THREE MONTHS ENDED MARCH 31, 2015 AND 2014
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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, 2014, as filed with the Securities and Exchange Commission (“SEC”) on March 30, 2015.
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 these financial statements with the SEC.
2
.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
On May 28, 2014, the FASB issued ASU 2014-09 regarding ASC Topic 606, Revenue from Contracts with Customers. The standard provides principles for recognizing revenue for the transfer of promised goods or services to customers with the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance will be effective for our fiscal year 2018, subject to the issuance of guidance from the SEC. Early adoption is not permitted. We are evaluating the accounting, transition and disclosure requirements of the standard and cannot currently estimate the financial statement impact it will have upon adoption.
Additionally, from time to time, new accounting pronouncements are issued that we adopt as of the specified effective date. Unless otherwise discussed in these financial statements and notes or in our financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2014, we believe the impact of any other recently issued standards that are not yet effective are either not applicable to us at this time or will not have a material impact on our consolidated financial statements upon adoption.
3. OPTIONS AND WARRANTS
Below is a summary of Auxilio stock option and warrant activity during the three month period ended March 31, 2015:
Options
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Shares
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Weighted Average Exercise Price
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Weighted Average Remaining Term in Years
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Aggregate
Intrinsic Value
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Outstanding at December 31, 2014
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4,886,829
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|
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$
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1.05
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|
|
|
|
|
|
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Granted
|
|
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107,750
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|
|
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1.22
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|
|
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|
|
|
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Exercised
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|
|
-
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|
|
|
-
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|
|
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|
|
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Cancelled
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(85,250
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)
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1.97
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|
|
|
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Outstanding at March 31, 2015
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4,909,329
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$
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1.04
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|
|
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4.73
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|
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$
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1,067,294
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Exercisable at March 31, 2015
|
|
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4,294,048
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$
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1.02
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|
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4.13
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$
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914,741
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Warrants
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Shares
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|
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Weighted Average Exercise Price
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Weighted Average Remaining Term in Years
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Aggregate
Intrinsic Value
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Outstanding at December 31, 2014
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|
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2,208,565
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$
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1.11
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|
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Granted
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-
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-
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Exercised
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|
-
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|
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-
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Cancelled
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|
|
-
|
|
|
|
-
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|
|
|
|
|
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Outstanding at March 31, 2015
|
|
|
2,208,565
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|
|
$
|
1.11
|
|
|
|
4.59
|
|
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$
|
314,084
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Exercisable at March 31, 2015
|
|
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1,508,565
|
|
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$
|
1.16
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|
|
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3.10
|
|
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$
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209,084
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During the three months ended March 31, 2015, we granted a total of 107,750 options to employees to purchase shares of our common stock at an exercise price of $1.22 per share. The exercise price equals the fair value of our stock on the grant date. The fair value of the options was determined using the Black-Scholes option-pricing model. The assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 0.11%; (ii) estimated volatility of 54.98%; (iii) dividend yield of 0.0%; and (iv) expected life of the options of three years. These options have graded vesting annually over three years starting March 2015.
For the three months ended March 31, 2015 and 2014, stock-based compensation expense recognized in the statement of operations was as follows:
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2015
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2014
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Cost of revenues
|
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$
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33,294
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|
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$
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127,164
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Sales and marketing
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|
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9,264
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|
|
|
15,075
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General and administrative expenses
|
|
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36,742
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|
|
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58,363
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Total stock based compensation expense
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$
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79,300
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|
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$
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200,602
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4. RESTRICTED STOCK
In July 2014, in connection with our acquisition of the common stock of Delphiis, Inc., we issued 400,000 shares of restricted stock to a key employee as part of his employment agreement. The shares vest as follows:
Vesting Date
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Shares
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July 1, 2016
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100,000
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July 1, 2017
|
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100,000
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July 1, 2018
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100,000
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July 1, 2019
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100,000
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The stock compensation expense recognized for these shares totaled $15,066 for the three months ended March 31, 2015.
5. NET LOSS PER SHARE
Basic net loss per share is calculated using the weighted average number of shares of our common stock issued and outstanding during a certain period, and is calculated by dividing net loss by the weighted average number of shares of our common stock issued and outstanding during such period. Diluted net loss per share is calculated using the weighted average number of common and potentially dilutive common shares outstanding during the period, using the as-if converted method for secured convertible notes, and the treasury stock method for options and warrants. Diluted net loss per share does not include potentially dilutive securities because such inclusion in the computation would be anti-dilutive.
