As filed with the Securities and Exchange Commission on August 14, 2006
Registration No. 333-135640
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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AUXILIO, INC.
(Name of small business issuer in its charter)
Nevada 7389 88-0350448
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State or jurisdiction of Primary Standard I.R.S. Employer
incorporation or Industrial Classification Identification No.
organization Code Number
27401 Los Altos, Suite 100
Mission Viejo, California 92691
(949) 614-0700
(Address and telephone number of principal
executive offices and principal place of business)
Joseph J. Flynn
Chairman and CEO
27401 Los Altos, Suite 100
Mission Viejo, California 92691
(949) 614-0700
(Name, address, and telephone number of agent for service)
Copies to:
-----------------------------------
Michael E. Flynn, Esq.
Patrick M. Murphy, Esq.
Stradling Yocca Carlson & Rauth
660 Newport Center Drive, Suite 1600
Newport Beach, California 92660
(949) 725-4000
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Approximate date of proposed sale to the public: From time to time after
this Registration Statement is declared effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
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Title of each Amount to be Proposed Proposed Amount of
class of Registered Maximum maximum registration
securities to be Offering aggregate fee (2)
registered Price Per offering price
unit (1) (1)
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Common Stock, 4,063,992 $1.01 $4,104,631.92 $439.20
$0.001 par value
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(1) The offering price is estimated solely for the purpose of calculating
the registration fee in accordance with Rule 457(c) under the Securities Act of
1933, as amended, using the average of the high and low prices of the
registrant's common Stock as reported on the OTC Bulletin Board on June 29,
2006, which was $1.01 per share.
(2) Previously paid.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the registration statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE
SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED AUGUST 14, 2006
PROSPECTUS
4,063,992 SHARES
OF
AUXILIO, INC.
COMMON STOCK
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This prospectus relates to the resale by the selling stockholders identified in
this prospectus of up to 4,063,992 shares of our common stock, consisting of:
o 2,106,916 shares of our common stock issuable upon (i) the conversion of
the principal amount owing under $3,000,000 Secured Convertible Term Note issued
to Laurus Master Fund, LTD and (ii) the conversion of the interest accrued and
owing under the note;
o 478,527 shares of our common stock issuable upon exercise of the warrant
issued to Laurus Master Fund, LTD in connection with the issuance of $3,000,000
Secured Convertible Term Note; and
o 1,478,549 shares of our common stock issuable upon the exercise of
currently outstanding warrants to purchase shares of our common stock.
The selling stockholders may sell their shares from time to time at the
prevailing market price or in negotiated transactions. The selling stockholders
will receive all of the proceeds from the sale of the shares. We will pay the
expenses of registration of the sale of the shares.
Our common stock trades on the Over-the-Counter (OTC) Bulletin Board(R), an
electronic stock listing service provided by the Nasdaq Stock Market, Inc. under
the symbol "AUXO.OB". On July 5, 2006, the last bid price for the common stock
on the OTC Bulletin Board was $1.02 per share.
The selling stockholders, and any participating broker-dealers may be deemed to
be "underwriters" within the meaning of the Securities Act of 1933, and any
commissions or discounts given to any such broker-dealer may be regarded as
underwriting commissions or discounts under the Securities Act. The selling
stockholders have informed us that they do not have any agreement or
understanding, directly or indirectly, with any person to distribute their
common stock.
Brokers or dealers effecting transactions in the shares should confirm the
registration of these securities under the securities laws of the states in
which transactions occur or the existence of an exemption from registration.
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BEGINNING ON PAGE 6, WE HAVE LISTED SEVERAL "RISK FACTORS" WHICH YOU SHOULD
CONSIDER. You should read the entire prospectus carefully before you make your
investment decision.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or passed on the
adequacy or accuracy of the disclosures in the prospectus. Any representation to
the contrary is a criminal offense.
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The date of this prospectus is ______ __, 2006
TABLE OF CONTENTS
Prospectus Summary...........................................................1
Our Business...............................................................1
The Offering...............................................................1
Risk Factors.................................................................2
Use of Proceeds..............................................................6
Market for Common Equity and Related Stockholder Matters.....................6
Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................7
Business....................................................................12
Directors and Executive Officers............................................14
Limitation on Liability and Indemnification of Directors and Officers.......15
Executive and Director Compensation and Other Information...................16
Security Ownership of Certain Beneficial Owners and Management..............20
Certain Relationships and Related Transactions..............................21
Description of Securities...................................................21
Selling Stockholders........................................................23
Plan of Distribution........................................................25
Changes in Certifying Accountants...........................................26
Legal Matters...............................................................26
Experts.....................................................................26
Where You Can Find Additional Information...................................26
Index to Financial Statements...............................................27
You should rely only on the information contained in or incorporated by
reference into this prospectus. We have not, and the selling stockholders have
not, authorized anyone, including any salesperson or broker, to give oral or
written information about this offering, our company, or the shares of common
stock offered hereby that is different from the information included in this
prospectus. If anyone provides you with different information, you should not
rely on it.
FORWARD-LOOKING INFORMATION
This prospectus contains "forward-looking statements" and information
relating to our business that are based on our beliefs as well as assumptions
made by us or based upon information currently available to us. When used in
this prospectus, the words "anticipate," "believe," "estimate," "expect,"
"intend," "may," "plan," "project", "should" and similar expressions are
intended to identify forward-looking statements. These forward-looking
statements include, but are not limited to, statements relating to our
performance in "Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operation". These statements reflect our current views
and assumptions with respect to future events and are subject to risks and
uncertainties. Actual and future results and trends could differ materially from
those set forth in such statements due to various factors. Such factors include,
among others: general economic and business conditions; industry capacity;
industry trends; competition; changes in business strategy or development plans;
project performance; the commercial viability of our products and offerings;
availability, terms, and deployment of capital; and availability of qualified
personnel. These forward-looking statements speak only as of the date of this
prospectus. Subject at all times to relevant federal and state securities law
disclosure requirements, we expressly disclaim any obligation or undertaking to
disseminate any update or revisions to any forward-looking statement contained
herein to reflect any change in our expectations with regard thereto or any
changes in events, conditions or circumstances on which any such statement is
based. In addition, we cannot assess the impact of each factor on our business
or the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any forward-looking
statements.
i
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary does not contain all the information that you should
consider before investing in the common stock. You should carefully read the
entire prospectus, including "Risk Factors" and the financial statements, before
making an investment decision.
Business
Auxilio, Inc. was incorporated under the laws of the State of Nevada on
August 29, 1995, under the name Corporate Development Centers, Inc. As a result
of a series of transactions, which are more fully described in the section
entitled "Business" below, in April 2004, we changed our name to Auxilio, Inc.
Where appropriate, references to "Auxilio", the "Company," "we" or "our" include
Auxilio, Inc., Auxilio Solutions, Inc. and e-Perception Technologies, Inc.
Auxilio provides total outsourced document 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. Auxilio's 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. Auxilio's document image
management programs help our clients achieve measurable savings and a fully
outsourced process. Auxilio's target market includes medium to large hospitals,
health plans and healthcare systems.
Our principal executive offices are located at 27401 Los Altos, Suite 100,
Mission Viejo, 92691 and its telephone number is (949) 614-0700. Our corporate
website is www.auxilioinc.com. The information found on our website is not
intended to be part of this prospectus and should not be relied upon by you when
making a decision to invest in our common stock.
The Offering
This prospectus relates to the resale by the selling stockholders
identified in this prospectus of up to 4,063,992 shares of our common stock,
consisting of:
o 2,106,916 shares of our common stock issuable upon (i) the conversion of
the principal amount owing under $3,000,000 Secured Convertible Term Note issued
to Laurus Master Fund, LTD and (ii) the conversion of the interest accrued and
owing under the note;
o 478,527 shares of our common stock issuable upon exercise of the warrant
issued to Laurus Master Fund, LTD in connection with the issuance of $3,000,000
Secured Convertible Term Note; and
o 1,478,549 shares of our common stock issuable upon the exercise of
currently outstanding warrants to purchase shares of our common stock.
The common shares offered under this prospectus may be sold by the selling
stockholders on the public market, in negotiated transactions with a
broker-dealer or market maker as principal or agent, or in privately negotiated
transactions not involving a broker or dealer. We will not receive any proceeds
from the sale of our common stock by the selling stockholders. See "Use of
Proceeds."
Information regarding the selling stockholders, the common shares they are
offering to sell under this prospectus, and the times and manner in which they
may offer and sell those shares is provided in the sections of this prospectus
captioned "Selling Stockholders" and "Plan of Distribution."
Our common stock trades on the Over-the-Counter (OTC) Bulletin Board(R),
an electronic stock listing service provided by the Nasdaq Stock Market, Inc.
under the symbol "AUXO.OB". On July 5, 2006, the last bid price for our common
stock on the OTC Bulletin Board was $1.02 per share.
As of July 5, 2006, we had 16,122,808 shares of common stock outstanding.
The number of shares registered under this prospectus would be approximately
25.2% of the total common stock outstanding, assuming the conversion of the
notes being registered hereunder, and the interest accruing thereon, into shares
of common stock and the exercise of all warrants to purchase common stock being
registered hereunder.
1
RISK FACTORS
You should carefully consider the risks described below before buying
shares of our common stock in this offering. The risks and uncertainties
described below are not the only risks we face. Additional risks and
uncertainties not currently known to us or that we currently deem immaterial may
impair our business operations. If any of the adverse events described in this
risk factors section actually occur, our business, results of operations and
financial condition could be materially adversely affected, the trading price of
our common stock could decline and you might lose all or part of your
investment. We make various statements in this section which constitute
"forward-looking" statements under Section 27A of the Securities Act.
WE ARE A NEW COMPANY WITH A LIMITED OPERATING HISTORY.
Our business was incorporated in March 2000. During March and April of
2004, we entered into two transactions which changed our business operations and
revenue model. In March 2004, we sold our survey and assessment software to
Workstream, Inc. In April 2004, we completed an acquisition of TMG and as a
result of such acquisition, entered the Image Management industry. We believe
that our future revenue opportunity is focused on providing outsourced financial
and business processes for image management in healthcare. We have limited
operating history in this industry on which to base an evaluation of our
business and prospects, and any investment decision must be considered in light
of the risks and uncertainties encountered by companies in the early stages of
development. Such risks and uncertainties are frequently more severe for those
companies operating in new and rapidly evolving markets.
Some of the factors upon which our success will depend include (but are
not limited to) the following:
o the market's acceptance of our products and services;
o the emergence of competitors in our target market, and the quality
and development of their products and services.
In order to address these risks, we must (among other things) be able to:
o successfully complete the development of our products and services;
o modify our products and services as necessary to meet the demands of
our market;
o attract and retain highly skilled employees; and
o respond to competitive influences.
We cannot guarantee that we will be able to successfully address any of
these risks on a going forward basis.
WE FACE SUBSTANTIAL COMPETITION FROM BETTER ESTABLISHED COMPANIES THAT MAY HAVE
SIGNIFICANTLY GREATER RESOURCES WHICH COULD LEAD TO REDUCED SALES OF OUR
PRODUCTS.
The market for our products and services is competitive and is likely to
become even more competitive in the future. Increased competition could result
in pricing pressures, reduced sales, reduced margins or the failure of our
products and services to achieve or maintain market acceptance, any of which
would have a material adverse effect on our business, results of operations and
financial condition. Many of our current and potential competitors enjoy
substantial competitive advantages, such as:
o greater name recognition and larger marketing budgets and resources;
o established marketing relationships and access to larger customer
bases;
o substantially greater financial, technical and other resources; and
o larger technical and support staffs.
As a result, our competitors may be able to respond more quickly than we
can to new or changing opportunities, technologies, standards or customer
requirements. For all of the foregoing reasons, we may not be able to compete
successfully against our current and future competitors.
2
WE HAVE A HISTORY OF LOSSES AND MAY NEED ADDITIONAL FINANCING TO CONTINUE OUR
OPERATIONS, AND SUCH FINANCING MAY NOT BE AVAILABLE UPON FAVORABLE TERMS, IF AT
ALL.
We experienced a net operating loss of approximately $1,168,525 for the
three months ended March 31, 2006 and an accumulated deficit of $13,402,044 as
of March 31, 2006. There can be no assurance that we will be able to operate
profitably in the future. In the event that we are not successful in
implementing our business plan, we will require additional financing in order to
succeed. There can be no assurance that additional financing will be available
now or in the future on terms that are acceptable to us. If adequate funds are
not available or are not available on acceptable terms, we may be unable to
develop or enhance our products and services, take advantage of future
opportunities or respond to competitive pressures, all of which could have a
material adverse effect on our business, financial condition or operating
results. If sufficient capital cannot be obtained, we may be forced to
significantly reduce operating expenses to a point which would be detrimental to
business operations, curtail research and development activities, sell business
assets or discontinue some or all of our business operations, or take other
actions which could be detrimental to business prospects and result in charges
which could be material to our operations and financial position. In the event
that any future financing should take the form of the sale of equity securities,
the current equity holders ownership stakes in the company will be diluted.
WE DEPEND UPON OUR VENDORS TO CONTINUE TO SUPPLY US WITH EQUIPMENT, PARTS,
SUPPLIES AND SERVICES AT COMPARABLE TERMS AND PRICE LEVELS AS THE BUSINESS
GROWS.
Our access to equipment, parts, supplies, and services depends upon our
relationships with, and our ability to purchase these items on competitive terms
from our principal vendors. We do not enter into long-term supply contracts with
these vendors and we have no current plans to do so in the future. These vendors
are not required to use us to distribute their equipment and are free to change
the prices and other terms at which they sell to us. In addition, we compete
with the selling efforts of some of these vendors. Significant deterioration in
relationships with, or in the financial condition of, these significant vendors
could have an adverse impact on our ability to sell and lease equipment as well
as our ability to provide effective service and technical support. If one of
these vendors terminates or significantly curtails its relationship with us, or
if one of these vendors ceases operations, we would be forced to expand our
relationships with our existing vendors or seek out new relationships with
previously-unused vendors.
WE DEPEND UPON OUR LARGEST CUSTOMERS.
The loss of any key customer could have a material adverse effect upon our
financial condition, business, prospects and results of operation. Our four
largest customers represent approximately 89% of our revenues for the three
months ended March 31, 2006. Although we anticipate that these customers will
represent less than 43% of revenue for the 2006 fiscal year and less than 24% of
revenue for the 2007 fiscal year, the loss of these customers may contribute to
our inability to operate as a going concern and may require us to obtain
additional equity funding or debt financing (beyond the amounts described above)
to continue our operations. We cannot be certain that we will be able to obtain
such additional financing on commercially reasonable terms, or at all.
WE DEPEND ON OUR MANAGEMENT TEAM AND THE UNEXPECTED LOSS OF ANY KEY MEMBER OF
THIS TEAM MAY PREVENT US FROM IMPLEMENTING OUR BUSINESS PLAN IN A TIMELY MANNER
OR AT ALL.
Our future success depends on the continued services and performance of
our management team and our key employees and their ability to work together
effectively. If our management team fails to work together effectively, our
business could be harmed. Although we believe we will be able to retain these
key employees, and continue hiring qualified personnel, our inability to do so
could materially adversely affect our ability to market, sell, and enhance our
services. The loss of key employees or our inability to hire and retain other
qualified employees could have a material adverse effect on our business,
prospects, financial condition and results of operations.
THE MARKET MAY NOT ACCEPT OUR PRODUCTS AND SERVICES AND OUR PRODUCTS AND
SERVICES MAY NOT ADDRESS THE MARKET'S REQUIREMENTS.
Our products and services are targeted to the healthcare market, a market
in which there are many competing service providers. Accordingly, the demand for
our products and services is very uncertain. The market may not accept our
products and services.
IF WE NEED ADDITIONAL FINANCING TO MAINTAIN AND EXPAND OUR BUSINESS, FINANCING
MAY NOT BE AVAILABLE ON FAVORABLE TERMS, IF AT ALL.
We may need additional funds to expand or meet all of our operating needs.
If we need additional financing, we cannot be certain that it will be available
on favorable terms, if at all. Further, if we issue equity securities, our
stockholders ownership stake in the company will be diluted and the equity
securities may have seniority over our common stock. If we need funds and cannot
raise them on acceptable terms, we may not be able to:
o develop or enhance our service offerings;
o take advantage of future opportunities; or
o respond to customers and competition.
3
OUR STOCKHOLDERS OWNERSHIP STAKES IN THE COMPANY WILL BE DILUTED AS A RESULT OF
THE COMPANY'S STOCK OPTION PLANS.
We have granted stock options to its employees and anticipate granting
additional stock options to our employees in order to remain competitive with
the market demand for such qualified employees. As a result, investors could
experience dilution.
IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US EVEN IF DOING SO WOULD BE
BENEFICIAL TO OUR STOCKHOLDERS.
