Exhibit 99.3
AUXILIO, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated financial statements give the effect to the acquisition by Auxilio, Inc. (“Auxilio”), of CynergisTek, Inc., (“CynergisTek”) following the execution on January 13, 2017, of a Stock Purchase Agreement (the “Agreement”) with CynergisTek and Dr. Michael G. Mathews and Michael H. McMillan pursuant to which CynergisTek was acquired by Auxilio and CynergisTek became our wholly-owned subsidiary (the “Acquisition”). As consideration for the Acquisition, Auxilio, Inc. paid upfront consideration of $14,000,000 in cash, 1,166,666 shares of Auxilio common stock, $0.001 par value (the “Shares”), issuance of Notes Payable totaling $9,000,000 bearing interest at 8% per annum and an earn-out of up to $7,500,000, less a net working capital deficit and less designated transaction expenses.
The unaudited pro forma condensed consolidated financial statements are based upon the estimates and assumptions set forth herein. The unaudited pro forma information has been prepared utilizing the historical financial statements and notes thereto, for which Auxilio and CynergisTek are included herein. The unaudited pro forma financial data does not purport to be indicative of the results which actually would have been obtained had the purchase been effected on the dates indicated or of the results which may be obtained in the future. The unaudited pro forma condensed consolidated financial statements should be read in conjunction with the historical financial statements of Auxilio, Inc. and the historical financial statements of CynergisTek, Inc. included herein. The pro forma adjustments are based on estimates, available information and certain assumptions and may be revised as additional information becomes available. The unaudited pro forma condensed consolidated balance sheet gives effect to the merger which is accounted for as an acquisition of CynergisTek by Auxilio as if it had occurred on September 30, 2016. The unaudited pro forma condensed consolidated statements of operations for the year ended December 31, 2015, and for the nine months ended September 30, 2016, give effect to the Acquisition as if it had occurred on January 1, 2015.
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AUXILIO, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
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| Auxilio, Inc. September 30, 2016 | | CynergisTek, Inc. September 30, 2016 | Pro Forma Adjustments | | Combined Pro Forma September 30, 2016 |
ASSETS | | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | |
Cash and cash equivalents | $ | 5,391 | | $ | 54 | | $ | 766 | (a) | $ | 6,211 | |
Accounts receivable, net | | 7,286 | | | 4,472 | | | (2,466) | (b) | | 9,292 | |
Supplies | | 1,115 | | | - | | | - | | | 1,115 | |
Prepaid and other current assets | | 284 | | | 12 | | | 55 | (b) | | 351 | |
Total current assets | | 14,076 | | | 4,538 | | | (1,645) | | | 16,969 | |
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Property and equipment, net | | 759 | | | 116 | | | (6) | (b) | | 869 | |
Deposits | | 41 | | | - | | | - | | | 41 | |
Intangible assets, net | | 2,325 | | | - | | | 12,050 | (b) | | 14,375 | |
Goodwill | | 3,666 | | | - | | | 16,458 | (b) | | 20,124 | |
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Total assets | $ | 20,867 | | $ | 4,654 | | $ | 26,857 | | $ | 52,378 | |
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LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | |
Accounts payable and accrued expenses | $ | 6,046 | | $ | 307 | | $ | 2,708 | (b) | $ | 9,061 | |
Accrued compensation and benefits | | 2,561 | | | 344 | | | 691 | (b) | | 3,596 | |
Line of credit | | - | | | 150 | | | (150) | (b) | | - | |
Deferred revenue | | 494 | | | 4,426 | | | (3,005) | (b) | | 1,915 | |
Deferred income taxes | | | - | | 6 | | | (6) | (b) | | - | |
Current portion of long-term liabilities | | 614 | | | - | | | - | | | 614 | |
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Total current liabilities | | 9,715 | | | 5,233 | | | 238 | | | 15,186 | |
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Term loan, less current portion | | 875 | | | - | | | 14,000 | (c) | | 14,875 | |
Officer notes payable | | - | | | - | | | 9,000 | (c) | | 9,000 | |
Capital lease obligations less current portion | | 79 | | | - | | | - | | | 79 | |
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Total liabilities | | 10,669 | | | 5,233 | | | 23,238 | | | 39,140 | |
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Commitments and contingencies | | | | | | | | | | | | |
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Stockholders’ equity: | | | | | | | | | | | | |
Common stock | | 8 | | | 5 | | | (4) | (d) | | 9 | |
Additional paid-in capital | | 27,909 | | | - | | | 2,771 | (d) | | 30,680 | |
Accumulated deficit | | (17,719 | ) | | (584 | ) | | 852 | (d) | | (17,451 | ) |
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Stockholders’ equity (deficit) | | 10,198 | | | (579 | ) | | 3,619 | | | 13,238 | |
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Total liabilities and stockholders’ equity | $ | 20,867 | | $ | 4,654 | | $ | 26,857 | | $ | 52,378 | |
See accompanying notes to unaudited pro forma condensed consolidated financial statements.