The following table sets forth the computation of basic and diluted net loss per share:
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Three Months Ended March 31,
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2015
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2014
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Numerator:
|
|
|
|
|
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Net loss
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$
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(32,542
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)
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$
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(70,873
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)
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Effects of dilutive securities:
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Convertible notes payable
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-
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(42,524
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)
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Loss after effects of conversion of note payable
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$
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(32,542
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)
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$
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(113,397
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)
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Denominator:
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Denominator for basic calculation weighted average shares
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23,681,559
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20,658,573
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Dilutive common stock equivalents:
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|
|
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Convertible notes payable
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-
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|
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1,600,000
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Denominator for diluted calculation weighted average shares
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|
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23,681,559
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|
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22,258,573
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|
|
|
|
|
|
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Net loss per share:
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|
|
|
|
|
|
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Basic net loss per share
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$
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(0.00
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)
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$
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(0.00
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)
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Diluted net loss per share
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$
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(0.00
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)
|
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$
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(0.01
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)
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6. INTANGIBLE ASSETS
Intangible assets consist of the following:
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Gross
Carrying
Amount
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Accumulated
Amortization
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Net
Carrying
Amount
|
|
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Useful Life (years)
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Acquired technology
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$
|
900,000
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|
|
$
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(67,500
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)
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$
|
832,500
|
|
|
|
10
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Customer relationships
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400,000
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|
|
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(60,000
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)
|
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340,000
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|
|
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5
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Trademarks
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50,000
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|
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(25,000
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)
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|
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25,000
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|
|
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1.5
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Non-compete agreements
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20,000
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|
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(5,000
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)
|
|
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15,000
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|
|
|
3
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Total intangible assets
|
|
$
|
1,370,000
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|
|
$
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(157,500
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)
|
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$
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1,212,500
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Please see Note 15, Stock Purchase Agreement – Delphiis, Inc., below for further discussion of the origin of these intangible assets.
7. ACCOUNTS RECEIVABLE
A summary of accounts receivable is as follows:
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March 31,
2015
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|
|
December 31,
2014
|
|
Trade receivables
|
|
$
|
8,365,984
|
|
|
$
|
8,105,330
|
|
Unapplied advances and unbilled revenue
|
|
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(1,061,761
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)
|
|
|
(1,297,147
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)
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Allowance for doubtful accounts
|
|
|
-
|
|
|
|
-
|
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Total accounts receivable
|
|
$
|
7,304,223
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|
|
$
|
6,808,183
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8. LINE OF CREDIT
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 (the “Avidbank Amendment”). 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 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. As of March 31, 2015 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). While there are outstanding credit extensions, our adjusted EBITDA shall be positive, as measured on a quarterly basis; provided however that our adjusted EBITDA may be an adjusted EBITDA loss of up to $200,000 for any single quarter so long as we achieve a positive adjusted EBITDA for the prior quarter and subsequent quarter. The foregoing description is qualified in its entirety by reference to the Third Amendment to the Loan and Security Agreement between Avidbank Corporate Finance and Auxilio, Inc., which is found as Exhibit 10.1 to this Form 10-Q. We were in compliance with all of the Avidbank agreement covenants as of March 31, 2015 and December 31, 2014.
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 $1.387 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 amortization of the discounts and loan acquisition costs totaled $2,124 and $5,250, respectively, for the three months ended March 31, 2015 and 2014, respectively.
9. NOTES PAYABLE – RELATED PARTIES
We assumed debt totaling $463,723 when we acquired Delphiis, Inc. effective July 1, 2014 (see Note 15). In July 2014, we paid $100,000 to the note holders upon Delphiis’s collection of $100,000 from accounts receivable outstanding as of June 30, 2014. For the remaining $363,723 we have outstanding promissory notes payable to an employee and another principal who were majority owners of Delphiis, Inc. The notes bear interest at the rate of 4% per annum, upon which we are to make quarterly interest-only payments on the total principal amount outstanding at the end of each calendar quarter. The notes mature on July 31, 2016 and contain no prepayment penalty. Pursuant to the terms of the notes, we will accelerate payment on fifty percent (50%) of the outstanding amount due under such notes at such time as Delphiis, Inc. achieves $1,500,000 of bookings measured from the date of the Agreement, and the remaining fifty percent (50%) will be paid at such time as Delphiis, Inc. achieves $4,000,000 of bookings measured from July 1, 2014.
In February 2015, Delphiis reached the first bookings target of $1,500,000 resulting in payment and vesting of 50% of the outstanding debt. On February 19, 2015, a holder of $257,835 of the notes agreed to convert the principal amount of his note into 257,835 shares of our common stock. Since Delphiis had reached the $1,500,000 bookings target, on February 24, 2015, we issued 128,917 of the shares to the note holder. The remaining $128,918 of his note was converted to restricted stock units and shares will be issued at the earlier of the achievement of the $4,000,000 of bookings target is reached, or July 31, 2016. The foregoing summary of the note conversion is qualified in its entirety by reference to the full context of the Note Conversion Agreement which is found as Exhibit 99.1 to our 8-K filing on February 27, 2015.