Certain provisions of our certificate of incorporation and Nevada law are
intended to encourage potential acquirers to negotiate with us and allow our
Board of Directors the opportunity to consider alternative proposals in the
interest of maximizing stockholder value. However, such provisions may also
discourage acquisition proposals or delay or prevent a change in control, which
in turn, could harm our stock price and our stockholders.
WE DO NOT INTEND TO PAY DIVIDENDS.
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain any future earnings to fund growth and, therefore, do
not expect to pay any dividends in the foreseeable future.
FUTURE SALES OF RESTRICTED SHARES COULD ADVERSELY AFFECT THE PRICE OF OUR COMMON
STOCK AND LIMIT OUR ABILITY TO COMPLETE ADDITIONAL FINANCING.
Although our shares are currently trading on the OTC Bulletin Board, the
volume of trading of our common stock and the number of shares in the public
float are small. Sales of a substantial number of shares of our common stock
into the public market in the future could materially adversely affect the
prevailing market price for our common stock. In connection with our acquisition
of TMG, we issued 3,900,068 shares of common stock, all of which became eligible
for resale pursuant to Rule 144 of the Securities Act in 2005. Such a large
"over-hang" of stock eligible for sale in the public market may have the effect
of depressing the price of our common stock, and make it difficult or impossible
for us to obtain additional debt or equity financing.
OUR STOCK PRICE HAS FLUCTUATED AND COULD CONTINUE TO FLUCTUATE SIGNIFICANTLY.
The market price for our common stock has been, and is likely to continue
to be, volatile. The following factors may cause significant fluctuations in the
market price of our ordinary shares:
o fluctuations in our quarterly revenues and earnings or those of our
competitors;
o shortfalls in our operating results compared to levels expected by
the investment community;
o announcements concerning us or our competitors;
o announcements of technological innovations;
o sale of shares or short-selling efforts by traders or other
investors;
o market conditions in the industry; and
o the conditions of the securities markets.
The factors discussed above may depress or cause volatility of our share
price, regardless of our actual operating results.
OUR COMMON STOCK IS LISTED ON THE OTC BULLETIN BOARD, AND AS SUCH, IT MAY BE
DIFFICULT TO RESELL YOUR SHARES OF STOCK AT OR ABOVE THE PRICE YOU PAID FOR THEM
OR AT ALL.
Our common stock is currently trading on the OTC Bulletin Board. As such,
the average daily trading volume of our common stock may not be significant, and
it may be more difficult for you to sell your shares in the future at or above
the price you paid for them, if at all. In addition, our securities may become
subject to "penny stock" restrictions, including Rule 15g-9 under the Securities
Exchange Act of 1934, as amended, which imposes additional sales practice
requirements on broker-dealers, such as requirements pertaining to the
suitability of the investment for the purchaser and the delivery of specific
disclosure materials and monthly statements. The Securities and Exchange
Commission has adopted regulations that generally define a "penny stock" to be
any equity security that has a market price of less than $5.00 per share,
subject to certain exceptions. The exceptions include exchange-listed equity
securities and any equity security issued by an issuer that has:
4
o net tangible assets of at least $2,000,000, if the issuer has been
in continuous operation for at least three years, or net tangible
assets of at least $5,000,000, if the issuer has been in continuous
operation for less than three years; or
o average annual revenue of at least $6,000,000 for the last three
years.
We are presently subject to penny stock restrictions, and there is no
guarantee that we will be able to meet any of the exceptions to the "penny
stock" classification in the future. As a result of the "penny stock"
restrictions, broker-dealers may be less willing or able to sell and/or make a
market in our common stock. In addition, the liquidity of our securities may be
impaired, not only in the number of securities that can be bought and sold, but
also through delays in the timing of the transactions, reduction in securities
analysts' and the news media's coverage of us, adverse effects on the ability of
broker-dealers to sell our securities, and lower prices for our securities than
might otherwise be obtained.
5
USE OF PROCEEDS
We will not receive any proceeds from the sale of our common stock by the
selling stockholders. Any proceeds from the sale of our common stock offered
pursuant to this prospectus will be received by the selling stockholders.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock currently trades on the Over-the-Counter
Bulletin Board, under the trading symbol of "AUXO.OB". Because we are listed on
the Over-the-Counter Bulletin Board, our securities may be less liquid, receive
less coverage by security analysts and news media, and generate lower prices
than might otherwise be obtained if they were listed on a NASDAQ market or other
exchange.
The following table sets forth for each quarter during fiscal years 2006,
2005 and 2004 the high and low bid quotations for the common stock as reported
by OTC Bulletin Board.
Quarter Low High
------- --- ----
Fiscal 2004
January 1, 2004--March 31, 2004 ......... $ 0.75 $ 2.70
April 1, 2004--June 30, 2004 ........... $ 0.75 $ 1.20
July 1, 2004--September 30, 2004 ....... $ 0.65 $ 1.85
October 1, 2004--December 31, 2004 ..... $ 1.50 $ 3.15
Fiscal 2005
January 1, 2005--March 31, 2005 ........ $ 1.95 $ 3.10
April 1, 2005--June 30, 2005 ........... $ 1.90 $ 2.40
July 1, 2005--September 30, 2005 ....... $ 1.65 $ 2.20
October 1, 2005--December 31, 2005 ..... $ 1.50 $ 2.25
Fiscal 2006
January 1, 2006--March 31, 2006 ........ $ 1.40 $ 2.10
April 1, 2006--June 30, 2006 ........... $ 0.90 $ 1.65
On June 30, 2006, Auxilio had approximately 339 stockholders of record.
We have not paid any dividends on our common stock and do not expect to do
so in the foreseeable future. We intend to apply our earnings, if any, in
expanding our operations and related activities. The payment of cash dividends
in the future will be at the discretion of the Board of Directors and will
depend upon such factors as earnings levels, capital requirements, our financial
condition and other factors deemed relevant by the Board of Directors. In
addition, our loan agreement with the Laurus Master Fund, Ltd. does not allow us
to directly or indirectly declare or pay any dividends so long as our secured
convertible term note to the Laurus Master Fund, Ltd. remains outstanding.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATIONS
The following discussion presents information about our consolidated
results of operations, financial condition, liquidity and capital resources and
should be read in conjunction with our consolidated financial statements and the
notes thereto included elsewhere in this Prospectus.
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995:
This prospectus contains forward-looking statements that relate to future
events, product or service offerings, or the future financial performance of the
Company. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," or "continue" or the negative
of such terms and other comparable terminology. These statements only reflect
Company management's expectations and estimates. Actual events or results may
differ materially from those expressed or implied by such forward-looking
statements due to a number of known and unknown risks and uncertainties. These
risks and uncertainties include the ability to generate cash to fund operating
activities or obtain additional funding, effective execution of product launches
or marketing programs, pricing and other activities by competitors, economic and
industry factors, system performance problems due to technical difficulties, and
other risks, including those described in the Company's Annual Report on Form
10-KSB and those described in the Company's other filings with the Securities
and Exchange Commission, press releases and other communications. Any
forward-looking statements in this prospectus reflect the Company's expectations
at the time of this prospectus only, and the Company disclaims any
responsibility to revise or update any such forward-looking statements except as
may be required by law.
Overview
Prior to March 2004, Auxilio, then operating under the name PeopleView,
Inc., developed, marketed and supported web based assessment and reporting tools
and provided consulting services that enabled companies to manage their Human
Capital Management ("HCM") needs in real-time. In March, 2004, Auxilio decided
to change its business strategy and sold the PeopleView business to Workstream,
Inc ("Workstream"). Following completion of the sale of PeopleView, Inc. to
Workstream, the Company focused its business strategy on providing outsourced
image management services to healthcare facilities.
To facilitate this strategy, Auxilio in April 2004 acquired Alan Mayo &
Associates, dba The Mayo Group ("The Mayo Group" or "TMG"), a provider of
integration strategies and outsourced services for document image management in
healthcare facilities. It was this acquisition that formed the basis of the
Auxilio's current operations.
Auxilio now provides total outsourced document 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. Auxilio's 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. Auxilio's document image
management programs help our clients achieve measurable savings and a fully
outsourced document image management process. Auxilio's target market includes
medium to large hospitals, health plans and healthcare systems.
As a result of the acquisition of TMG and disposal of our previous product
offering to Workstream, the financial statements for the year ended December 31,
2005, are not comparable to the financial statements for the year ended December
31, 2004.
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 accounting principles generally accepted in the United States of
America. 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 related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate these estimates, including those
related to customer programs and incentives, product returns, bad debts,
inventories, investments, intangible assets, income taxes, contingencies and
litigation. We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
We consider the following accounting policies to be both those most
important to the portrayal of our financial condition and those that require the
most subjective judgment:
7
o Revenue recognition
o Accounting for income taxes
o Impairment of intangible assets
For a further explanation of our accounting procedures and policies please
see Note 1 to the Financial Statements contained in this prospectus.
Results of Operations
For the Three Months Ended March 31, 2006 Compared to the Three Months Ended
March 31, 2005
Revenue
Revenue increased $1,251,116 to $2,035,193 for the three months ended
March 31, 2006, as compared to the same period in 2005. The current period's
revenue is higher due substantially to a single March 2006 equipment sale
totaling approximately $690,000 compared to a total of $49,586 during the first
quarter of 2005. The increase in revenue is also attributable to an increase in
recurring revenue contracts.
Cost of Revenue
Cost of revenue consists of document imaging equipment, parts, supplies
and salaries and expenses of field services personnel. Cost of revenue was
$1,971,734 for the three months ended March 31, 2006, as compared to $774,174
for the same period in 2005. The increase in the cost of revenue for the first
quarter of 2006 is consistent in relation to the increase in revenues. A
substantial component of these costs was the cost of a March 2006 equipment sale
as well as the costs to implement and maintain an increased number of recurring
revenue contracts. Also contributing to the increase is a stock based
compensation charge for approximately $40,000 in 2006. The stock based
compensation charge is a new requirement in 2006 in accordance with SFAS 123(R).
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 $510,903 for the three
months ended March 31, 2006, as compared to $439,720 for the same period in
2005. Sales and marketing expenses for the first quarter of 2006 are higher as a
result of the increase in sales staff and travel expenses incurred in an
intensified effort to procure new business, and a stock based compensation
charge for approximately $58,000 in 2006. The stock based compensation charge is
a new requirement in 2006 in accordance with SFAS 123(R).
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 $173,288 to $657,164 for
the three months ended March 31, 2006, as compared to $483,876 for the same
period in 2005. The increase is due to higher legal and accounting fees, an
increase in administrative staff in 2006, and a stock based compensation charge
for approximately $109,000 in 2006. The stock based compensation charge is a new
requirement in 2006 in accordance with SFAS 123(R).
Intangible Asset Amortization
As a result of our acquisition activity, we have recorded a substantial
amount of goodwill, which is the excess of the cost of our acquired business
over the fair value of the acquired net assets, and other intangible assets. We
evaluate the goodwill for impairment at least annually. We examine the carrying
value of our other intangible assets as current events and circumstances warrant
a determination of whether there are any impairment losses. If indicators of
impairment arise with respect to our other intangible assets and our future cash
flows are not expected to be sufficient to recover the assets' carrying amounts,
an impairment loss will be charged as an expense in the period identified. To
date, we have not identified any event that would indicate an impairment of the
value of our goodwill recorded in our condensed consolidated financial
statements. However in December 2005, the remaining value of intangible assets
related to non-compete agreements was charged to expense as management
determined they no longer held value. Other intangible assets are amortized over
their estimated lives.
8
Amortization expense was $63,802 for the three months ended March 31, 2006
compared to $93,368 for the same period in 2005. The reduction is due to the
fact that we charged the remaining book value of certain non-compete agreements
to expense in December 2005, as management determined they had no future value.
Other Income (Expense)
Interest expense for the three months ended March 31, 2006 was $9,850,
compared to $20,957 for the same period in 2005. We borrowed less on our
revolving note payable and for a shorter period of time in 2006. Interest income
is primarily derived from short-term interest-bearing securities and money
market accounts. Interest income for the three months ended March 31, 2006 was
$1,327, as compared to $2,212 for the same period in 2005, primarily due to a
decrease in the average balance of invested cash and short-term investments.
Gain on marketable equity securities for the three months ended March 31,
2006 was $10,448, compared to $403,795 for the same period in 2005. The 2006
gain was from our sale of 32,500 shares in General Environmental Management Inc
(GEVM.OB). The 2005 gain was from our sale of 196,900 shares in Workstream Inc.
(WSTM).
Income Tax Expense
Income tax expense for the three months ended March 31, 2006 and 2005 of
$2,400 and $3,200 respectively, represents the minimum amounts due for state
filing purposes.
Fiscal Year Ended December 31, 2005 Compared to the Year Ended December 31, 2004
Net Revenue
Revenues consist of equipment sales and ongoing service and supplies. Net
revenue decreased $2,990,847 to $4,290,962 for the year ended December 31, 2005,
as compared to the same period in 2004. Revenues for the first quarter of 2004
related to the sale of the Peopleview business and are included in discontinued
operations. The prior year's revenue was higher due to a large second quarter
sale to a major customer totaling approximately $4,300,000, offset by a current
year increase in recurring revenue contracts.
Cost of Revenue
Cost of revenue consists of document imaging equipment, parts, supplies
and salaries and expenses of field services personnel. Cost of revenue was
$3,225,155 for the year ended December 31, 2005, as compared to $4,012,100 for
the same period in 2004. Cost of revenue for the first quarter of 2004 related
to the sale of the Peopleview business and is included in discontinued
operations. The prior year's cost of revenue was higher due to a large second
quarter sale to a major customer. This is partially offset by the current year
cost to maintain an increased number of recurring revenue contracts.
Sales and Marketing
Sales and marketing expenses include salaries, commissions and expenses of
sales and marketing personnel, travel and entertainment, and other selling and
marketing costs. Sales and marketing expenses were $1,783,196 for the year ended
December 31, 2005, as compared to $1,423,106 for the same period in 2004. Sales
and marketing expenses for the first quarter of 2004 related to the disposed
business and are included in discontinued operations. While expenses for the
second quarter of 2004 included sales commissions paid on a large sale to a
major customer, the current year's expense reflects increased sales staff and
travel expenses incurred in an intensified effort to procure new business.
General and Administrative
General and administrative expenses, which include personnel costs for
finance, administration, information systems, and general management, as well as
facilities expenses, professional fees, legal expenses, and other administrative
costs, increased by $1,041,921 to $2,327,497 for the year ended December 31,
2005, as compared to $1,285,576 for the same period in 2004. Certain general and
administrative expenses for the first quarter of 2004 which are related to the
sale of the Peopleview business are included in discontinued operations. This,
in addition to higher legal and accounting fees, increased office space rent,
and an increase in administrative staff accounts for the bulk of the increase in
2005. The increase is largely due to the administration of an increased number
of recurring revenue contracts.
9
Intangible Asset Amortization
As a result of our acquisition activity, we have recorded a substantial
amount of goodwill, which is the excess of the cost of our acquired business
over the fair value of the acquired net assets, and other intangible assets. The
Company evaluates the goodwill for impairment annually. We examine the carrying
value of our other intangible assets as current events and other circumstances
warrant a determination of whether there are any impairment losses. If
indicators of impairment arise with respect to our other intangible assets and
our future cash flows are not expected to be sufficient to recover the assets'
carrying amounts, an impairment loss will be charged as an expense in the period
identified. To date, we have not identified any event that would indicate an
impairment of the value of our goodwill or other intangible assets recorded in
our condensed consolidated financial statements. Other intangible assets are
amortized over their estimated lives.
Amortization expense of $482,564 for the year ended December 31, 2005,
compared to $333,092 in the same period in 2004. Amortization was related to
intangible assets acquired through the acquisition of The Mayo Group in April
2004. The increase is due substantially to charging to expense in 2005 the
remaining unamortized balance of non-compete agreements which management
determined no longer held value.
Other Income (Expense)
Interest expense for the year ended December 31, 2005 was $148,365, as
compared to $13,662 for the same period in 2004. The increase in interest
expense is due primarily to discount charges and periodic interest costs
incurred under the Revolving Loan and Security Agreement between Auxilio and
Michael D. Vanderhoof and the Loan and Security Agreement with Cambria
Investment Fund, L.P.
Interest income is primarily derived from short-term interest-bearing
securities and money market accounts. Interest income for the year ended
December 31, 2005 was $35,373, as compared to $6,148 for the same period in
2004, primarily due to an increase in the average balance of invested cash and
short-term investments.
Gain on sale of marketable securities of $293,083 related primarily to the
excess of sales price over the cost of investment in Workstream's common stock
in 2005 and the disposition of other Workstream derivatives. No such activities
took place in 2004.
Loss on disposal of fixed assets of $8,225 in 2005 was due to the write
off of capitalized software no longer being utilized. No such activities took
place in 2004.
