed under federal and state tax laws.  Deferred taxes are provided for timing differences in the recognition of revenue and expenses for income tax and financial reporting purposes and are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.  Deferred income tax expense represents the change during the period in the deferred tax assets and liabilities.  The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics.  Realization of the deferred tax asset is dependent on generating sufficient taxable income in future years.  Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Reference is made to our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed on March 30, 2016 for additional discussion of our critical accounting policies.

RESULTS OF OPERATIONS

 

Revenue

 

Revenue decreased by $454,460 to $15,162,070 for the three months ended June 30, 2016, as compared to the same period in 2015.  We added approximately $3,100,000 of new recurring service revenue contracts. This is offset by reductions of approximately $1,800,000 due to volume reductions at clients and terminated services. Equipment sales for 2016 were approximately $900,000 as compared to approximately $2,700,000 in 2015. Equipment revenues were lower in 2016 due to some delays in copier fleet refresh activities at customers which we expect to be completed over the next couple of quarters.

 

 

Cost of Revenue

 

Cost of revenue consists of document imaging equipment, parts, supplies and salaries and expenses of direct labor and indirect support staff.  Cost of revenue was $12,070,163 for the three months ended June 30, 2016, as compared to $13,500,076 for the same period in 2015. We incurred approximately $100,000 in additional staffing costs, including contract labor, and approximately $100,000 in additional service and supply costs, primarily as a result of our new customers, however equipment costs decreased by approximately $1,600,000 in 2016, primarily as a result of the decrease in equipment revenues from the copier fleet refresh activities.

 

Gross margin increased to 20% of revenue for the three months ended June 30, 2016 as compared to 14% for the same period in 2015. As our implementations at new customers have slowed and these accounts start to mature, and we are able to effect change in these environments, we experience improvement in margins. Conversely, we expect higher cost of revenues at the start of our engagement with new customers as was the case in 2015. In addition to the costs associated with implementing our services, we absorb our new customers' legacy contracts with third-party vendors. As we implement our programs, we strive to improve upon these legacy contracts and thus reduce costs over the term of the contract. Given the varying expiration dates of these vendor contracts and the amount of savings being specific to each arrangement, we cannot predict our anticipated profit margins as these legacy contracts approach renewal. We anticipate this trend to continue but anticipate an overall increase in cost revenues sold as a result of the expansion of our customer base.

 

Sales and Marketing

 

Sales and marketing expenses include salaries, commissions and expenses for sales and marketing personnel, travel and entertainment, and other selling and marketing costs. Sales and marketing expenses were $730,149 for the three months ended June 30, 2016, as compared to $808,816 for the same period in 2015. The decrease is primarily attributable to approximately $70,000 less in sales commissions paid in 2016.

 

General and Administrative

 

General and administrative expenses include personnel costs for finance, administration, information systems, and general management, as well as facilities expenses, professional fees, legal expenses and other administrative costs. General and administrative expenses decreased by $274,021 to $1,649,006 for the three months ended June 30, 2016, as compared to $1,923,027 for the three months ended June 30, 2015. The decrease in general and administrative expenses is primarily attributed to one-time charges in 2015 of approximately $300,000 in severance and related costs from the integration efforts initiated with the two recent acquisitions, and an increase in professional fees, mostly related to due diligence efforts related to the acquisition of Redspin.

 

Other Income (Expense)

 

Interest expense for the three months ended June 30, 2016 was $23,554, compared to $34,347 for the same period in 2015. In 2015 we paid loan origination fees of $10,000 which were not required under the loan agreement in 2016.

 

 

Revenue

 

Revenue increased by $213,264 to $29,677,709 for the six months ended June 30, 2016, as compared to the same period in 2015.  We added approximately $5,900,000 of new recurring service revenue contracts. This is offset by reductions of approximately $2,500,000 due to volume reductions at clients and terminated services. Equipment sales for 2016 were approximately $1,400,000 as compared to approximately $4,600,000 in 2015. Equipment revenues were lower in 2016 due to some delays in copier fleet refresh activities at customers which we expect to be completed over the next couple of quarters.