Interest expense on the notes, including amortization of the discount, for the three months ended March 31, 2015 totaled $28,676.
10. CONVERTIBLE NOTES PAYABLE
Effective July 29, 2011, we closed on a private offering of secured convertible promissory notes and warrants (“Units”) for gross proceeds of $1,850,000. Each of the Units consisted of (i) a $5,000 secured convertible promissory note (each a “Note” and collectively “Notes”) and (ii) a warrant (each a “Warrant” and collectively “Warrants”) to purchase 1,000 shares of our common stock at an exercise price of $1.50 per share. The Notes matured July 29, 2014 and were secured by our tangible and intangible assets, subject to the senior security interest of AvidBank, as discussed in the immediately preceding note. The Notes accrued interest at a rate of eight percent (8%) per annum, compounded annually, and the interest on the outstanding balance of the Notes was payable no later than thirty (30) days following the close of each calendar quarter. The Notes were convertible into 1,850,000 shares of common stock. The Warrants expire April 29, 2016 and are exercisable to purchase up to 370,000 shares of our common stock. We additionally granted piggyback registration rights to the investors in this offering. Several members of our Board at the time, including John Pace, Michael Joyce, Mark St. Clare and Michael Vanderhoof, participated in the offering.
We also agreed to pay Cambria Capital, LLC a placement fee of $149,850 in sales commissions, reimbursement for costs associated with the placement of the Units and to issue a warrant to purchase up to 199,800 shares of common stock exercisable at a price of $1.50 per share. Cambria Capital, LLC is an affiliate of Michael Vanderhoof, a member of the
Board. The engagement of Cambria Capital, LLC, the payment of the placement fee and the issuance of the warrant to Cambria Capital, LLC were approved by a majority of the disinterested members of the Board. We additionally granted piggyback registration rights to Cambria Capital, LLC that are the same as those afforded to the investors in the offering.
The holders of the Notes elected to convert all of the principal into 1,850,000 shares of common stock with 150,000 shares converted during 2012 and 2013, 150,000 shares converted from March 2014 to June 2014 and the remaining 1,550,000 shares converted in July 2014. The warrants remain outstanding until their exercise or expiration.
Interest charges associated with the convertible notes payable, including amortization of the discounts and loan acquisition costs totaled $90,888 for the three months ended March 31, 2014.
11. EMPLOYMENT AGREEMENTS
Effective January 1, 2014, we entered into a new employment agreement 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, and will automatically renew for subsequent twelve 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 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 $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. 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, 2014, we entered into a new 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. The 2014 Anthony Agreement will automatically renew for subsequent twelve 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 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 $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. 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.
12. CONCENTRATIONS
Cash Concentrations
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.
Major Customers
Our two largest customers accounted for approximately 34% of our revenues for the three months ended March 31, 2015 and our three largest customers accounted for approximately 43% of our revenues for the three months ended March 31, 2014. Our largest customers had net accounts receivable totaling approximately $2,600,000 and $2,800,000 as of March 31, 2015 and December 31, 2014, respectively.
13. SEGMENT REPORTING
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.
14. GOODWILL
We performed an impairment test of goodwill as of December 31, 2014, determining that its estimated fair value based on its market capitalization was greater than our carrying amount including goodwill. We did not perform step 2 since the fair value was greater than the carrying amount.
Although the Company has experienced a net loss for the three months ended March 31, 2015, the net cash provided by operating activities totaled $439,580. No other triggering events were noted during the three months ended March 31, 2015, therefore management did not feel it was necessary to perform an interim impairment test.
15. STOCK PURCHASE AGREEMENT – DELPHIIS, INC.
As previously disclosed in our Current Report on Form 8-K, filed with the SEC, on July 8, 2014, on July 7, 2014 we entered into a Stock Purchase Agreement (the “Agreement”) with Delphiis, Inc., a California corporation (“Delphiis”), certain stockholders of Delphiis (the “Stockholders”), and Mike Gentile, as seller representative (“Gentile”). By agreement of the parties, the effective date of the Agreement was July 1, 2014.
Pursuant to the Agreement, we acquired 100% of the issued and outstanding shares of common stock (the “Shares”) of Delphiis from the Stockholders. The purchase price paid for the Shares consisted of three components: the Securities Consideration, the Cash Consideration, and the Debt Assumption.