Income from Discontinued Operations
We sold the assets from our discontinued business to Workstream in the
first quarter of 2004. All of the operating results and gains related to the
sale were classified as discontinued operations in the accompanying condensed
consolidated statements of operations for 2004. No such activities took place in
2005.
Liquidity and Capital Resources
At March 31, 2006, our cash and cash equivalents were equal to $292,571.
Our principal cash requirements are for operating expenses, including equipment,
supplies, employee costs, capital expenditures and funding of the operations.
Our primary sources of cash were from revenues and a 2005 private placement
offering of our common stock.
During the three months ended March 31, 2006, we used $549,526 for
operating activities, as compared to using $1,584,947 for the same period in
2005. The decrease in cash use was primarily due to paying down approximately
$800,000 of accounts payable and accrued expenses in the first quarter of 2005.
In April 2006, the Company entered into a $3,000,000 Fixed Price
Convertible Note (the "Note") agreement with Laurus Master Fund (LMF). The term
of the Note is for three years at an interest rate of Wall Street Journal prime
plus 2.0%. The fixed conversion price to convert the Note to equity will be set
at a premium to the average closing price of the Company's common stock for the
10 days prior to the closing of the transaction based on a tiered schedule
whereby the first third of the investment amount will have a fixed conversion
price equal to a 103% premium, the next third will have a fixed conversion price
equal to a 109% premium, and the last third will have a fixed conversion price
equal to a 118% premium. The Company shall reduce the principal Note by 1/60th
per month starting 90 days after the closing, payable in cash or registered
stock.
The Company shall provide LMF a first lien on all assets of the Company.
The Company will have the option of redeeming any outstanding principal of the
Note by paying to the LMF 120% of such amount, together with accrued but unpaid
interest under this Note. LMF earns fees in the amount of 3.5% of the total
investment amount at the time of closing. LMF also receives warrants to purchase
shares of the Company's common stock in an amount equal to 26% coverage of the
investment amount. The exercise price of the warrants will be set at a 120%
premium to the average closing price of the Company's common stock for the 10
days prior to the closing of the transaction. The warrants will have a term of
seven years. In addition, the Company will pay fees to LMF of $40,000 plus any
additional due diligence costs deemed necessary and approved by the Company in
advance.
10
In November 2005, we entered into a Loan and Security Agreement (the Loan)
with Cambria Investment Fund, L.P. One of our directors, Michael D. Vanderhoof,
is a principal in Cambria Investment Fund. Under the agreement, we can borrow up
to $500,000. Interest accrues daily upon any unpaid principal balance at the
rate of twelve percent (12%) per annum and is payable in full on a quarterly
basis. The outstanding principal balance is due and payable in full on March 15,
2007. The Loan is secured by substantially all of our assets. In the event that
we complete any future public or private placement offering which results in net
proceeds in excess of $3,000,000, Cambria Investment Fund L.P. may demand
repayment of the Loan. As of December 31, 2005, there were no borrowings from
this Loan. In March 2006, we borrowed $250,000 on this Loan. In April 2006, the
Loan was paid off with funds received from Laurus Master Fund Fixed Price
Convertible Note.
In February 2005, we commenced a private placement offering of up to
2,500,000 shares of our common stock at a purchase price of $2.00 per share. We
completed the offering on July 31, 2005 and sold 1,619,750 shares of our common
stock as part of this offering, receiving net proceeds of $2,967,327.
We believe that our current cash on hand plus the proceeds from financing
with the Larus Master Fund, Ltd. will be sufficient to sustain us through the
next 12 months.
Our audited consolidated financial statements have been prepared on a
basis that contemplates our continuation as a going concern and the realization
of assets and liquidation of liabilities in the ordinary course of business. Our
audited financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should we be unable to
continue as a going concern.
Contractual Obligations and Contingent Liabilities and Commitments
We lease certain of our facilities under non-cancelable operating lease
arrangements that expire at various dates through 2010. The following table
summarizes future minimum payments for these leases as of December 31, 2005:
Total 2006 2007-2008 2009-2010
---------------------------------------------------
Operating Leases $738,561 $205,468 $332,265 $200,828
11
BUSINESS
Introduction
Auxilio, Inc. was originally incorporated under the laws of the State of
Nevada on August 29, 1995, under the name Corporate Development Centers, Inc. As
a result of a series of transactions, which are more fully described in the
section entitled "Background" below, in April 2004 we changed our name to
Auxilio, Inc. The Company is currently headquartered in Orange County,
California, with its principal executive offices located at 27401 Los Altos,
Suite 100, Mission Viejo, 92691. Auxilio is engaged in the business of providing
fully outsourced document image management services to the healthcare industry.
For more information on Auxilio and its products and services see the section
entitled "Principal Products or Services" below or visit our website at
www.auxilioinc.com. The information found on our website is not intended to be
part of this prospectus and should not be relied upon by you when making a
decision to invest in our common stock.
Background
Auxilio, Inc. was incorporated in the State of Nevada on August 29, 1995.
From its incorporation in August 1995 until January 2002, we had no significant
operations. In January of 2002, Auxilio's predecessor e-Perception Technologies,
Inc. (e-Perception), a Human Resources software concern, completed a tender
offer with Corporate Development Centers, Inc. (CDC). CDC's common stock traded
on the OTC Bulletin Board. In connection with the tender offer, the stockholders
of e-Perception received one (1) share of CDC for each four (4) shares of
e-Perception common stock they owned prior to the tender offer. As a result,
e-Perception became a wholly owned subsidiary of CDC. CDC subsequently changed
its name to e-Perception, Inc. Approximately eighteen months later e-Perception
changed its name to PeopleView, Inc. (PeopleView) and traded under the symbol
PPVW.
For the fiscal year ended December 31, 2003, and including the period from
January 1 to March 31, 2004, PeopleView developed, marketed and supported web
based assessment and reporting tools and provided consulting services that
enabled companies to manage their HCM needs in real-time. Companies ranging in
size from 50 person firms to Fortune 500 companies implemented PeopleView
solutions in order to have deep insight into their human capital assets.
In March of 2004, PeopleView entered into an asset purchase and sale
agreement with Workstream, Inc. (Workstream) whereby the Company sold to
Workstream essentially all of its assets, including its software products and
related intellectual property, its accounts receivable, certain computer
equipment, customer lists, and the PeopleView name, among other things. Pursuant
to an addendum to the original agreement, the final consideration the Company
received was cash equal to $250,000, 246,900 shares of Workstream common stock,
and a warrant to purchase an additional 50,000 shares at an exercise price of
$3.00 per share. The business operations of PeopleView were discontinued in
March 2004.
On April, 1, 2004, PeopleView completed the acquisition of Alan Mayo and
Associates, Inc. dba The Mayo Group (and referred to herein as TMG). TMG offered
outsourced image management services to healthcare facilities throughout
California, and this acquisition forms the basis for Auxilio's current
operations. Subsequent to the acquisition of TMG, PeopleView changed its name to
Auxilio, Inc. and changed TMG's subsidiary name to Auxilio Solutions, Inc. Our
stock now trades on the Over-the Counter Bulletin Board under the symbol
AUXO.OB.
Principal Products or Services
Auxilio is a services and technology firm that provides fully outsourced
document image management services, or Image Management, to the healthcare
industry. Auxilio provides full-time on-site management teams to perform a
customized Image Management program that includes the following services:
o vendor monitoring, management and contract negotiation;
o change management and end-user training programs;
o utilization management;
o financial reporting;
o workflow efficiency management;
o information systems integration, connectivity and image migration
strategies; and
o strategy execution working with the customer to execute a long-term
Image Management strategy;
Auxilio's products and services also include the sales, integration and
services of automated office equipment including digital and color copiers,
printers, facsimile machines and multi-function equipment.
12
Competition
We operate in a highly competitive market. The majority of the competition
in the healthcare industry market for Image Management services comes from the
large photocopy/multi-functional digital device manufacturers such as Xerox,
Canon, Konica Minolta, Ricoh and Sharp. In addition to the manufacturers the
competitive landscape contains large equipment dealer/distributors such as Ikon,
Lanier, and Global Imaging Systems as well as a number of regional and local
equipment dealers and distributors that exist in the communities which the
hospitals serve. Our analysis of the competitive landscape shows a very strong
opportunity for fully outsourced Image Management services to the healthcare
industry.
While this competition does present a significant competitive threat,
Auxilio believes that it has a strong competitive position in the marketplace
due to a number of important reasons:
o Auxilio is distinctive in its 100% focus on healthcare. No other
vendor/service provider has its entire business dedicated to solving
issues inside of healthcare with the expertise and knowledge base
unmatched in the market.
o Auxilio is distinctive in its approach to providing fully outsourced
Image Management programs. Auxilio's program is completely
outsourced and hospitals need only pay a single invoice. Auxilio
operates the Image Management process as a department in the
hospital with a full-time staff on-site. The vendors and dealers in
the vast majority of instances have multiple small and large
customers in a geographic area to whom they are providing services
and this causes major delays in service and supplies to the
hospitals. In addition, by focusing solely on the hospital campus
Auxilio enjoys much lower turn-around times for service, greater up
sell opportunities and a much deeper service relationship with the
customer.
o Auxilio is not restricted to any single equipment vendor. Auxilio is
committed to bringing the best hardware and software solutions to
our customers. Our approach is to use the best technology to solve
the solution in the best manner possible without any prejudice as to
equipment.
o Auxilio maintains a daily connection with the hospital providing a
detailed strategy and plan on equipment acquisition saving the
hospitals a great deal of time, effort and money in this cumbersome
and confusing process.
Customers
Most of our customers are hospitals and Integrated Health Delivery
Networks (IDN). The loss of any key customer could have a material adverse
effect upon our financial condition, business, prospects and results of
operation. Our four largest customers represent approximately 89% of our
revenues for the quarter ended March 31, 2006.
Intellectual Property
We have not applied for or been granted any patents, trademarks or
copyrights with respect to our technology, or processes, as they relate to
document and image management services and processing.
Government Regulation
We are subject to federal, state and local regulations concerning the
environment and occupational safety and health standards. We have not
experienced significant difficulty in complying with such regulations and
compliance has not had a material effect on our business or our financial
results.
Research and Development
As a result of our acquisition of TMG on April 1, 2004, and our subsequent
decision to concentrate our focus on document and image management services, as
well as document and image processing, it is no longer required that we make
material expenditures on research and development. Prior to our acquisition of
TMG, we had a research and development organization that was responsible for
product architecture, development of core technology, product testing, quality
assurance and ensuring the compatibility of the products with leading hardware
platforms, operating systems and database systems for our human resources
software, which was sold to Workstream in March of 2004. In the first quarter of
2004 we incurred research and development expenses of $46,249. These expenses
have been included in discontinued operations in Auxilio's financial statements
for the year ended December 31, 2004.
13
Employees
As of April 30, 2006, we had sixty full-time employees and two part-time
employees. Of these employees, forty-four were engaged in providing services,
eleven were engaged in sales and marketing, and seven were engaged in general
and administrative. None of our employees are represented by a labor union or a
collective bargaining agreement. We have not experienced any work stoppages and
consider our relations with our employees to be good.
Properties
We currently lease approximately 6,672 square feet of office space in one
building located in Mission Viejo, California. The lease terminates on December
31, 2010. The Company expects that the current leased premises will be
satisfactory until the future growth of its business operations necessitates an
increase in office space. There is an ample supply of office space in the Orange
County, California area and we do not anticipate any problem in securing
additional space if, and when, necessary.
Legal Proceedings
From time to time, we may become involved in litigation relating to claims
arising from our ordinary course of business. We are aware of no claims or
actions pending or threatened against us, the ultimate disposition of which
would have a material adverse effect on us.
DIRECTORS AND EXECUTIVE OFFICERS
The following sets forth the name, age and position of each of our
directors and executive officers as of July 5, 2006:
Name Age Position with the Company
---- --- -------------------------
Joseph J. Flynn 40 Chief Executive Officer, Director and Chairman
of the Board
Edward B. Case 54 Director, Member of the Audit Committee
Robert L. Krakoff 70 Director, Chairman of the Audit Committee, and
Member of the Compensation Committee
John D. Pace 52 Director
Max Poll 59 Director, Member of the Audit Committee
Michael Vanderhoof 46 Director, Chairman of the Compensation Committee
Etienne L. Weidemann 41 Director, President and Chief Operating Officer
Paul T. Anthony 35 Chief Financial Officer
Joseph J. Flynn, 40. Mr. Flynn was hired as the Chief Executive Officer
effective January 1, 2003, and has served as a director since that date. From
1998 to 2002, Mr. Flynn was General Manager of the e-learning, Collaboration and
Telecommunications Group at Advanstar Communications. From 1992-1998, Mr. Flynn
was Vice President for Latin America and the Iberian Peninsula for E. J. Krause,
a privately held, leading international exhibition organizer. Mr. Flynn holds a
BA in International Relations, 1987 from the Catholic University of America in
Washington, DC and completed the Masters at Teaching Post Graduate Program in
Foreign Language Education from the University of Rhode Island in 1989.
Edward B. Case, 54. Mr. Case has served as a member of the Company's Board
of Directors since January 2006. Mr. Case has over 20 years in the healthcare
industry having served as CEO and President of Presbyterian Healthcare, as well
as CEO and CFO of BJC Health Systems. Most recently Mr. Case has owned and
operated Healthcare Resource Associates, a leading provider of business process
outsourcing services focused on cash flow improvements for hospitals and
physicians.
Robert L. Krakoff, 70. Mr. Krakoff has served as a member of the Company's
Board of Directors since November 2004. Mr. Krakoff has served as a member of
the Company's Board of Directors since January, 2005. Mr. Krakoff was the former
Chairman and Chief Executive Officer of Advanstar, Inc. Before joining
Advanstar, Inc., Mr. Krakoff had a 23 year career with Reed Elsevier plc, a
leading international publisher and information provider. He was Vice Chairman
of Reed Elsevier Inc., a director of Reed Elsevier plc, and Chairman and CEO of
Cahners Publishing Company. During his tenure with Reed, he also held the
position of Chief Executive of Reed Exhibition Companies and Reed Reference
Publishing. Prior to joining Reed Elsevier in 1973, Mr. Krakoff was President,
Chief Executive Officer and a director of AITS, Inc., then a large wholesale
travel company. He also held executive positions in finance, marketing and
planning with Ford Motor Company, Trans World Airlines, The Singer Corporation,
and RCA. Mr. Krakoff graduated from Pennsylvania State University with a
Bachelor of Science degree in Business Administration. He also earned an MBA
from the Harvard Graduate School of Business Administration. Mr. Krakoff is a
past Chairman and a past Director of the Association of American Business Media
(ABM), and the 2002 recipient of the ABM's McAllister Top Management Fellowship
award for career leadership in business-to-business media. He also is a Trustee
of the Beth Israel Deaconess Hospital in Boston. He is a member of the Board of
Freedom Communications, Inc., of Irvine, CA and Chairman of the Audit Committee;
a prior Director of three mutual funds of the Aquila Corporation (Capital Cash
Management Trust, Narragansett Insured Tax Free Income Fund, and Trinity Liquid
Assets Trust).
14
John D. Pace, 52. Mr. Pace has served as a member of the Company's Board
of Directors since June 2004. Mr. Pace has served as a member of the Company's
Board of Directors since November, 2004. He spent 25 years with ServiceMaster's
Healthcare Division in a variety of senior leadership roles, the last as
Executive Vice President for the West. Currently Mr. Pace is retired from
ServiceMaster. He currently provides consulting services to the Company. Mr.
Pace is also on the Mission Hospital Foundation Board, in Mission Viejo, CA.
Max Poll, 59. Mr. Poll has served as a member of the Company's Board of
Directors since May 2005. Mr. Poll most recently served as President and Chief
Executive Officer of Scottsdale Healthcare, where he retired from in 2005. He
has been in health care administration for over 30 years and has held the
positions of President & CEO of Barnes Hospital in St. Louis, Missouri, the
primary teaching affiliate of Washington University School of Medicine;
Administrator & CEO of Boone Hospital Center, Columbia, Missouri; and Assistant
Director of St. Luke's Hospital, Kansas City, Missouri. Mr. Poll received his
Bachelors of Business Administration from Western Michigan University, and his
Masters of Hospital Administration from the University of Minnesota. His
activities have included board, committee membership, and officer positions on
metropolitan, state and national health organizations, including the American
Hospital Association, Association of American Medical Colleges, and Voluntary
Hospitals of America, Inc. Mr. Poll is a Fellow in the American College of
Healthcare Executives, and currently is a board member of the International
Genomics Consortium and serves as its Executive Advisor.
Michael Vanderhoof, 46. Mr. Vanderhoof has served as a member of the
Company's Board of Directors since May 2001. Mr. Vanderhoof is Chairman of
Cambria Asset Management LLC and a principal in Cambria Investment Fund LP.