 

 

Cost of Revenue

 

Cost of revenue consists of document imaging equipment, parts, supplies and salaries and expenses of direct labor and indirect support staff.  Cost of revenue was $24,276,490 for the six months ended June 30, 2016, as compared to $25,215,670 for the same period in 2015. We incurred approximately $1,100,000 in additional staffing costs, including contract labor, and approximately $700,000 in additional service and supply costs, primarily as a result of our new customers, however equipment costs decreased by approximately $2,800,000 in 2016, primarily as a result of the decrease in equipment revenues from the copier fleet refresh activities.

 

Gross margin increased to 18% of revenue for the six months ended June 30, 2016 as compared to 14% for the same period in 2015. As our implementations at new customers have slowed and these accounts start to mature, and we are able to effect change in these environments, we experience improvement in margins. Conversely, we expect higher cost of revenues at the start of our engagement with new customers as was the case in 2015. In addition to the costs associated with implementing our services, we absorb our new customers' legacy contracts with third-party vendors. As we implement our programs, we strive to improve upon these legacy contracts and thus reduce costs over the term of the contract. Given the varying expiration dates of these vendor contracts and the amount of savings being specific to each arrangement, we cannot predict our anticipated profit margins as these legacy contracts approach renewal. We anticipate this trend to continue but anticipate an overall increase in cost revenues sold as a result of the expansion of our customer base.

 

Sales and Marketing

 

Sales and marketing expenses include salaries, commissions and expenses for sales and marketing personnel, travel and entertainment, and other selling and marketing costs. Sales and marketing expenses were $1,401,496 for the six months ended June 30, 2016, as compared to $1,550,888 for the same period in 2015. The decrease is primarily attributable to approximately $80,000 less in sales commissions paid in 2016 along with a reduced marketing spend in 2016.

 

General and Administrative

 

General and administrative expenses include personnel costs for finance, administration, information systems, and general management, as well as facilities expenses, professional fees, legal expenses and other administrative costs. General and administrative expenses increased by $102,658 to $3,412,027 for the six months ended June 30, 2016, as compared to $3,309,369 for the same period in 2015. While 2015 included approximately $300,000 in severance and related costs from the integration efforts initiated with the two recent acquisitions, 2016 includes approximately $100,000 more in amortization expenses from the April 2015 acquisition of Redspin as well as a reduction of approximately $100,000 less in payroll and related costs due primarily to a reduction in HR staff in 2016.

 

Other Income (Expense)

 

Interest expense for the six months ended June 30, 2016 was $49,254 compared to $68,397 for the same period in 2015.  The decrease is a result of a lower borrowing base in 2016.

 

Income Tax Expense

 

Income tax expense for the six months ended June 30, 2016 was $44,000 compared to $2,400 for the same period in 2015. The increase is due to taxes on a profitable period in 2016, whereas the 2015 amount represents the minimum tax liability due for required state income taxes.

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

At June 30, 2016, our cash and cash equivalents were $4,449,013 and our working capital was $3,846,183.  Our principal cash requirements are for operating expenses, including equipment, supplies, employee costs, and capital expenditures and funding of the operations. Our primary sources of cash are service and equipment sale revenues, our bank line of credit and term loan, the exercise of options and warrants and the sale of common stock.

 

During the six months ended June 30, 2016, our cash used for operating activities amounted to $1,614,708, as compared to $536,983 provided by operating activities for the same period in 2015.  The decrease in cash from operating activities in 2016 is primarily due to an increase in accounts receivable, primarily from customers who are near the end of their implementation periods and have higher than normal balances due. There is a decrease in accounts payable as we have reduced the number of days to validate expense related vendors of recently implemented clients.

 

We expect to continue to establish recurring revenue contracts to new customers throughout 2016 which we expect to have higher cost of revenues at the start of the engagements with new customers. In addition, we plan to continue our recent strategy to diversify our business into the data security industry. As a result of these two factors, we may seek additional financing, which may include debt and/or equity financing or funding through third party agreements. In May 2012, we entered into an asset-based line of credit agreement with a financial institution. This facility provides for borrowings up to $2,000,000 not to exceed 80% of eligible receivables.  In June 2015, we borrowed $2,000,000 under a four-year term loan agreement. We may seek additional financing; however there can be no assurance that additional financing will be available on acceptable terms, if at all.  Any equity financing may result in dilution to existing stockholders and any debt financing may include restrictive covenants.  Management believes that cash generated from debt and/or equity financing arrangements along with funds from operations will be sufficient to sustain our business operations over the next twelve months. Management believes that cash flows from operations together with cash reserves and our bank line of credit and term loan availability will allow us to complete these transactions without disrupting operations.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