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AUXILIO, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
| | Nine Months Ended September 30, 2016 | |
| | Auxilio, Inc. | | CynergisTek, Inc. | | Pro Forma Adjustments | | Combined Pro Forma | |
Revenue | $ | 44,004 | | $ 10,606 | | $ | - | | $ | 54,610 | |
Cost of revenues | | 35,359 | | 4,069 | | | - | | | 39,428 | |
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Gross profit | | 8,645 | | 6,537 | | | - | | | 15,182 | |
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Selling, general and administrative expenses | | 7,277 | | 3,230 | | | 1,314 | (e)(f)(g) | | 11,821 | |
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Operating income | | 1,368 | | 3,307 | | | (1,314) | | | 3,361 | |
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Interest and other income (expense), net | | (71 | ) | 16 | | | (1,091) | (h) | | (1,146 | ) |
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Income before income taxes | | 1,297 | | 3,323 | | | (2,405) | | | 2,215 | |
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Provision for income taxes | | (128 | ) | (52 | ) | | (1,130) | (i) | | (1,310 | ) |
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Net income | $ | 1,169 | | $ 3,271 | | $ | (3,535) | | $ | 905 | |
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Per share data: | | | | | | | | | | | |
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Basic net income per share | $ | 0.14 | | | | | | | $ | 0.10 | |
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Diluted net income per share | $ | 0.14 | | | | | | | $ | 0.10 | |
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Basic weighted average shares outstanding | | 8,169 | | | | | 1,167 | | | 9,336 | |
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Diluted weighted average shares outstanding | | 8,287 | | | | | 1,167 | | | 9,454 | |
See accompanying notes to unaudited pro forma condensed consolidated financial statements.
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AUXILIO, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
| | Year Ended December 31, 2015 | |
| | Auxilio, Inc. | | CynergisTek, Inc. | | Pro Forma Adjustments | | Combined Pro Forma |
Revenue | $ | 61,254 | | $ 11,789 | | $ | - | | $ | 73,043 | |
Cost of revenues | | 50,665 | | 5,685 | | | - | | | 56,350 | |
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Gross profit | | 10,589 | | 6,104 | | | - | | | 16,693 | |
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Selling, general and administrative expenses | | 9,612 | | 3,368 | | | 2,109 | (e)(f)(g) | | 15,089 | |
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Operating income | | 977 | | 2,736 | | | (2,109) | | | 1,604 | |
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Interest and other income (expense), net | | 492 | | - | | | (1,455) | (h) | | (963) | |
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Income before income taxes | | 1,469 | | 2,736 | | | (3,564) | | | 641 | |
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Provision for income taxes | | (152 | ) | (43 | ) | | (930) | (i) | | (1,125 | ) |
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Net income (loss) | $ | 1,317 | | $ 2,693 | | $ | (4,494) | | $ | (484 | ) |
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Per share data: | | | | | | | | | | | |
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Basic net income (loss) per share | $ | 0.16 | | | | | | | $ | (0.05) | |
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Diluted net income (loss) per share | $ | 0.16 | | | | | | | $ | (0.05) | |
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Basic weighted average shares outstanding | | 8,050 | | | | | 1,167 | | | 9,217 | |
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Diluted weighted average shares outstanding | | 8,326 | | | | | 1,167 | | | 9,493 | |
See accompanying notes to unaudited pro forma condensed consolidated financial statements.
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AUXILIO, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
Note 1 — Basis of presentation
The historical consolidated financial statements have been adjusted in the pro forma condensed combined financial statements to give effect to pro forma events that are (1) directly attributable to the business combination, (2) factually supportable and (3) with respect to the pro forma condensed combined statements of operations, expected to have a continuing impact on the combined results following the business combination.
The business combination was accounted for under the acquisition method of accounting in accordance with ASC Topic 805,Business Combinations. As the acquirer for accounting purposes, the Company has estimated the fair value of CynergisTek, Inc.’s s assets acquired and liabilities assumed and conformed the accounting policies of CynergisTek, Inc. to its own accounting policies.
The pro forma combined financial statements do not necessarily reflect what the combined company’s financial condition or results of operations would have been had the acquisition occurred on the dates indicated. They also may not be useful in predicting the future financial condition and results of operations of the combined company. The actual financial position and results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors.
The combined pro forma financial information does not reflect the realization of any expected cost savings or other synergies from the acquisition of CynergisTek, Inc. as a result of restructuring activities and other planned cost savings initiatives following the completion of the business combination.