Cambria Asset Management is the holding corporation for Cambria Capital LLC, a
NASD registered broker dealer with offices in Los Angeles, New York, Seattle and
Salt Lake City. Cambria Investment Fund LP provides bridge loans and equity
financing to early stage developing companies. Mr. Vanderhoof is a board member
of Bionovo, Inc. He has over nineteen years experience in the capital markets.
From 1998 to present, he has advised various private and public companies on
capital formation, mergers and acquisitions and financing. From 1993 to 1997,
Mr. Vanderhoof was a trader on a trading desk that made markets in over 200 OTC
companies. His career began in 1985 as an Account Executive for a NASD
broker-dealer firm in Salt Lake City, Utah.
Etienne L. Weidemann, 41. Mr. Weidemann is the President and Chief
Operating Officer for the Company. In May 2006 Mr. Weidemann was appointed to
the Company's Board of Directors. He joined the Company in November 2002 as Vice
President of Marketing. In March 2003, Mr. Weidemann was promoted to Executive
Vice President of Sales and Marketing. Prior to Auxilio, Mr. Weidemann was Vice
President of Sales and Vendor Marketing for the e-Learning and Collaboration
Groups at Advanstar Communications Inc. From 1996 to 1999, Mr. Weidemann was a
Director and founding member of WildnetAfrica.com where he played a leading
strategic role in determining the company's go-to-market strategy. From 1991
through 1996, Mr. Weidemann was Managing Director of Elecrep Corporation, an
engineering and automotive manufacturing concern in South Africa. Mr. Weidemann
graduated with a law degree from the University of South Africa and was admitted
as an Attorney of the Supreme Court of South Africa in 1989.
Paul T. Anthony, 35. Mr. Anthony was hired as the Chief Financial Officer
effective January 3, 2005. Prior to joining the Company, Mr. Anthony served as
Vice President, Finance and Corporate Controller with Callipso, a provider of
voice-over IP based network services. During his tenure at Callipso, Mr. Anthony
was responsible for all of the financial operations including accounting,
finance, investor relations, treasury, and risk management. Before joining
Callipso, Mr. Anthony was the Controller for IBM-Access360, a provider of
enterprise software. Mr. Anthony joined Access360 from Nexgenix, Inc. where he
served as Corporate Controller. Prior to this, Mr. Anthony held numerous
positions in Accounting and Finance at FileNET Corporation, a provider of
enterprise content management software applications. Mr. Anthony started his
career at KPMG Peat Marwick LLP in Orange County in the Information,
Communications & Entertainment practice. He is a certified public accountant and
holds a Bachelor of Science in Accounting from Northern Illinois University.
LIMITATION ON LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under the Nevada General Corporation Law and our Articles of
Incorporation, as amended, and our Bylaws, our directors will have no personal
liability to us or our stockholders for monetary damages incurred as the result
of the breach or alleged breach by a director of his "duty of care." This
provision does not apply to the directors' (i) acts or omissions that involve
intentional misconduct or a knowing and culpable violation of law, (ii) acts or
omissions that a director believes to be contrary to the best interests of the
corporation or its stockholders or that involve the absence of good faith on the
part of the director, (iii) approval of any transaction from which a director
derives an improper personal benefit, (iv) acts or omissions that show a
reckless disregard for the director's duty to the corporation or its
stockholders in circumstances in which the director was aware, or should have
been aware, in the ordinary course of performing a director's duties, of a risk
of serious injury to the corporation or its stockholders, (v) acts or omissions
that constituted an unexcused pattern of inattention that amounts to an
abdication of the director's duty to the corporation or its stockholders, or
(vi) approval of an unlawful dividend, distribution, stock repurchase or
redemption. This provision would generally absolve directors of personal
liability for negligence in the performance of duties, including gross
negligence.
15
The effect of this provision in our Articles of Incorporation and Bylaws
is to eliminate our rights and the rights of our stockholders (through
stockholder's derivative suits on behalf of Auxilio) to recover monetary damages
against a director for breach of his fiduciary duty of care as a director
(including breaches resulting from negligent or grossly negligent behavior)
except in the situations described in clauses (i) through (vi) above. This
provision does not limit nor eliminate the rights of Auxilio or any stockholder
to seek non-monetary relief such as an injunction or rescission in the event of
a breach of a director's duty of care. In addition, our Bylaws provide that if
the Nevada General Corporation Law is amended to authorize the future
elimination or limitation of the liability of a director, then the liability of
the directors will be eliminated or limited to the fullest extent permitted by
the law, as amended. The Nevada General Corporation Law grants corporations the
right to indemnify their directors, officers, employees and agents in accordance
with applicable law.
Insofar as indemnification for liabilities under the Securities Act of
1933 may be permitted to our directors, officers and controlling persons
pursuant to the provisions described above, or otherwise, we have been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by us of
expenses incurred or paid by our director, officer or controlling person in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, we will, unless in the opinion of our counsel the matter as been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
EXECUTIVE AND DIRECTOR COMPENSATION AND OTHER INFORMATION
Director Compensation
Auxilio compensates its non-employee directors for their service on the
Board of Directors with an initial grant of an option to purchase 25,000 shares
of common stock. Each outside director also receives 2,500 shares of common
stock for each board meeting and committee meeting attended.
Summary Executive Compensation Table
The following table discloses the annual and long-term compensation
received in each of the last three fiscal years by (i) our Chief Executive
Officer of the Company during the last fiscal year, (ii) the Company's four most
highly compensated executive officers, in addition to the Chief Executive
Officer, serving at the end of the last fiscal year whose salary and incentive
compensation exceeded $100,000 in the last fiscal year, and (iii) any executive
officer of the Company who resigned during the last fiscal year whose salary and
incentive compensation exceeded $100,000 in the last fiscal year.
Long Term
Annual Compensation Compensation
--------------------- ----------------
Shares of Common
Stock Underlying
Name and Principal Fiscal Stock Options and All Other
Position Year Salary Bonus Warrants Compensation
- -------------------- ---- ------ ------- ------------------ ------------
Joseph J. Flynn (1) 2005 $165,000 $43,464 -- --
Chairman and Chief 2004 $163,542 $ -- 333,333 --
Executive Officer 2003 $149,885 $22,527 83,325 --
Etienne Weidemann (2) 2005 $160,000 $40,002 16,667 --
President and Chief 2004 $157,083 $10,000 316,666 --
Operating Officer 2003 $142,500 $45,215 99,990 --
Paul T. Anthony (3) 2005 $155,000 $10,000 330,000 $6,757
Chief Financial 2004 -- -- -- --
Officer 2003 -- -- -- --
Charles Nickell (4) 2005 $142,500 $46,740 -- --
Vice President 2004 $142,500 $90,000 -- --
2003 -- -- --
Joseph B. Hoban (5) 2005 $112,500 $39,500 300,000 --
Executive Vice 2004 -- -- -- --
President -- Sales 2003 -- -- -- --
16
(1) Mr. Flynn joined the Company in January 2003 as Chief Executive
Officer.
(2) Mr. Weidemann joined the Company in November 2002.
(3) Mr. Anthony joined the Company in January 2005 as Chief Financial
Officer.
(4) Mr. Nickell joined the Company in April 2004 through the acquisition
of The Mayo Group.
(5) Mr. Hoban joined the Company in April 2005 as Senior Vice President
- Sales.
Option Grants Table
The following table sets forth information concerning options to purchase
shares of our common stock granted to our named executive officers in the fiscal
year ended December 31, 2005.
% of
Total
Options
Shares Shares of and
of Common Common Warrants
Stock Stock Granted Exercise Grant
Underlying Underlying to Price Date
Warrants Stock Options Company Per Share Expiration Present
Executive Officer (1) (2) Employees (3) Date Value(4)
- ----------------- --- --- --------- ------- --------- ---------
Etienne Weidemann - 16,666 1.3% $2.00 4/15/2015 $ 21,883
Paul T. Anthony 330,000 -- 26.0% $1.95 12/10/2009 $515,228
Joseph B. Hoban - 300,000 23.6% $2.00 5/10/2015 $396,000
(1) The warrants have a term of no more than five years, subject to earlier
termination in certain events related to termination of employment. The
warrants begin to vest on the first anniversary from the grant date,
subject to certain earnings and revenue targets being accomplished. To the
extent not already exercisable, the warrants generally become exercisable
upon a merger or consolidation of the Company with or into another
corporation, or upon the acquisition by another corporation or person of
all or substantially all of the Company's assets.
(2) The options were granted under the Auxilio 2004 Stock Incentive Plan for a
term of no more than ten years, subject to earlier termination upon
certain events related to termination of employment. The options begin to
vest on the first anniversary from the grant date. To the extent not
already exercisable, the options generally become exercisable upon a
merger or consolidation of the Company with or into another corporation,
or upon the acquisition by another corporation or person of all or
substantially all of the Company's assets.
(3) All options were granted at fair market value (the last price for the
Company's common stock as reported by NASDAQ on the day previous to the
date of grant), or the price paid during a private placement, as long as
the restrictions on the shares sold pursuant to a private placement where
equal to the vesting on the option grants.
(4) As suggested by the SEC's rules on executive compensation disclosure, the
Company used the Black-Scholes model of option valuation to determine
grant date pre-tax present value. The calculation is based on a five-year
term and upon the following assumptions: annual dividend growth of zero
percent, volatility of approximately 80.47%, and an interest rate of 2.75%
to 3.00%. There can be no assurance that the amounts reflected in this
column will be achieved.
Equity Compensation Plan Information
The following table provides certain information as of December 31, 2005
with respect to the Company's equity compensation plans under which equity
securities of the Company are authorized for issuance.
17
Number of
Securities to be Number of
Issued Upon Weighted Average Securities
Exercise of Exercise Price Remaining
Outstanding of Outstanding Available
Options, Options, for Future
Warrants and Warrants and Issuances
Plan Category Rights Rights Under Plan
------------- ------ ------ ----------
Equity compensation plans
approved by security 2,008,497 $1.48 1,458,170
holders (1):
Equity compensation plans
not approved by security
holders (2): 1,398,535 $1.25 --
--------- ---------
Total 3,407,032 1,458,170
========= =========
(1) These plans consist of the 2004 Stock Incentive Plan, 2003 Stock Option
Plan, 2001 Stock Option Plan, and the 2000 Stock Option Plan.
(2) Warrants and rights. From time to time and at the discretion of the Board
of Directors the Company may issue warrants to key individuals or officers
of the Company as performance based compensation.
Aggregated Options and Warrants Exercised in Last Fiscal Year and Fiscal
Year-End Option Values
The following table sets forth information regarding the exercisable and
unexercisable options to acquire our common stock granted to our named executive
officers.
Shares Number of Unexercised Value of Unexercised
Acquired Value Options and Warrants at In-the-Money Options and Warrants at
Name on Exercise Realized December 31, 2005 December 31, 2005 (1)
---- ----------- -------- ----------------- ---------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
Joseph J. Flynn - - 152,788 263,889 $147,917 $264,583
Etienne Weidemann - - 163,889 269,444 $138,333 $251,666
Paul T. Anthony - - 110,000 330,000 $220,000 -
Joseph B. Hoban - - - 300,000 - -
- ----------------------------------------------------------------------------------------------------------------------------
(1) Represents the difference between the fair market value of the shares
underlying such options at fiscal year-end ($1.50) and the exercise price
of such options.
Employment and Separation Agreements and Change in Control Arrangements
On April 1, 2004, the Company entered into an employment agreement with
Joseph J. Flynn to serve as its Chief Executive Officer, effective April 1,
2004. Mr. Flynn's agreement has a term of two year and provides for a base
annual salary of $165,000. Mr. Flynn may receive an annual bonus if certain
earnings and revenue targets are accomplished. On March 14, 2006, the Company
entered in to a new employment agreement with Mr. Flynn. This new agreement is
effective January 1, 2006, has a term of two years, and provides for a base
annual salary of $180,000. Mr. Flynn received 100,000 options and may receive an
annual bonus if certain earnings and revenue targets are accomplished. In the
event of Mr. Flynn's termination without cause (as defined in the agreement) or
voluntary resignation for good reason (as defined in the agreement), he shall be
entitled to base salary prorated to the date of termination, and severance,
equal to compensation for an additional six (6) months payable in accordance
with the payroll cycle or as a lump sum. In addition, Mr. Flynn's unvested stock
options and warrants will accelerate.
18
On April 1, 2004, the Company entered into an employment agreement with
Etienne Weidemann, to serve as President and Chief Operating Officer, effective
April 1, 2004. Mr. Weidemann's agreement has a term of two years, and provides
for a base annual salary of $155,000. Mr. Weidemann may receive an annual bonus
if certain earnings and revenue targets are accomplished. On March 15, 2006, the
Company entered in to anew employment agreement with Mr. Weidemann. This new
agreement is effective January 1, 2006, has a term of two years, and provides
for a base annual salary of $175,000. Mr. Weidemann received 80,000 options and
may receive an annual bonus if certain earnings and revenue targets are
accomplished. In the event of Mr. Weidemann's termination without cause (as
defined in the agreement) or voluntary resignation for good reason (as defined
in the agreement), he shall be entitled to base salary prorated to the date of
termination, and severance, equal to compensation for an additional twelve (12)
months payable in accordance with the payroll cycle or as a lump sum. In
addition, Mr. Weidemann's unvested stock options and warrants will accelerate.
On December 10, 2004, the Company entered into an employment agreement
with Paul T. Anthony to serve as Chief Financial Officer and Corporate
Secretary, effective January 3, 2005. Mr. Anthony's agreement has a term of two
years, and provides for a base annual salary of $155,000. Mr. Anthony received
warrants and may receive an annual bonus if certain earnings and revenue targets
are accomplished. Mr. Anthony's agreement does allow for severance upon
termination as a result of a change in control. On March 15, 2006, the Company
entered in to a new employment agreement with Mr. Anthony. This new agreement is
effective January 1, 2006, has a term of two years, and provides for a base
annual salary of $170,000. Mr. Anthony received 75,000 options and may receive
an annual bonus if certain earnings and revenue targets are accomplished. In the
event of Anthony's termination without cause (as defined in the agreement) or
voluntary resignation for good reason (as defined in the agreement), he shall be
entitled to base salary prorated to the date of termination, and severance,
equal to compensation for an additional six (6) months payable in accordance
with the payroll cycle or as a lump sum. In addition, Mr. Anthony's unvested
stock options and warrants will accelerate.
19
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table and the notes thereto set forth certain information
regarding the beneficial ownership of our common stock as of July 5, 2006, by
(i) each current director; (ii) each executive officer named in the summary
compensation table included herein who were serving as executive officers at the
end of fiscal 2005; (iii) all our current directors and executive officers as a
group; and (iv) each person who is known by us to be a beneficial owner of five
percent or more of our common stock.
Shares Beneficially Owned
-------------------------
Name and Address of Beneficial Owner (1) Number (2) Percent
---------------------------------------- ---------- -------
Paul Anthony (3)............................ 220,000 1.3
Edward B. Case.............................. - -
Joseph J. Flynn (4) ........................ 518,056 3.1
Raymond Gerrity (5)......................... 94,835 *
Robert L. Krakoff (6)....................... 8,333 *
John Pace (7)............................... 20,538 *
Max Poll (8)................................ 8,333 *
Michael Vanderhoof (9)...................... 1,686,819 9.0
Etienne Weidemann (10)...................... 375,000 2.3
All directors and executive officers, as a
group (11).................................. 2,931,915 15.4
* Less than 1% of the outstanding shares of common stock.
(1) The address for all officers and directors is 27401 Los Altos, Suite 100,
Mission Viejo, CA 92691.
(2) Unless otherwise indicated, the named persons possess sole voting and
investment power with respect to the shares listed (except to the extent
such authority is shared with spouses under applicable law). The
percentages are based upon 16,122,808 shares outstanding as of July 5,
2006, except for certain parties who hold options and warrants that are
presently exercisable or exercisable within 60 days, are based upon the
sum of shares outstanding as of July 5, 2006 plus the number of shares
subject to options and warrants that are presently exercisable or
exercisable within 60 days held by them, as indicated in the following
notes.
(3) Includes 220,000 shares subject to stock warrant agreements.
(4) Includes 118,055 shares subject to stock options exercisable within 60
days, and 250,000 subject to stock warrant agreements.
(5) Includes 2,333 shares subject to stock options exercisable within 60 days.
(6) Includes 8,333 shares subject to stock options exercisable within 60 days.
(7) Includes 1,000 shares subject to stock options exercisable within 60 days.
(8) Includes 8,333 shares subject to stock options exercisable within 60 days.
(9) Includes 5,750 shares subject to stock options exercisable within 60 days,
and 50,000 subject to stock warrant agreements. Includes 425,156
beneficial shares owned by Avintaquin Capital, LLC 880 Apollo Street,
Suite 334, El Segundo, CA 90245. Avintaquin Capital, LLC shares include
28,733 shares subject to stock warrant agreements. Includes 155,000
beneficial shares owned by Cambria Investment Fund, L.P. 2321 Rosecrans
Avenue, Suite 4270, El Segundo, CA 90245. Cambria Investment Fund L.P.
shares include 75,000 shares subject to stock warrant agreements.