Our off-balance sheet arrangements consist primarily of conventional operating leases arising in the normal course of business, as further discussed below under "Contractual Obligations and Contingent Liabilities and Commitments." As of June 30, 2016, we did not have any other relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

 

CONTRACTUAL OBLIGATIONS AND CONTINGENT LIABILITIES AND COMMITMENTS

 

As of June 30, 2016, expected future cash payments related to contractual obligations and commercial commitments were as follows:

 

 

As a "smaller reporting company" as defined by Rule 229.10(f)(1), we are not required to provide the information required by this Item 3.

 

 

 

 

We maintain disclosure controls and procedures (as defined in Rules 13a-15(c) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this Quarterly Report.  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including each of such officers as appropriate to allow timely decisions regarding required disclosure.

 

No change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

 

 

 

As of the date of this filing, we have identified the following changes to the Risk Factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, filed with the SEC on March 30, 2016. (the "2015 Form 10-K").  The Risk Factors set forth in the 2015 Form 10-K should be read carefully in connection with evaluating our business and in connection with the forward-looking statements contained in this Quarterly Report on Form 10-Q.  Any of the risks described in the 2015 Form 10-K could materially adversely affect our business, financial condition or future results and the actual outcome of matters as to which forward-looking statements are made.  These are not the only risks we face.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

 

We have acquired other businesses, and we may acquire additional businesses, that could negatively affect our operating results, dilute our stockholders' ownership, increase our debt or cause us to incur significant expenses.

 

We have completed two business combinations over the past 24 months and we may pursue additional acquisitions of businesses and assets. We have limited experience with acquiring other companies and/or assets. We may not be able to find suitable partners or acquisition candidates, and we may not be able to complete such transactions on favorable terms, if at all. If we make any acquisitions, we may not be able to integrate these acquisitions successfully into our existing business, and we could assume unknown or contingent liabilities. Any future acquisitions also could result in the incurrence of debt, contingent liabilities or future write-offs of intangible assets or goodwill, any of which could have a negative impact on our cash flows, financial condition and results of operations. Integration of an acquired company also may disrupt ongoing operations and require management resources that we would otherwise focus on developing our existing business. We may experience losses related to investments in other companies, which could harm our financial condition and results of operations. We may not realize the anticipated benefits of any acquisition.

 

To finance any acquisitions, we may choose to issue shares of common stock as consideration, which could dilute the ownership of our stockholders. Additional funds may not be available on terms that are favorable to us, or at all. If the price of our common stock is low or volatile, we may not be able to acquire other companies using our stock as consideration.

 

 

 

Effective August 6, 2015, the Board of the Company adopted an amendment to the Company's amended and restated bylaws (the "Amendment"). The Amendment, among other things, adopts a modified system for the election of directors.  Under this system, shareholders vote either "for" or "against" a director, and any nominee who receives more "against" than "for" votes is required to tender his or her resignation.  The Company's Nominating and Corporate Governance Committee (the "Committee") then reviews the resignation and makes a recommendation to the Board.  The Board, acting on the Committee's recommendation, will publicly disclose its decision whether to accept or reject the resignation and the rationale behind it within 90 days from the date of the certification of the election results.  This description of the Amendment is a summary only and is qualified in its entirety by the text of the Amendment, filed as Exhibit 3.1 hereto and incorporated by reference herein.

 

 

 

* Pursuant to Rule 406T of Regulation S-T, this XBRL information will not be deemed "filed" for the purpose of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liability of that section, nor will it be deemed filed or made a part of a registration statement or prospectus for purposes of Sections 11 and 12 of the Securities Act of 1933, or otherwise subject to liability under those sections.

 

SIGNATURES

 

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	AUXILIO, INC.
Date:  August 8, 2016	By:  /s/  Joseph J. Flynn
	Joseph J. Flynn Chief Executive Officer (Principal Executive Officer)
Date:  August 8, 2016	By:  /s/  Paul T. Anthony
	Paul T. Anthony Chief Financial Officer (Principal Accounting Officer)