-
|
The Securities Consideration consisted of 930,406 shares of our common stock, which was the number of shares having an aggregate value of $1,250,000, with the price per share equal to the average of the closing price of our common stock on the OTC Markets for the 20 most recent trading days prior to the closing date, rounded up to the nearest whole number of shares.
|
-
|
The Cash Consideration was equal to $1,000,000.
|
-
|
The Debt Assumption was equal to $463,723 which was owed by Delphiis to Gentile and two other parties. By way of background, of such amount, $363,723 is represented by certain amended and restated promissory notes (the “Notes”) dated of even date with the Agreement, which bear interest at the rate of 4% per annum, and pursuant to which Delphiis was to make quarterly interest-only payments on the total principal amount outstanding at the end of each calendar quarter. The Notes have a maturity date which is 24 months from the date of the Agreement and contain no prepayment penalty. Pursuant to the terms of the Notes, Delphiis will accelerate payment on (i) fifty percent (50%) of the outstanding amount due under such Notes at such time as Delphiis achieves $1,500,000 of bookings measured from the date of the Agreement, and (ii) the remaining fifty percent (50%) will be paid at such time as Delphiis achieves $4,000,000 of bookings measured from the date of the Agreement, all as set forth in the Notes. Delphiis also agreed to pay the remaining $100,000 to Gentile and the other noteholders upon Delphiis’s collection of $100,000 from accounts receivable outstanding as of June 30, 2014. Pursuant to the Agreement, Auxilio, as the sole owner of Delphiis, agreed to assume the obligations of Delphiis and to make the payments pursuant to the terms of the Notes.
|
The allocation of the purchase price of the assets acquired and liabilities assumed based on their fair values was as follows:
Acquired technology
|
|
$
|
900,000
|
|
Customer relationships
|
|
|
400,000
|
|
Trademarks
|
|
|
50,000
|
|
Non-compete agreements
|
|
|
20,000
|
|
Goodwill
|
|
|
956,639
|
|
Other assets received
|
|
|
376,775
|
|
Deferred revenue
|
|
|
(154,089
|
)
|
Notes payable
|
|
|
(424,000
|
)
|
Other liabilities assumed
|
|
|
(113,325
|
)
|
Total
|
|
$
|
2,012,000
|
|
Purchased identifiable intangible assets are amortized on a straight-line basis over the respective useful lives. Our estimated useful life of the identifiable intangible assets acquired ranges from 1.5 to 10 years. We recognized goodwill of $956,639.
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 Delphiis products and services to Auxilio’s customers.
The Company incurred approximately $98,000 in legal, accounting and other professional fees related to this acquisition, all of which were expensed during the nine months ended September 30, 2014.
Escrow Agreement
In connection with the Agreement, we entered into an escrow agreement with the Stockholders and Colonial Stock Transfer (the “Escrow Agent”), pursuant to which we deposited $100,000 of the Cash Consideration into an escrow to be held by the Escrow Agent to cover any indemnification claims made pursuant to the Agreement. If no indemnification claims have been made prior to July 7, 2015, the Escrow Agent will release the escrowed funds to the Stockholders.
Employment Agreement
In connection with the Agreement, we entered into an employment agreement with Mr. Gentile (the “Gentile Employment Agreement”), pursuant to which Gentile was employed to serve as our Executive Vice President of Innovation and Security. The initial term of the Gentile Employment Agreement is for three years (unless sooner terminated), and automatically renews for subsequent twelve-month periods unless either party determines to not renew. Gentile’s base annual salary will be $200,000, and Gentile will be eligible to receive incentive compensation. Pursuant to the Gentile Employment Agreement, Gentile will also receive 400,000 shares of our common stock, vesting as follows: 100,000 shares will vest 2 years from the date of the Gentile Employment Agreement; 100,000 shares will vest 3 years from the date of the Gentile Employment Agreement; 100,000 shares will vest 4 years from the date of the Gentile Employment Agreement; and 100,000 shares will vest 5 years from the date of the Gentile Employment Agreement.
Pro Forma Information
The following supplemental unaudited pro forma information presents the combined operating results of the Company and the acquired business during the three months ended March 31, 2015 and 2014, 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.
|
|
Three Months Ended March 31
,
|
|
|
|
2015
|
|
|
2014
|
|
Pro forma revenue
|
|
$
|
13,847,915
|
|
|
$
|
10,501,082
|
|
Pro forma net income (loss)
|
|
$
|
(32,542
|
)
|
|
$
|
6,278
|
|
Pro forma basic net income (loss) per share
|
|
$
|
(0.00
|
)
|
|
$
|
0.00
|
|
Pro forma diluted net income per share
|
|
$
|
(0.00
|
)
|
|
$
|
0.00
|
|
16. SUBSEQUENT EVENT
On April 6, 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 of Redspin. 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 substantially all of Redspin’s assets (the “Acquired Assets”) and assumption of certain of Redspin’s liabilities 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 of the Acquired Assets, the Company paid Redspin $2,050,000 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 “Securities Consideration”). The Company also agreed to pay a cash Earn-out Payment and the Employee Bonus Shares, as each are defined in the Purchase Agreement, upon the achievement of certain earnings targets in the first year following the date of the Purchase Agreement. If no indemnification claims have been made prior to June 30, 2016, the Company’s secretary will release the holdback funds to Redspin.
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 $10,000 per month.