(10) Includes 125,000 shares subject to stock options exercisable within 60
days, and 250,000 shares subject to stock warrant agreements.
(11) Includes 272,472 shares subject to stock options exercisable within 60
days, and 873,733 shares subject to stock warrant agreements.
20
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On November 23, 2005, Auxilio entered into a Loan and Security Agreement
(the Loan) with Cambria Investment Fund, L.P. Michael D. Vanderhoof, a director
of the Company, is a principal in Cambria Investment Fund L.P. Under the
agreement, the Company can borrow up to $500,000, The Loan is secured by all of
the Company's inventory, accounts receivable, equipment, cash, deposit accounts,
securities, intellectual property, chattel paper, general intangibles and
instruments, now existing or hereafter arising, and all proceeds thereof. In
consideration for entering into the Loan, Cambria Investment Fund L.P. also
received warrants to purchase up to 250,000 shares of the Company's common stock
at the market price upon execution, with 75,000 shares vesting upon the
execution of the warrant agreement and 17,500 shares vesting for every multiple
of $50,000 borrowed under the Revolving Loan Agreement with the Company. The
fair value of the warrant to received the 75,000 shares issued upon execution
was $69,557. Such amount was recorded as interest expense. The fair value of the
warrants was determined using the Black-Scholes option-pricing model.
On December 28, 2004, Auxilio entered into a Revolving Loan and Security
Agreement with Mr. Michael D. Vanderhoof. Mr. Vanderhoof is a director of the
Company. Under the agreement, the Company could borrow up to $500,000 (the
Revolving Loan). The Revolving Loan was secured by all of the Company's
inventory, accounts receivable, equipment, cash, deposit accounts, securities,
intellectual property, chattel paper, general intangibles and instruments, now
existing or hereafter arising, and all proceeds thereof. In consideration for
the making of the Revolving Loan, Mr. Vanderhoof also received a warrant to
purchase 50,000 common shares of the Company in a number equal to 10% of the
highest amount outstanding at an exercise price of $2.00 per share. During 2005
the Company borrowed $500,000 and issued 50,000 warrants in connection with the
Revolving Loan. The fair value of the warrants was determined using the
Black-Scholes option-pricing model. Such amount was recorded as interest
expense. In accordance with APB 14, "Accounting for Convertible Debt and Debt
Issued with Stock Purchase Warrants," the Company has compared the relative fair
value of the warrants and the face value of the note and has allocated a value
of $58,029. Such amount was recorded as a discount against the carrying value of
the note and was amortized over the life of the note using the straight-line
interest method. In April 2005, the Company paid in full all outstanding
principal balance under the Revolving Loan, and all remaining unamortized
discount was immediately expensed. The Revolving Loan expired December 10, 2005.
In June 2004 the Company entered in to a consulting agreement with John D.
Pace, a director, to provide support in the Company's sales efforts with major
healthcare facilities as well as consulting services related to the Company's
operations. The agreement terminates June 1, 2006. Mr. Pace receives $1,000 per
day for his services not to exceed three days per month and $1,500 per day for
each additional day worked during a given month. In addition, Mr. Pace receives
commission at a rate of 5% of the gross profit for any business closed through
introductions made by Mr. Pace. The commission will be paid 25% in the form of
Auxilio's common stock (priced at prevailing market values) and 75% in cash.
Total compensation to Mr. Pace in 2005 was $61,704.
Auxilio believes that each of the foregoing transaction was in its best
interests. As a matter of policy, these transactions were and all future
transactions between the Company and its officers, directors, principal
stockholders or their affiliates will be approved by a majority of the
independent and disinterested members of the Board of Directors, will be on
terms no less favorable than could be obtained from unaffiliated third parties
and will be undertaken only in connection with bona fide business purposes of
the Company.
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 33,333,333 shares of common
stock, par value $.001 per share. As of July 5, 2006, 16,122,808 shares of
common stock were issued and outstanding. In addition, at such date, 6,373,985
shares of common stock were reserved for issuance upon the exercise of
outstanding options and warrants and the conversion of outstanding convertible
indebtedness.
Common Stock
Voting, Dividend and Other Rights. Each outstanding share of common stock
will entitle the holder to one vote on all matters presented to the stockholders
for a vote. Holders of shares of common stock will have no preemptive,
subscription or conversion rights. All shares of common stock to be outstanding
following this offering will be duly authorized, fully paid and non-assessable.
Our Board of Directors will determine if and when distributions may be paid out
of legally available funds to the holders. We have not declared any cash
dividends during the past fiscal year with respect to the common stock. Our
declaration of any cash dividends in the future will depend on our Board of
Directors' determination as to whether, in light of our earnings, financial
position, cash requirements and other relevant factors existing at the time, it
appears advisable to do so. In addition, our loan agreement with Laurus does not
allow us to directly or indirectly declare or pay any dividends so long as our
secured convertible term note to Laurus remains outstanding.
21
Rights Upon Liquidation. Upon liquidation each outstanding share of common
stock may participate pro rata in the assets remaining after payment of, or
adequate provision for, all our known debts and liabilities.
Majority Voting. The holders of a majority of the outstanding shares of
common stock constitute a quorum at any meeting of the stockholders. A plurality
of the votes cast at a meeting of stockholders elects our directors. The common
stock does not have cumulative voting rights. Therefore, the holders of a
majority of the outstanding shares of common stock can elect all of our
directors. A majority of the votes cast at a meeting of stockholders must
authorize stockholder actions other than the election of directors.
Transfer Agent
The registrar and transfer agent for our common stock is Colonial Stock
Transfer Company, Inc., 66 Exchange Place, Suite 100, Salt Lake City, Utah
84111.
22
SELLING STOCKHOLDERS
The following table provides the name of each selling stockholder and the
number of shares of our common stock offered by each selling stockholder under
this prospectus. Of the 4,063,992 shares of common stock listed below:
o 2,106,916 shares of our common are stock issuable upon (i) the
conversion of the principal amount owing under $3,000,000 Secured Convertible
Term Note issued to Laurus Master Fund, LTD and (ii) the conversion of the
interest accrued and owing under the note;
o 478,527 shares of our common are stock issuable upon exercise of the
warrant issued to Laurus Master Fund, LTD in connection with the issuance of
$3,000,000 Secured Convertible Term Note; and
o 1,478,549 shares of our common are stock issuable upon the exercise of
currently outstanding warrants to purchase shares of our common stock.
The following table provides the name of each selling stockholder and the
number of shares of our common stock offered by each selling stockholder under
this prospectus. Because the selling stockholders may sell all or part of their
shares of our common stock under this prospectus and since this offering is not
being underwritten on a firm commitment basis, we cannot estimate the number and
percentage of shares of our common stock that the selling stockholders will hold
at the end of the offering covered by this prospectus.
Percentage
Common Shares Common Common Shares of Shares
Owned Prior To Shares Owned After Following
Selling Stockholders Offering(1) Registered Offering(1) Offering
Laurus Master Fund, LTD(2) 804,528(3) 2,585,443(3) ---
Alpine Securities, LLC 52,492(4) 52,492 --- ---
Paul Anthony(5) 330,000(4) 330,000 --- ---
Avintaquin Capital, LLC 362,006(6) 45,339 --- ---
Dave Belcher 8,333(4) 8,333 --- ---
Blue Bay Capital 3,600(4) 3,600 --- ---
Cambria Investment
Fund L.P.(7) 162,500(4) 162,500 --- ---
Jonathan Destler 63,752(8) 22,085 --- ---
Joseph Flynn(9) 518,056(10) 250,000 --- ---
Dale Garnett 47,243(4) 47,243 --- ---
Ray Gerrity (11) 500(4) 500 --- ---
Ibrahim Kurtulus (12) 27,900(13) 4,650 --- ---
Meyers & Associates L.P. 18,600(4) 18,600 --- ---
Rodman Renshaw, LLC 156,289(14) 110,429 --- ---
SBI E2-Capital (USA) 102,445(4) 102,445 --- ---
Shai Stern 5,000(4) 5,000 --- ---
Michael Vanderhoof(15) 1,686,819 (16) 50,000 --- ---
Etienne Weidemann(17) 375,000(18) 250,000 --- ---
World in Motion 15,333(4) 15,333 --- ---
- -------------------
(1) Calculated in accordance with Rule 13d-3 promulgated under the
Securities Exchange Act of 1934, as amended.
23
(2) In April 2006, the Company entered into a $3,000,000 Fixed Price
Convertible Note (the "Note") agreement with Laurus Master Fund
(LMF). The term of the Note is for three years at an interest rate
of Wall Street Journal prime plus 2.0%. The conversion, repayment,
collateral and other terms are detailed in note 18 to the December
31, 2005 consolidated financial statements.
(3) Consists of 2,585,443 shares, of which 2,106,916 shares of common
stock are issuable upon ( a ) the conversion of the principal amount
owning under ( i ) $3,000,000 Secured Convertible Term Note issued
to Laurus Master Fund, Ltd., on April 7, 2006 and (ii) the
conversion of interest accrued and owing under the note; and (b) of
which 478,527 shares of common stock are issuable upon exercise of
warrants with an exercise price of $1.96 per share. The 804,528
shares of common stock shown as being beneficially owned by Laurus
Master Fund prior to the offering represent 4.99% of the Company's
outstanding common stock on July 5, 2006, as Laurus Master Fund may
not exercise the warrants or convert the term note into shares if
such exercise or conversion would cause Laurus Master Fund to
beneficially own more than 4.99% of the Company's common stock.
Laurus Master Fund, Ltd. is managed by Laurus Capital Management,
LLC. Eugene Grin and David Grin, through other entities, are the
controlling principals of Laurus Capital Management, LLC and have
share sole voting and investment power over the shares owned by
Laurus Master Fund, Ltd.
(4) Includes shares of our common stock issuable upon exercise of
warrants.
(5) Mr. Anthony was hired as Auxilio's Chief Financial Officer effective
January 3, 2005.
(6) Includes 45,339 shares issuable upon exercise of warrants.
(7) In March 2006, Auxilio borrowed $250,000 from Cambria Investment
Fund L.P., pursuant to the terms of a Revolving Loan Agreement.
Michael D. Vanderhoof, a director of Auxilio is a principal in
Cambria Investment Fund. In April 2006, we paid in full all
outstanding principal balance under the Revolving Loan Agreement.
(8) Includes 22,085 shares issuable upon exercise of warrants.
(9) Mr. Flynn was hired as Auxilio's Chief Executive Officer effective
January 1, 2003, and has served as a director since that date.
(10) Includes 118,055 shares subject to stock options exercisable within
60 days, and 250,000 subject to stock warrant agreements.
(11) Mr. Gerrity served as a director of the Company from May 2001 until
May 2006.
(12) Mr. Kurtulus was previously engaged by the Company as a consultant
in August 2005.
(13) Includes 4,650 shares issuable upon exercise of warrants.
(14) Includes 110,429 shares issuable upon exercise of warrants.
(15) Vanderhoof has served as a member of the Company's Board of
Directors since May, 2001.
(16) Includes 5,750 shares subject to stock options exercisable within 60
days, and 50,000 subject to stock warrant agreements. Includes
425,156 beneficial shares owned by Avintaquin Capital, LLC 880
Apollo Street, Suite 334, El Segundo, CA 90245. Avintaquin Capital,
LLC shares include 28,733 shares subject to stock warrant
agreements. Includes 155,000 beneficial shares owned by Cambria
Investment Fund, L.P. 2321 Rosecrans Avenue, Suite 4270, El Segundo,
CA 90245. Cambria Investment Fund L.P. shares include 75,000 shares
subject to stock warrant agreements.
(17) Mr. Weidemann is the President and Chief Operating Officer of
Axulio. In May 2006 Mr. Weidemann was appointed to the Company's
Board of Directors.
(18) Includes 125,000 shares subject to stock options exercisable within
60 days, and 250,000 shares subject to stock warrant agreements.
24
PLAN OF DISTRIBUTION
The selling stockholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on the OTC Bulletin Board, or any other market or trading
facility on which the shares are traded or in private transactions. These sales
may be at fixed or negotiated prices. The selling stockholders may use any one
or more of the following methods when selling shares:
o directly by any selling stockholder to one or more purchasers;
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o settlement of short sales entered into after the date of this
prospectus;
o broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
Broker-dealers engaged by the selling stockholders may arrange for other
broker-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The selling stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
The selling stockholders may from time to time pledge or grant a security
interest in some or all of the shares of common stock owned by them and, if they
default in the performance of their secured obligations, the pledge or secured
parties may offer and sell the shares of common stock from time to time under
this prospectus, or under an amendment to this prospectus under Rule 424(b)(3)
or other applicable provision of the Securities Act amending the list of selling
stockholders to include the pledgee, transferee or other successors in interest
as selling stockholders under this prospectus.
The selling stockholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. The selling stockholders have
informed us that they do not have any agreement or understanding, directly or
indirectly, with any person to distribute the common stock.
We are required to pay certain fees and expenses incurred by us incident
to the registration of the shares. We have agreed to indemnify the selling
stockholders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
25
CHANGE IN CERTIFYING ACCOUNTANTS
On December 19, 2005 the Company's Audit Committee approved the dismissal
of Stonefield Josephson, Inc. as the Company's independent registered public
accounting firm and appointed Haskell & White LLP as the Company's independent
registered public accounting firm for the year ended December 31, 2005. There
were no disagreements with Stonefield Josephson, Inc. on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope procedures which disagreements, if not resolved to Stonefield Josephson,
Inc.'s satisfaction, would have caused them to refer to the subject matter of
the disagreements in connection with their report; and there were no "reportable
events" as defined in Item 304 (a)(1)(iv) of the Securities and Exchange
Commission's Regulation S-B.
The Company requested Stonefield Josephson, Inc. to furnish it with a
letter addressed to the Commission stating whether it agreed with the above
statements. A copy of that letter, dated December 22, 2005, was filed as Exhibit
16.1 to the Form 8-K, as amended, announcing Stonefield Josephson, Inc.'s
dismissal and the appointment of Haskell & White LLP, which was filed with the
SEC on December 23, 2005, and amended on January 18, 2006.
LEGAL MATTERS
The validity of the issuance of the common stock offered hereby will be
passed upon for us by Stradling Yocca Carlson & Rauth, a Professional
Corporation, Newport Beach, California.
EXPERTS
Haskell & White LLP, an independent registered public accounting firm, has
audited our consolidated financial statements for the year ended December 31,
2005, as set forth in their report, which is included in this prospectus and
elsewhere in the registration statement. Such consolidated financial statements
are included herein in reliance upon such report given on the authority of such
firm as experts in accounting and auditing.
Stonefield Josephson, Inc., an independent registered public accounting
firm, has audited our consolidated financial statements for the year ended
December 31, 2004, as set forth in their report, which is included in this
prospectus and elsewhere in the registration statement. Such consolidated
financial statements are included herein in reliance on upon such report, given
on their authority as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We file annual, quarterly, and current reports, proxy statements and other
documents with the Securities and Exchange Commission. You may read and copy any
document we file at the SEC's public reference room at Judiciary Plaza Building,
450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. You should call
1-800-SEC-0330 for more information on the public reference room. The SEC
maintains an Internet site at http://www.sec.gov where certain information
regarding issuers (including Auxilio, Inc.) may be found.
This prospectus is part of a registration statement that we filed with the
SEC (Registration No. 333-135640). The registration statement
contains more information than this prospectus regarding Auxilio, Inc. and its
common stock, including certain exhibits and schedules. You can obtain a copy of
the registration statement from the SEC at the address listed above or from its
Internet site.