Note 2 — Financing transactions
The Company acquired CynergisTek, Inc. for approximately $28.3 million, including approximately $14.2 million in cash, approximately $2.8 million in Company stock, loans to the sellers totaling $9.0 million and contingent earn-out fees payable to the sellers with a fair value of approximately $2.3 million. The Company further financed the purchase by entering into a $14 million bank term loan.
Note 3 — Preliminary purchase price allocation
The Company has performed a preliminary valuation analysis of the fair market value of CynergisTek, Inc.’s assets and liabilities. The following table summarizes the allocation of the preliminary purchase price as of the acquisition date (in thousands):
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Cash | | $ | 754 | |
Accounts receivable | | | 2,006 | |
Prepaid expenses | | | 67 | |
Fixed assets, net | | | 111 | |
Identified intangible assets | | | 12,050 | |
Goodwill | | | 16,458 | |
Accounts payable and accrued expenses | | | (659 | ) |
Accrued compensation and benefits | | | (1,036 | ) |
Deferred revenue | | | (1,420 | ) |
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Total allocated purchase price | | $ | 28,331 | |
This preliminary purchase price allocation has been used to prepare pro forma adjustments in the pro forma balance sheet and income statement. The final purchase price allocation will be determined when the Company has completed the detailed valuations and necessary calculations. The final allocation could differ materially from the preliminary allocation used in the pro forma adjustments. The final allocation may include (1) changes in allocations to intangible assets such as trademarks, acquired technology, customer relationships and non-compete agreements as well as goodwill and (2) other changes to assets and liabilities.
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Note 4 — Pro forma adjustments
The pro forma adjustments are based on our preliminary estimates and assumptions that are subject to change. The following adjustments have been reflected in the unaudited pro forma condensed combined financial information:
(a) Reflects the add back of approximately $270 thousand in legal fees paid by CynergisTek, Inc. in 2016. Also reflects approximately $200 thousand in cash paid to sellers at close.
(b) Reflects the working capital adjustments based on the purchase price allocation as of the acquisition date as shown in Note 3.
(c) Reflects the new term debt incurred to finance the acquisition of CynergisTek, Inc. The net increase to debt includes (in thousands):
Bank term loan | $ | 14,000 |
Officers notes payable | $ | 9,000 |
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(d) Represents the elimination of the historical equity of CynergisTek, Inc. and the issuance of common shares to finance the acquisition, as follows (in thousands):
Issuance of 1,166,666 shares of Company common stock | $ | 2,772 |
Historical shareholder equity | | 579 |
Acquisition related legal fees paid by CynergisTek in 2016 | | 268 |
| | |
| $ | 3,619 |
(e) New employment contracts with the two selling shareholders in connection with the acquisition of CynergisTek, Inc. results in an increase in annual compensation for these executives of $285,000 and $380,000, which is reflected in the pro forma statements of operations for the nine months ended September 30, 2016 and the year ended December 31, 2015, respectively.
(f) Reflects the addition of intangible assets acquired by the Company at their estimated fair values. As part of the preliminary valuation analysis, the Company identified intangible assets. The fair value of identifiable intangible assets is determined primarily using the “income approach,” which requires a forecast of the expected future cash flows. Since all information required to perform a detailed valuation analysis of CynergisTek, Inc.’s intangible assets could not be obtained as of the date of this filing, for purposes of these unaudited pro forma condensed combined financial statements, the Company used certain assumptions based on publicly available transaction data for the industry. The following table summarizes the estimated fair values of CynergisTek, Inc.’s identifiable intangible assets and their estimated useful lives (in thousands):
| Estimated Fair Value | Estimated Useful Life in Years | Year ended December 31, 2015 Amortization Expense | Nine months ended September 30, 2016 Amortization Expense |
Trademarks | $ | 1,550 | 5 | $ | 310 | $ | 233 |
Acquired Technology | | 8,150 | 10 | | 815 | | 611 |
Customer Relationships | | 2,150 | 4 | | 537 | | 403 |
Non-compete Agreements | | 200 | 3 | | 67 | | 50 |
Total | $ | 12,050 | | $ | 1,729 | $ | 1,297 |
(g) As discussed in (a) above, CynergisTek, Inc. incurred approximately $268,000 in acquisition related legal fees during the nine months ended September 30, 2016. This is added back to the pro forma income statement as a nonrecurring item.
(h) Represents the increase to interest expense resulting from interest on the new bank term debt and shareholder loans to finance the acquisition of CynergisTek, Inc.
A summary of the pro forma adjustment to interest expense (in thousands) follows:
| December 31, 2015 | | September 30, 2016 |
| | | |
Bank term loan | $ | 735 | | $ | 551 |
Officers notes payable | | 720 | | | 540 |
Pro forma adjustment to interest expense | $ | 1,455 | | $ | 1,091 |
(a) Represents the increase in income taxes expected to be incurred as a C Corporation.
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