26
INDEX TO FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2006 AND MARCH 31, 2005
Financial Statements:
Condensed Consolidated Balance Sheet ....................................F-1
Condensed Consolidated Statements of Operations..........................F-2
Condensed Consolidated Statements of Comprehensive (Loss) Income........F-3
Condensed Consolidated Statements of Stockholders' Equity................F-4
Condensed Consolidated Statements of Cash Flows...................F-5 to F-6
Notes to Condensed Consolidated Financial Statements.............F-7 to F-11
FISCAL YEARS ENDED DECEMBER 31, 2005 AND DECEMBER 31, 2004
Reports of Independent Registered Public Accounting Firms ..........F-12 to F-13
Financial Statements:
Consolidated Balance Sheet .............................................F-14
Consolidated Statements of Operations...................................F-15
Consolidated Statements of Comprehensive (Loss) Income..................F-16
Consolidated Statements of Stockholders' Equity.........................F-17
Consolidated Statements of Cash Flows...........................F-18 to F-19
Notes to Consolidated Financial Statements......................F-20 to F-38
27
AUXILIO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2006
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 292,571
Accounts receivable, net 369,421
Prepaid and other current assets 147,328
Supplies 420,803
------------
Total current assets 1,230,123
Property and equipment, net 281,582
Deposits 41,355
Intangible assets, net 620,542
Goodwill 1,517,017
------------
Total assets $ 3,690,619
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 733,564
Accrued compensation and benefits 243,874
Deferred revenue 390,413
Current portion of long-term debt 16,626
Current portion of capital lease obligations 34,211
Revolving loan payable, net of discount of $79,605 170,395
------------
Total current liabilities 1,589,083
Commitments and contingencies --
Stockholders' equity:
Common stock, par value at $0.001, 33,333,333 shares
authorized,15,964,948 shares issued and outstanding 15,966
Additional paid-in capital 15,487,614
Accumulated deficit (13,402,044)
------------
Total stockholders' equity 2,101,536
------------
Total liabilities and stockholders' equity $ 3,690,619
============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-1
AUXILIO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,
----------------------------
2006 2005
------------ ------------
Revenues $ 2,035,193 $ 784,077
Cost of revenues 1,971,374 774,174
------------ ------------
Gross profit
63,819 9,903
Operating expenses:
Sales and marketing 510,903 439,720
General and administrative expenses 657,164 483,876
Intangible asset amortization 63,802 93,368
------------ ------------
Total operating expenses 1,231,869 1,016,964
------------ ------------
Loss from operations
(1,168,050) (1,007,061)
------------ ------------
Other income (expense):
Interest expense (9,850) (20,957)
Interest income 1,327 2,212
Gain on sale of marketable securities 10,448 403,795
------------ ------------
Total other income (expense) 1,925 385,050
------------ ------------
Loss before provision for income taxes (1,166,125) (622,011)
Income tax expense 2,400 3,200
------------ ------------
Net loss $ (1,168,525) $ (625,211)
============ ============
Net loss per share:
Basic $ (0.07) $ (0.04)
============ ============
Diluted $ (0.07) $ (0.04)
============ ============
Number of weighted average shares:
Basic 15,961,724 14,563,651
============ ============
Diluted 15,961,724 14,563,651
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-2
AUXILIO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
Three Months Ended March 31,
----------------------------
2006 2005
----------- -----------
Net loss $(1,168,525) $ (625,211)
----------- -----------
Other comprehensive loss:
Unrealized gain on marketable securities -- 52,500
Reclassification of realized amounts included
in net (loss) -- (177,210)
----------- -----------
Total other comprehensive (loss) -- 124,710
----------- -----------
Comprehensive (loss) $(1,168,525) $ (749,921)
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-3
AUXILIO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2006
(UNAUDITED)
Additional Total
Common Stock Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2005 $ 15,961,410 $ 15,963 $ 15,190,416 $(12,233,519) $ 2,972,860
Common stock issued for services
3,538 3 4,950 -- 4,953
Relative fair value of warrants
issued related to revolving
loan payable -- -- 85,079 -- 85,079
Stock compensation expense for
options and warrants granted to
employees and consultants -- -- 207,169 -- 207,169
Net loss -- -- -- (1,168,525) (1,168,525)
------------ ------------ ------------ ------------ ------------
Balance at March 31, 2006 15,964,948 $ 15,966 $ 15,487,614 $(13,402,044) $2,101,536
============ ============ ============ ============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-4
AUXILIO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31,
----------------------------
2006 2005
------------ ------------
Cash flows used for operating activities:
Net loss $ (1,168,525) $ (625,211)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation 26,387 19,639
Amortization of intangible assets 63,802 93,368
Stock compensation expense for warrants and
options issued to employees and consultants 207,169 --
Stock issued for services 4,953 --
Interest expense related to amortization of
warrants issued 5,474 10,634
Interest expense 2,055 --
Gain on sale of marketable securities (10,448) (403,795)
Changes in operating assets and liabilities:
Accounts receivable 119,403 51,559
Supplies 22,774 99,347
Prepaid and other current assets (55,963) 15,894
Accounts payable and accrued expenses 220,905 (796,796)
Accrued compensation and benefits (79,063) --
Deferred revenue 91,551 (49,586)
------------ ------------
Net cash used for operating
activities (549,526) (1,584,947)
------------ ------------
Cash flows provided by (used for) investing
activities:
Purchases of property and equipment (97,107) (29,975)
Net proceeds from sale of marketable
securities 26,698 896,045
------------ ------------
Net cash provided by (used for)
investing activities (70,409) 866,070
------------ ------------
Cash flows provided by financing activities:
Proceeds from line of credit agreement 250,000 500,000
Borrowings on capital leases -- 14,117
Payments on capital leases (2,435) (353)
Payments on notes payable and long-term debt -- (122,761)
Net proceeds from issuance of common stock -- 1,983,569
Proceeds from exercise of warrants -- 2,250
------------ ------------
Net cash provided by financing
activities 247,565 2,376,822
------------ ------------
Net (decrease) increase in cash and cash equivalents (372,370) 1,657,945
Cash and cash equivalents, beginning of period 664,941 951,090
------------ ------------
Cash and cash equivalents, end of period $ 292,571 $ 2,609,035
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-5
AUXILIO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
Three Months Ended March 31,
---------------------------
2006 2005
------------ ------------
Supplemental disclosure of cash flow information:
Interest paid $ 2,321 $ 10,318
============ ============
Income tax paid -- $ 3,200
============ ============
Non-cash investing and financing activities:
Relative fair value of warrants issued related to $ 85,079 $ 58,029
issuance of note payable ============ ============
Warrants issued for expenses of private placement -- $ 106,846
============ ============
Accrued private placement cost -- $ 16,280
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2006 and 2005
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Auxilio, Inc. and its subsidiaries ("the Company") have been prepared in
accordance with generally accepted accounting principles of the United States of
America for interim financial statements pursuant to the rules and regulations
of the Securities and Exchange Commission. Accordingly, certain information and
footnote disclosures normally included in consolidated financial statements
prepared in accordance with accounting principles have been omitted. These
condensed consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 2005, as
filed with the Securities and Exchange Commission on April 17, 2006.
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 the financial
position and results of operations of the Company 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 accounting
principles generally accepted in the United States of America 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 were prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplate the continuation of the Company as a going concern. The Company
reported a net loss of $1,168,525 for the three months ended March 31, 2006
after a loss of $3,358,784 for the year ended December 31, 2005. Although the
Company reported net income of $993,726 for the year ended December 31, 2004, it
reported a net loss of $3,405,020 for the year ended December 31, 2003 and, at
March 31, 2006, has an accumulated deficit of $13,402,044. This raises
substantial doubt about the Company's ability to continue as a going concern.
The unaudited condensed consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
In April 2006 the Company raised additional working capital through a
$3,000,000 fixed price convertible note agreement with Laurus Master Fund. The
Company believes that such working capital will provide it with the ability to
continue as a going concern for at least the next twelve months. Through March
31, 2006, the Company has not been able to generate sufficient revenues from its
operations to cover its costs and operating expenses. However, the Company
anticipates that its revenues will increase through the sale of additional
product offerings and the growth of the Company's customer base. The Company
believes that the convertible note agreement, the sale of new product offerings
and the growth of its customer base will enable the Company to generate positive
operating cash flows and to continue its operations.
No assurances can be given as to the success of these plans. Although the
Company has been able to raise additional working capital through convertible
note agreements and private placement offerings of its common stock, the Company
may not be able to continue this practice in the future nor may the Company be
able to obtain additional working capital through other debt or equity
financings. In the event that sufficient capital cannot be obtained, the Company
may be forced to significantly reduce operating expenses to a point which would
be detrimental to business operations, business development activities, sell
business assets or discontinue some or all of its business operations, or take
other actions which could be detrimental to business prospects and result in
charges which could be material to its operations and financial position. In the
event that any future financing should take the form of the sale of equity
securities, the current equity holders may experience dilution of their
investments. In addition, the Company may continue to not generate sufficient
revenues from its operations to cover its cash operating expenses. As a result,
the Company may not be able to continue as a going concern. The accompanying
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
The accompanying financial statements include the accounts of the Company
and its wholly owned subsidiaries. All intercompany balances and transactions
have been eliminated.
F-7
2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain
Hybrid Financial Instruments. SFAS No. 155 replaces SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities and SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.
SFAS No. 155 permits fair value measurement for any hybrid financial instrument
that contains an embedded derivative that otherwise would require bifurcation.
It clarifies which interest-only strips and principal-only strips are not
subject to the requirements of SFAS No. 133. SFAS No. 155 also establishes a
requirement to evaluate interests in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation. It also
clarifies that concentrations of credit risk in the form of subordination are
not embedded derivatives and amends SFAS No. 140 to eliminate the prohibition on
a qualifying special-purpose entity from holding a derivative financial
instrument that pertains to a beneficial interest other than another derivative
financial instrument. SFAS No. 155 shall be effective for all financial
instruments acquired or issued after the beginning of an entity's first year
that begins after September 2006 (January 1, 2007 for the Company). The Company
does not expect SFAS No. 155 to have a material impact on its results of
operations and financial position in future periods.
In May 2005, the FASB issued FASB Statement No. 154, Accounting Changes
and Error Corrections. This new standard replaces APB Opinion No. 20, Accounting
Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim
Financial Statements, and represents another step in the FASB's goal to converge
its standards with those issued by the IASB. Among other changes, Statement 154
requires that a voluntary change in accounting principle be applied
retrospectively with all prior period financial statements presented on the new
accounting principle, unless it is impracticable to do so. Statement 154 also
provides that (1) a change in method of depreciating or amortizing a long-lived
nonfinancial asset be accounted for as a change in estimate (prospectively) that
was effected by a change in accounting principle, and (2) correction of errors
in previously issued financial statements should be termed a "restatement." The
new standard is effective for accounting changes and correction of errors made
in fiscal years beginning after December 15, 2005. Early adoption of this
standard is permitted for accounting changes and correction of errors made in
fiscal years beginning after June 1, 2005. The Company does not expect SFAS No.
154 to have a material impact on its results of operations and financial
position in future periods.
3. OPTIONS AND WARRANTS.
Below is a summary of Auxilio stock option and warrant activity during the
three-month period ended March 31, 2006:
Weighted
Weighted Average
Average Remaining Term Aggregate
Shares Exercise Price in Years Intrinsic Value
---------- -------------- -------------- ---------------
Outstanding at December 31, 2005 2,008,497 $ 1.48
Granted 499,000 $ 1.40
Exercised -- --
Cancelled (136,000) $ 1.61
---------- -------------- -------------- ---------------
Outstanding at March 31, 2006 2,371,497 $ 1.46 8.64 $ 692,406
========== ============== -------------- ===============
Exercisable at March 31, 2006 532,055 $ 1.33 7.64 $ 247,524
========== ============== ============== ===============
Weighted
Weighted Average
Average Remaining Term Aggregate
Shares Exercise Price in Years Intrinsic Value
---------- -------------- -------------- ---------------
Warrants
Outstanding at December 31, 2005 1,398,535 $ 1.25
Granted 87,500 $ 1.80
Exercised -- --
Cancelled -- --
---------- -------------- -------------- ---------------
Outstanding at March 31, 2006 1,486,035 $ 1.28 3.37 $ 871,399
========== ============== ============== ===============
Exercisable at March 31, 2006 932,702 $ 1.47 3.42 $ 454,733
========== ============== ============== ===============
During the three months ended March 31, 2006, the Company granted 499,000
options to its employees and directors to purchase shares of the Company's
common stock at an exercise price of $1.40 per share, which exercise price
equals the fair value of such options on the grant date. The options have graded
vesting annually over three years, starting February 2007. 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 4.51%; (ii) estimated volatility of 65.16%; (iii)
dividend yield of 0.0%; and (iv) expected life of the options of three years.
F-8
In March 2006, the Company borrowed $250,000 from Cambria Investment Fund
L.P., a related party, under the Revolving Loan Agreement. This borrowing earned
Cambria the right to receive warrants to purchase 87,500 shares of the Company's
common stock at $1.80, with 17,500 shares vesting for every multiple of $50,000
borrowed under the Revolving Loan Agreement with the Company. The fair value of
the warrant for the 87,500 shares issued in connection with the borrowing was
$128,970. The fair value of the warrant was determined using the Black-Scholes
option-pricing model, with the following assumptions: (i) no expected dividends;
(ii) a risk free interest rate of 4.51%; (iii) expected volatility of 90.41%;
and (iv) an expected life of the warrants of five years. In accordance with APB
14, "Accounting for Convertible Debt and Debt Issued with Stock Purchase
Warrants," the Company has allocated a value of $85,079 to the warrants based on
their relative fair value. Such amount was recorded as a discount against the
carrying value of the note and will be amortized to interest expense over the
life of the note using the straight-line interest method. In April 2006, the
Company paid in full all outstanding principal balance under the Revolving Loan
Agreement.
Beginning January 1, 2006, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 123(R), "Share-Based Payments" ("SFAS No.
123(R)") on a modified prospective transition method to account for its employee
stock options and warrants. Under the modified prospective transition method,
fair value of new and previously granted but unvested equity awards are
recognized as compensation expense in the income statement, and prior period
results are not restated. For the three months ended March 31, 2006, stock-based
compensation expense recognized in the statement of operations as follows
Cost of Revenues $ 40,262
Sales and marketing 57,994
General and administrative expenses 108,913
--------
Total stock based compensation expense $207,169
========
If the Company had accounted for stock-based compensation plans using the
fair value based accounting method described by SFAS No. 123 for the periods
prior to January 1, 2006, the Company's net income per common share-basic and
diluted for the three months ended March 31, 2005, would have been the
following:
Three Months
Ended
March 31,
2005
------------
Net loss:
As reported $ (625,211)
Add: APB 25 Expense --
Deduct: Total stock based employee
compensation expense determined under
SFAS 123 fair value based method 258,714
------------
Net loss, as adjusted $ (883,925)
============
Basic loss per share:
As reported $ (0.04)
Pro forma $ (0.06)
Diluted loss per share:
As reported $ (0.04)
Pro forma $ (0.05)
4. NET LOSS PER SHARE
Basic net income (loss) per share is based on the weighted average number
of shares of the Company's common stock issued and outstanding during a certain
period, and is calculated by dividing net loss by the weighted average number of
shares of the Company's common stock issued and outstanding during such period.
Common stock equivalents consist of 3,857,532 and 3,095,732 equity instruments
at March 31, 2006 and 2005, respectively. None of the equity instruments
outstanding at March 31, 2006 and 2005 have been included in the computation of
diluted EPS for the three months ended March 31, 2006 and 2005 due to the net
loss for these periods, which causes these equity instruments to be
anti-dilutive.
F-9
5. ACCOUNTS RECEIVABLE
As of March 31, 2006, the accounts receivable balance is as follows:
Trade receivable $ 415,471
Allowance for doubtful accounts (46,050)
---------
Total accounts receivable $ 369,421
=========
6. INVESTMENTS IN MARKETABLE SECURITIES
Investments in marketable securities consist of equity securities
classified as "available for sale" under SFAS No. 115 and reported at fair
value. Accordingly, unrealized gains and losses on the equity securities are
reflected in the statement of comprehensive income (loss).
7. FINANCIAL INSTRUMENTS
The carrying amounts of the Company's cash equivalents, accounts
receivable, prepaid expenses, other current assets, accounts payable and accrued
expenses, accrued compensation and benefits and deferred revenue approximate
fair value due to the short-term maturities of those financial instruments.
The rates currently available to the Company on debt with similar terms
and remaining maturities are used to estimate the fair value of existing debt.
8. EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement with Joseph Flynn to
serve as its Chief Executive Officer, effective April 1, 2004. Mr. Flynn's
agreement had a term of two years and provided for a base annual salary of
$165,000. Mr. Flynn may have received an annual bonus if certain earnings and
revenue targets were accomplished. On March 14, 2006, the Company entered into a
new employment agreement with Mr. Flynn. This new agreement was effective
January 1, 2006, has a term of two years, and provides for a base annual salary
of $180,000. Mr. Flynn received 100,000 options and may receive an annual bonus
if certain earnings and revenue targets are accomplished.
Effective April 1, 2004, the Company entered into an employment agreement
with Etienne Weidemann, to serve as President and Chief Operating Officer. Mr.
Weidemann's agreement had a term of two years, and provided for a base annual
salary of $160,000. Mr. Weidemann may have received an annual bonus if certain
earnings and revenue targets were accomplished. On March 15, 2006, the Company
entered into a new employment agreement with Mr. Weidemann. This new agreement
was effective January 1, 2006, has a term of two years, and provides for a base
annual salary of $175,000. Mr. Weidemann received 80,000 options and may receive
an annual bonus if certain earnings and revenue targets are accomplished
On December 10, 2004, the Company entered into an employment agreement
with Paul T. Anthony, to serve as Chief Financial Officer and Corporate
Secretary, effective January 3, 2005. Mr. Anthony's agreement had a term of two
years, and provided for a base annual salary of $155,000. Mr. Anthony received
warrants and may have received an annual bonus if certain earnings and revenue
targets are accomplished. On March 15, 2006, the Company entered into a new
employment agreement with Mr. Anthony. This new agreement was effective January
1, 2006, has a term of two years, and provides for a base annual salary of
$170,000. Mr. Anthony received 75,000 options and may receive an annual bonus if
certain earnings and revenue targets are accomplished.
9. CONCENTRATIONS
The Company's four largest customers accounted for approximately 89% of
the Company's revenues for the three months ended March 31, 2006. Accounts
receivable for these four customers totaled approximately $222,000 as of March
31, 2006. The Company's two largest customers accounted for approximately 78% of
the Company's revenues for the three months ended March 31, 2005.
F-10
10. SEGMENT REPORTING
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." Since the Company operates in one business
segment based on the Company's integration and management strategies, segment
disclosure has not been presented
11. SUBSEQUENT EVENT
In April 2006, the Company entered into a $3,000,000 Fixed Price
Convertible Note (the "Note") agreement with Laurus Master Fund (LMF). The term
of the Note is for three years at an interest rate of Wall Street Journal prime
plus 2.0%. The fixed conversion price to convert the Note to equity will be set
at a premium to the average closing price of the Company's common stock for the
10 days prior to the closing of the transaction based on a tiered schedule
whereby the first third of the investment amount will have a fixed conversion
price of $1.68, the next third will have a fixed conversion price of $1.78, and
the last third will have a fixed conversion price of $1.92. The Company shall
reduce the principal Note by 1/60th per month starting 90 days after the
closing, payable in cash or registered stock.
The Company will file a registration statement for the Company's common
stock underlying the note and all the underlying warrants with the SEC within 60
days of funding and will attempt to have the registration declared effective
within 180 days of funding. The Company shall provide a first lien on all assets
of the Company. The Company will have the option of redeeming any outstanding
principal of the Note by paying to the LMF 120% of such amount, together with
accrued but unpaid interest under this Note. LMF earned fees in the amount of
3.5% of the total investment amount at the time of closing. LMF also received
478,527 warrants to purchase shares of the Company's common stock. The exercise
price of the warrants was $1.96, representing a 120% premium to the average
closing price of the Company's common stock for the 10 days prior to the closing
of the transaction. The warrants have a term of seven years. In addition, the
Company paid loan origination fees to LMF of $105,000.
F-11
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Auxilio, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Auxilio, Inc. and
Subsidiaries as of December 31, 2005, and the related consolidated statements of
operations, comprehensive (loss), stockholders' equity (deficit), and cash flows
for the year ended December 31, 2005. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on the consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Auxilio, Inc. and Subsidiaries as of December 31, 2005, and the consolidated
results of its operations and its cash flows for the year ended December 31,
2005, in conformity with accounting principles generally accepted in the United
States of America.
/s/ HASKELL & WHITE LLP
Irvine, California
March 24, 2006, except for Note 18 as to which the date is April 11, 2006
F-12
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Audit Committee and Board of Directors
Auxilio, Inc. and Subsidiaries
Mission Viejo, California
We have audited the accompanying consolidated statement of operations,
comprehensive income, stockholders' equity (deficit), and cash flows for the
year ended December 31, 2004. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Auxilio. Inc. and
Subsidiaries as of December 31, 2004, and the results of its operations and its
cash flows for the year ended December 31, 2004, in conformity with accounting
principles generally accepted in the United States of America.
/s/Stonefield Josephson, Inc.
CERTIFIED PUBLIC ACCOUNTANTS
Irvine, California
April 5, 2005
F-13
AUXILIO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 2005
ASSETS
Current assets:
Cash and cash equivalents $ 664,941
Accounts receivable, net 488,824
Prepaid and other current assets 91,365
Supplies 443,577
Investment in marketable securities 16,250
------------
Total current assets 1,704,957
Property and equipment, net 210,862
Deposits 41,355
Intangible assets, net 684,344
Goodwill 1,517,017
------------
Total assets $ 4,158,535
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 510,604
Accrued compensation and benefits 322,937
Deferred revenue 298,862
Current portion of long-term debt 16,626
Current portion of capital lease obligations 36,646
------------
Total current liabilities 1,185,675
Commitments and contingencies
Stockholders' equity:
Common stock, par value at $0.001, 33,333,333 shares
authorized, 15,961,410 shares issued and outstanding 15,963
Additional paid-in capital 15,190,416
Accumulated deficit (12,233,519)
------------
Total stockholders' equity 2,972,860
------------
Total liabilities and stockholders' equity $ 4,158,535
============
The accompanying notes are an integral part of these consolidated
financial statements.
F-14
AUXILIO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
----------------------------
2005 2004
------------ ------------
Net Revenues $ 4,290,962 $ 7,281,809
Cost of revenues 3,225,155 4,012,100
------------ ------------
Gross profit 1,065,807 3,269,709
Operating expenses:
Sales and marketing 1,783,196 1,423,106
General and administrative expenses 2,327,497 1,285,576
Intangible asset amortization 482,564 333,092
------------ ------------
Total operating expenses 4,593,257 3,041,774
------------ ------------
(Loss) income from operations (3,527,450) 227,935
------------ ------------
Other income (expense):
Interest expense (148,365) (13,662)
Interest income 35,373 6,148
Other income -- 3,250
Gain on sale of marketable securities 293,083 --
Loss on disposal of property and equipment (8,225) --
------------ ------------
Total other income (expense) 171,866 (4,264)
------------ ------------
(Loss) income before provision for income taxes (3,355,584) 223,671
Income tax expense (benefit) 3,200 (282,160)
------------ ------------
(Loss) income from continuing operations (3,358,784) 505,831
Income from discontinued operations, (including gain
on disposal of $674,942) net of tax expense of $14,000 -- 487,895
------------ ------------
Net (loss) income $ (3,358,784) $ 993,726
============ ============
Net (loss) income per share - basic:
(Loss) income per share - continuing operations $ (0.21) $ 0.04
(Loss) income per share - discontinued operations $ -- $ 0.04
------------ ------------
Net (loss) income per share - basic $ (0.21) $ 0.08
============ ============
Net (loss) income per share - diluted:
(Loss) income per share - continuing operations $ (0.21) $ 0.03
(Loss) income per share - discontinued operations $ -- $ 0.04
------------ ------------
Net (loss) income per share - diluted $ (0.21) $ 0.07
============ ============
Number of weighted average shares outstanding -
Basic 15,623,690 12,729,311
============ ============
Diluted 15,623,690 14,517,617
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
F-15
AUXILIO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
Year Ended December 31,
----------------------------
2005 2004
------------ ------------
Net (loss) income $ (3,358,784) $ 993,726
Holding gain on marketable securities 70,873 222,210
Reclassification adjustment, net of tax (293,083) --
------------ ------------
Comprehensive (loss) income $ (3,580,994) $ 1,215,936
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
F-16
AUXILIO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2005 AND 2004
Additional
Common Stock Paid-in
Shares Amount Capital
------------ ------------ ------------
Balance at January 1, 2004 8,345,766 $ 25,037 $ 9,833,091
Shares issued in private placement, net of
offering costs of $0 1,733,833 1,733 518,417
Shares issued for acquisition 4,000,070 4,000 1,196,022
Shares issued for payables 40,000 120 29,880
Reclass of par value due to reverse stock
split -- (16,769) 16,769
Fair value of warrants issued for services -- -- 3,137
Common stock issued upon exercise of
warrants 318,993 319 238,926
Unrecognized gain on marketable securities -- -- --
Net income -- -- --
------------ ------------ ------------
Balance at December 31, 2004 14,438,662 14,440 11,836,242
Common stock issued in private placement,
net of offering costs of $272,173 1,619,750 1,620 2,965,707
Common stock issued upon exercise of
warrants 3,000 3 2,247
Return of shares issued for acquisition but
unearned (100,002) (100) (29,900)
Relative fair value of warrants issued
related to revolving loans payable -- -- 127,587
Stock compensation expense for options and
warrants granted to employees and
consultants -- -- 288,533
Holding gain on marketable securities -- -- --
Reclassification of realized amount
included in net loss -- -- --
Net loss -- -- --
------------ ------------ ------------
Balance at December 31, 2005 15,961,410 $ 15,963 $ 15,190,416
============ ============ ============
Other Accumulated Total
Accumulated Comprehensive Stockholders'
Deficit Income Equity (Deficit)
------------ ------------- ----------------
Balance at January 1, 2004 $ (9,868,461) $ -- $ (10,333)
Shares issued in private placement, net of
offering costs of $0 -- -- 520,150
Shares issued for acquisition -- -- 1,200,022
Shares issued for payables -- -- 30,000
Reclass of par value due to reverse stock
split -- -- --
Fair value of warrants issued for services -- -- 3,137
Common stock issued upon exercise of
warrants -- -- 239,245
Unrecognized gain on marketable securities -- 222,210 222,210
Net income 993,726 -- 993,726
------------ ------------- ----------------
Balance at December 31, 2004 (8,874,735) 222,210 3,198,157
Common stock issued in private placement,
net of offering costs of $272,173 -- -- 2,967,327
Common stock issued upon exercise of
warrants -- -- 2,250
Return of shares issued for acquisition but
unearned -- -- (30,000)
Relative fair value of warrants issued
related to revolving loans payable -- -- 127,587
Stock compensation expense for options and
warrants granted to employees and
consultants -- -- 288,533
Holding gain on marketable securities -- 70,873 70,873
Reclassification of realized amount
included in net loss -- (293,083) (293,083)
Net loss (3,358,784) -- (3,358,784)
------------ ------------- ----------------
Balance at December 31, 2005 $(12,233,519) $ -- $ 2,972,860
============ ============= ================
The accompanying notes are an integral part of these consolidated
financial statements.
F-17
AUXILIO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
----------------------------
2005 2004
------------ ------------
Cash flows (used for) provided by operating activities:
Net (loss) income $ (3,358,784) $ 993,726
Adjustments to reconcile net (loss) income to net cash (used for)
provided by operating activities:
Depreciation 84,423 47,264
Amortization of intangible assets 482,564 333,092
Bad debt (recoveries) expense (4,449) 12,755
Deferred tax benefit -- (300,000)
Loss on disposal of property and equipment 8,225 --
Gain on sale of certain assets -- (668,441)
Gain on sale of marketable securities (293,083) --
Interest expense related to warrants issued 127,587 3,137
Options issued for professional services 288,533 --
Changes in operating assets and liabilities:
Accounts receivable (243,177) (201,852)
Supplies (33,791) (251,272)
Prepaid and other current assets (30,857) 20,346
Deposits 15,040 (29,040)
Accounts payable and accrued expenses (687,223) 809,186
Accrued compensation and benefits (332,581) (227,515)
Lease buy-out provision (32,196) 32,196
Deferred revenue 339 81,585
------------ ------------
Net cash (used for) provided by operating activities (4,009,430) 655,167
------------ ------------
Cash flows provided by (used for) investing activities:
Purchases of property and equipment (60,042) (152,358)
Payment for purchase of Mayo Group, net of cash acquired -- (550,613)
Proceeds from sale of certain assets -- 250,000
Net proceeds from sale of marketable securities 979,311 --
------------ ------------
Net cash provided by (used for) investing activities 919,269 (452,971)
------------ ------------
Cash flows provided by financing activities:
Proceeds from line of credit 500,000 --
Repayments on line of credit (500,000) --
Payments on capital leases (5,947) --
Payments on notes payable and long-term debt (159,618) (236,899)
Net proceeds from issuance of common stock 2,967,327 520,150
Proceeds from exercise of warrants 2,250 239,245
------------ ------------
Net cash provided by financing activities 2,804,012 522,496
------------ ------------
Net (decrease) increase in cash and cash equivalents (286,149) 724,692
Cash and cash equivalents, beginning of year 951,090 226,398
------------ ------------
Cash and cash equivalents, end of year $ 664,941 $ 951,090
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
F-18
AUXILIO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year Ended December 31,
---------------------------
2005 2004
------------ ------------
Supplemental disclosure of cash flow information:
Interest paid $ 20,778 $ 12,415
============ ============
Income tax paid $ 70,373 $ 800
============ ============
Non-cash investing and financing activities:
Fair value of warrants issued in private placement offering $ (159,445) $ --
============ ============
Return of stock issued in conjunction with acquisition but unearned $ (30,000) $ --
============ ============
Net assets acquired (liabilities assumed), net of bank overdraft,
through acquisition of Alan Mayo and Associates, Inc. $ -- $ (181,254)
============ ============
Stock and note payable issued in conjunction with acquisition $ -- $ 2,015,150
============ ============
Stock issued for payables $ -- $ 30,000
============ ============
Options and warrants issued for services $ 18,200 $ 3,137
============ ============
Deferred tax liability incurred related to intangibles from acquisition $ -- $ (300,000)
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
F-19
AUXILIO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
(1) Summary of Significant Accounting Policies
Business Activity
The origins of the Company date back to January of 2002, when the Company's
predecessor e-Perception Technologies, Inc. (e-Perception), a Human Resources
software concern, completed a tender offer with Corporate Development Centers,
Inc. (CDC). CDC's common stock traded on the OTC Bulletin Board. In connection
with the tender offer, the stockholders of e-Perception received one (1) share
of CDC for each four (4) shares of e-Perception common stock they owned prior to
the tender offer. As a result, e-Perception became a wholly owned subsidiary of
CDC. CDC subsequently changed its name to e-Perception, Inc. Approximately
eighteen months later e-Perception changed its name to PeopleView, Inc.
(PeopleView) and traded under the symbol PPVW. Subsequent to that name change
PeopleView, Inc. changed its name to Auxilio, Inc. (Auxilio). The stock now
trades under the symbol AUXO.OB.
In March 2004, PeopleView entered into an asset purchase and sale agreement with
Workstream, Inc. (NASDQ:WSTM) (Workstream) whereby the Company sold to
Workstream essentially all of its assets, including its software products and
related intellectual property, its accounts receivable, certain computer
equipment, customer lists, and the PeopleView name, among other things. Pursuant
to an addendum to the original agreement, the final consideration the Company
received was cash equal to $250,000, 246,900 shares of Workstream common stock,
and a warrant to purchase an additional 50,000 shares at an exercise price of
$3.00 per share. The business operations of PeopleView were discontinued as of
March 2004.
On April, 1, 2004, PPVW Acquisition Company (PPVW), a wholly owned subsidiary of
PeopleView, completed the acquisition of Alan Mayo and Associates, Inc. dba The
Mayo Group (and referred to herein as TMG). TMG offered outsourced Image
Management services to healthcare facilities throughout California, and this
acquisition forms the basis for Auxilio's current operations. Subsequent to the
acquisition of TMG, PeopleView changed its name to Auxilio, Inc. and changed
PPVW's name to Auxilio Solutions, Inc.
Basis of Presentation
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplate continuation of the Company as a going concern. The Company has
reported a net loss of $3,358,784 for the year ended December 31, 2005 and has
an accumulated deficit of $12,233,519 as of December 31, 2005. The Company
reported net income of $993,726 for the year ended December 31, 2004. The
Company has working capital of $519,282 as of December 31, 2005.
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All intercompany balances and transactions have
been eliminated.
As a result of the acquisition of TMG and disposal of the Company's previous
product offering to Workstream, the financial statements for the year ended
December 31, 2005, are not comparable, from a business activity viewpoint, to
the financial statements for the year ended December 31, 2004.
Liquidity
The Company has incurred significant operating losses and cash outflows from
operations of approximately $3,527,000 and $4,009,000 for the fiscal year ended
December 31, 2005, respectively. The Company expects to incur additional losses
and negative cash flow from operations in fiscal 2006.
In November 2005, the Company entered into a Loan and Security Agreement with
Cambria Investment Fund, L.P. Under the agreement, the Company can borrow up to
$500,000. The Company also added three new customers in the fourth quarter of
2005 and signed its largest customer contract to date in March 2006. There is
also the expectation of signing additional customer contracts throughout 2006.
As further described in Note 18, the Company entered into a $3,000,000 Fixed
Price Convertible Note agreement with Laurus Master Fund (LMF). It is
anticipated by Management that these measures will allow the Company to reach
positive cash flow by the end of 2006.
F-20
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and 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. Actual results could differ from those estimates.
Revenue Recognition
Revenue is recognized pursuant to applicable accounting standards including
Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) No. 101
(SAB 101), "Revenue Recognition in Financial Statements", and SAB 104, "Revenue
Recognition". SAB 101 as amended and SAB 104 summarize certain points of the SEC
staff's views in applying generally accepted accounting principles to revenue
recognition in financial statements and provides guidance on revenue recognition
issues in the absence of authoritative literature addressing a specific
arrangement or a specific industry. The Company's revenue recognition policy
complies with the requirements of SAB 101 and SAB 104. Revenues from equipment
sales transactions are earned upon equipment being accepted by the customer. For
equipment that is to be placed at the customers location at a future date
revenue is deferred until that equipment is placed. Monthly service and supply
revenue is earned monthly during the term of the contract, as services and
supplies are provided monthly. Overages as defined in the contract are billed to
customers monthly and are earned when the number of images in any period exceeds
the number allowed for in the contract.
When the Company enters into arrangements that include multiple deliverables,
which typically consist of the sale of equipment, reserve for replacement of
future equipment and a support services contract. Pursuant to Emerging Issues
Task Force EITF 00-21: "Revenue Arrangements with Multiple Deliverables" ("ETIF
00-21"), the Company accounts for each element within an arrangement with
multiple deliverables as separate units of accounting. Revenue is allocated to
each unit of accounting using the residual method, which allocates revenue to
each unit of accounting based on the fair value of the undelivered items,
provided that the Company can establish vendor - specific objective evidence of
fair value.
Deferred Revenue
Deferred revenue is an estimate of revenue expected to be earned in the future
under the equipment contracts for additional equipment (printers and faxes) to
be placed at the customer's location that has been included in the original
contract amount. This additional equipment is identified by the Company at the
start of a contract. Deferred revenue also includes proceeds received in excess
of the residual value assigned to equipment from multiple deliverable sales,
which is amortized over the expected term of the related service contract in
accordance with ETIF 00-21.
Cash and Cash Equivalents
For purposes of the statement of cash flows, cash equivalents include all highly
liquid debt instruments with original maturities of three months or less which
are not securing any corporate obligations.
Accounts Receivable
The Company provides an allowance for doubtful accounts equal to the estimated
uncollectible amounts. The Company's estimate is based on historical collection
experience and a review of the current status of trade accounts receivable. It
is reasonably possible that the Company's estimate of the allowance for doubtful
accounts will change. Accounts receivable are presented net of an allowance for
doubtful accounts of $27,009 at December 31, 2005.
F-21
Investments in Marketable Securities
Investments in marketable securities consist of equity securities classified as
"available for sale" under Statements of Financial Accounting Standards No. 115
and reported at fair value. Accordingly, unrealized gains and losses on the
equity securities are reflected in the statements of comprehensive income.
Supplies
Supplies consist of parts and supplies for the automated office equipment,
including copiers, facsimile machines and printers. Supplies are valued at the
lower of cost or market value on a first-in, first-out basis.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation.
Depreciation of the property and equipment is provided using the straight-line
method over the assets' estimated economic lives, which range from 2 to 7 years.
Expenditures for maintenance and repairs are charged to expense as incurred.
Intangible Assets
Under Statement of Financial Accounting Standard (SFAS) No. 142 (SFAS 142),
"Goodwill and Other Intangible Assets", goodwill and intangible assets with
indefinite lives are no longer amortized, but the remaining useful lives are
reviewed at least annually for impairment. In order to measure any impairment,
the Company evaluates whether there were any events or circumstances that have
occurred that may affect the carrying amount of the intangible. This testing
includes the determination of the fair value of the reporting unit. If the value
of the asset exceeds the fair value of the reporting unit, then the Company
would estimate the undiscounted cash flows from continuing to use the asset and
compare that amount to the assets carrying amount. If the carrying amount of the
asset is greater than the expected future cash flows then an impairment loss
would be recognized. The result of this testing indicated that a goodwill
impairment charge was not necessary. Separately identified intangibles that are
deemed to have definite lives will continue to be amortized over their useful
life, with no maximum life.
Long-Lived Assets
In accordance with SFAS Nos. 142 and 144, long-lived assets to be held and used
are analyzed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. SFAS No. 142
relates to assets with an indefinite life whereas SFAS 144 relates to assets
that can be amortized and the life determinable. The Company evaluates at each
balance sheet date whether events and circumstances have occurred that indicate
possible impairment. If there are indications of impairment, the Company uses
future undiscounted cash flows of the related asset or asset grouping over the
remaining life in measuring whether the assets are recoverable. In the event
such cash flows are not expected to be sufficient to recover the recorded asset
values, the assets are written down to their estimated fair value. Long-lived
assets to be disposed of are reported at the lower of carrying amount or fair
value of asset less the cost to sell.
Lease Buy-Out Provision
Lease buy-out provision consists of amounts expected to be paid to third party
lessors on equipment currently located at new customer's locations. The Company
may buy-out existing lease agreements at a customer's location if it is
beneficial to the Company to do so. This liability represents an estimate of the
amounts that are to be paid to end the current lease agreements that certain
customers have.
Advertising
The Company expenses advertising costs when incurred. For the first quarter of
2004, advertising expenses are included in discontinued operations. Advertising
expense totaled $4,174 and $3,152, respectively, for the years ended December
31, 2005 and 2004.
F-22
Research and Development
Pursuant to the Workstream transaction, the Company no longer incurs research
and development expenses. For the first quarter of 2004, research and
development expenses consisted of personnel expenses and associated overhead and
are included in discontinued operations. Research, development, and engineering
costs were expensed in the year incurred. These costs were $46,249 for the first
quarter of 2004. Auxilio is not involved in research and development activities
as the Company has changed it business pursuant to the acquisition of TMG.
Income Taxes
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.
Fair Value of Financial Instruments
The carrying amount of the Company's cash and cash equivalents, accounts
receivable, notes payable, deferred revenue, accounts payable, and accrued
expenses, none of which is held for trading, approximates their estimated fair
values due to the short-term maturities of those financial instruments.
Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for the
reporting and display of comprehensive income and its components in the
financial statements. The Company had unrecognized gains on marketable
securities of $222,210 as of December 31, 2004 and none as of December 31, 2005
(See Note 3).
Stock-Based Compensation
The Company accounts for employee stock options in accordance with Accounting
Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to
Employees." Under APB 25, the Company does not recognize compensation expense
related to options issued under the Company's employee stock options plans,
unless the option is granted at a price below fair value on the date of grant.
For non-employee stock based compensation, the Company recognizes an expense in
accordance with Statement of Financial Accounting Standards No. 123 (Accounting
for Stock-Based Compensation) (SFAS 123) and values the equity securities based
on the fair value of the security on the date of grant. For stock-based awards,
the value is based on the market value for the stock on the date of grant and if
the stock has restrictions as to transferability, a discount is provided for
lack of tradability. Stock option awards are valued using the Black-Scholes
option-pricing model.
Since the Company elected to follow APB 25 for its employee stock options, no
compensation expense is recognized in the accompanying financial statements as
the exercise price of the Company's employee stock options equals the market
price of the Company's common stock on the date of grant. If under SFAS 123 the
Company determined compensation costs based on the fair value at the grant date
for its stock options, net income (loss) and income (loss) per share would have
been as follows:
F-23
2005 2004
-------------- --------------
Net (loss) income:
As reported $ (3,358,784) $ 993,726
Add: APB 25 Expense -- --
-------------- --------------
Deduct: Total stock based employee
compensation expense determined
under SFAS 123 fair value based method 669,913 414,203
-------------- --------------
Pro forma $ (4,028,697) $ 579,523
============== ==============
Basic (loss) income per share:
As reported $ (0.21) $ 0.08
Pro forma $ (0.26) $ 0.05
Diluted (loss) income per share:
As reported $ (0.21) $ 0.07
Pro forma $ (0.26) $ 0.04
The weighted average estimated fair value of stock options granted during 2005
and 2004 was $1.96 and $0.82 per share, respectively. These amounts were
determined using the Black-Scholes option-pricing model, which values options
based on the stock price at the grant date, the expected life of the option, the
estimated volatility of the stock, the expected dividend payments, and the
risk-free interest rate over the expected life of the option. The assumptions
used in the Black-Scholes model were as follows for stock options granted in
2005 and 2004:
2005 2004
---------------- ---------------
Risk-free interest rate 2.75% to 4.00% 1.25% to 2.67%
Expected volatility of common stock 58.13% to 80.47% 210.13% to 253.54%
Dividend yield 0% 0%
Expected life of options 5 years 1 year
The Black-Scholes option valuation model was developed for estimating the fair
value of traded options that have no vesting restrictions and are fully
transferable. Because option valuation models require the use of subjective
assumptions, changes in these assumptions can materially affect the fair value
of the options. The Company's options do not have the characteristics of traded
options; therefore, the option valuation models do not necessarily provide a
reliable measure of the fair value of its options.
Basic and Diluted Loss Per Share
In accordance with SFAS No. 128, "Earnings Per Share," the basic earnings per
common share is computed by dividing net income available to common stockholders
by the weighted average number of common shares outstanding. Diluted earnings
per common share is computed similarly to basic earnings per common share,
except that the denominator is increased to include the number of additional
common shares that would have been outstanding if the potential common shares
had been issued and if the additional common shares were anti-dilutive. At
December 31, 2005 and 2004, the Company had approximately 3,407,032 and
2,598,535, respectively, of common stock equivalents, of which 3,407,032 and
107,211 have not been included in the computation of diluted earnings per share
as their effect would be anti-dilutive.
Segment Reporting
Based on the Company's integration and management strategies, the Company
operated in a single business segment. For the years ended December 31, 2005 and
2004, all revenues have been derived from domestic operations.
F-24
New Accounting Pronouncements
In March 2004, the FASB approved the consensus reached on the Emerging Issues
Task Force (EITF) Issue No. 03-1, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments." The objective of this
Issue is to provide guidance for identifying impaired investments. EITF 03-1
also provides new disclosure requirements for investments that are deemed to be
temporarily impaired. In September 2004, the FASB issued a Staff Position (FSP)
EITF 03-1-1 that delays the effective date of the measurement and recognition
guidance in EITF 03-1 until after further deliberations by the FASB. The
disclosure requirements are effective only for annual periods ending after June
15, 2004. The Company has evaluated the impact of the adoption of the disclosure
requirements of EITF 03-1 and does not believe the impact will be significant to
the Company's overall results of operations or financial position. Once the FASB
reaches a final decision on the measurement and recognition provisions, the
Company will evaluate the impact of the adoption of EITF 03-1.
In November 2004, the SFAS issued SFAS No. 151, "Inventory Costs, an amendment
of ARB No. 43, Chapter 4". The amendments made by Statement 151 clarify that
abnormal amounts of idle facility expense, freight, handling costs, and wasted
materials (spoilage) should be recognized as current period charges and require
the allocation of fixed production overheads to inventory based on the normal
capacity of the production facilities. The guidance is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. Earlier
application is permitted for inventory costs incurred during fiscal years
beginning after November 23, 2004. The Company has evaluated the impact of the
adoption of SFAS 151, and does not believe the impact will be significant to the
Company's overall results of operations or financial position.
In December 2004, the SFAS issued SFAS No.153, "Exchanges of Nonmonetary Assets,
an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions."
The amendments made by Statement 153 are based on the principle that exchanges
of nonmonetary assets should be measured based on the fair value of the assets
exchanged. Further, the amendments eliminate the narrow exception for
nonmonetary exchanges of similar productive assets and replace it with a broader
exception for exchanges of nonmonetary assets that do not have commercial
substance. Previously, Opinion 29 required that the accounting for an exchange
of a productive asset for a similar productive asset or an equivalent interest
in the same or similar productive asset should be based on the recorded amount
of the asset relinquished. Opinion 29 provided an exception to its basic
measurement principle (fair value) for exchanges of similar productive assets.
The Board believes that exception required that some nonmonetary exchanges,
although commercially substantive, be recorded on a carryover basis. By focusing
the exception on exchanges that lack commercial substance, the Board believes
this Statement produces financial reporting that more faithfully represents the
economics of the transactions. The Statement is effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges occurring in fiscal
periods beginning after the date of issuance. The provisions of this Statement
shall be applied prospectively. The Company has evaluated the impact of the
adoption of SFAS 152, and does not believe the impact will be significant to the
Company's overall results of operations or financial position.
In December 2004, the FASB issued SFAS No.123 (revised 2004), "Share-Based
Payment". Statement 123(R) will provide investors and other users of financial
statements with more complete and neutral financial information by requiring
that the compensation cost relating to share-based payment transactions be
recognized in financial statements. That cost will be measured based on the fair
value of the equity or liability instruments issued. Statement 123(R) covers a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. Statement 123(R) replaces SFAS Statement No. 123,
Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. Statement 123, as originally issued in
1995, established as preferable a fair-value-based method of accounting for
share-based payment transactions with employees. However, that Statement
permitted entities the option of continuing to apply the guidance in Opinion 25,
as long as the footnotes to financial statements disclosed what net income would
have been had the preferable fair-value-based method been used. The Company will
be required to apply Statement 123(R) as of January 1, 2006. The Company has
evaluated the impact of the adoption of SFAS 123(R), and believes that
stock-based compensation will increase significantly.
F-25
In March 2005, the FASB issued Staff Accounting Bulletin No. 107 (SAB 107) which
provides additional guidance to the new stock option expensing provisions under
SFAS 123(R). SAB 107 acknowledges that fair value estimates cannot predict
actual future events and as long as the estimates are made in good faith, they
will not be subsequently questioned no matter what the actual outcome.
Historical volatility should be measured on an unweighted basis over a period
equal to or longer than the expected option term or contractual term, depending
on the option-pricing model that is used. Implied volatility is based on the
market prices of a company's traded options or other financial instruments with
option-like features, and is derived by entering the market price of the traded
option into a closed-form model and solving for the volatility input. SAB 107
provides additional guidance for companies when estimating an option's expected
term. In general, companies are not allowed to consider additional term
reduction and the option term cannot be shorter than the vesting period.
Companies are permitted to use historical stock option exercise experience to
estimate expected term if it represents the best estimate for future exercise
patterns. SAB 107 provides that companies should enhance MD&A disclosures
related to equity compensation subsequent to adoption of Statement 123(R). SAB
107 provided that companies should provide all disclosures required by Statement
123 (R) in the first 10-Q filed after adoption of the new rules.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" (SFAS 154). SFAS 154 replaces the Accounting Principles Board
Opinion No. 20, "Accounting Changes" and SFAS No. 3, "Reporting Accounting
Changes in Interim Financial Statements," to require retrospective application
to prior periods' financial statements of changes in accounting principle. The
provisions of SFAS 154 are effective for accounting changes made in fiscal years
beginning after December 15, 2005. The adoption of SFAS 154 is not expected to
have a material effect on the Company's financial statements.
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments. SFAS No. 155 replaces SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities and SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.
SFAS No. 155 permits fair value measurement for any hybrid financial instrument
that contains an embedded derivative that otherwise would require bifurcation.
It clarifies which interest-only strips and principal-only strips are not
subject to the requirements of SFAS No. 133. SFAS No. 155 also establishes a
requirement to evaluate interests in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation. It also
clarifies that concentrations of credit risk in the form of subordination are
not embedded derivatives and amends SFAS No. 140 to eliminate the prohibition on
a qualifying special-purpose entity from holding a derivative financial
instrument that pertains to a beneficial interest other than another derivative
financial instrument. SFAS No. 155 shall be effective for all financial
instruments acquired or issued after the beginning of an entity's first year
that begins after September 2006 (January 1, 2007 for the Company). The Company
does not expect SFAS No. 155 to have a material impact on its results of
operations and financial position in future periods.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
(2) Acquisition
On April 1, 2004, PPVW Acquisition Company, a wholly owned subsidiary of the
Company, completed an acquisition of Alan Mayo and Associates, Inc., dba The
Mayo Group (TMG). TMG provides outsourced document image management services to
the healthcare industry. The purchase price was as follows: $255,000 cash and
1,700,030 shares of common stock (post split) upon closing; $45,000 placed in an
indemnity escrow account; 300,005 shares of common stock (post split) placed in
the indemnity escrow account, 2,000,035 shares of common stock (post split) to
be put in an escrow account as contingency based on certain earn-out and a note
payable in the amount of $315,000 due April 15, 2005 also subject to certain
earnout provisions. The value of the common stock issued was determined based on
the price of the Company's common stock in the March 2004 private placement of
$0.30 per share (post split). This value is more indicative of the fair market
value of the stock due to the stock being thinly traded and the shares being
issued in the acquisition have trading restrictions that are similar to those on
the shares sold in the private placement. All contingent amounts from the
original agreement have subsequently been paid (both cash and stock). Therefore
the amounts are included in the purchase price as is required under SFAS 141. In
addition to the above amounts, the Company has included severance payments
totaling $465,500. Other acquisition costs totaling $264,174 have also been
included in the purchase price.
F-26
Based on a valuation performed as of the acquisition date, the purchase price
has been allocated as follows:
Purchase Price:
Cash:
Originally paid $ 255,000
Contingent 45,000
Note payable 315,000
Stock at FMV:
Originally paid 510,009
Contingent 690,013
Expenses related to acquisition:
Legal and accounting 264,174
Severance 465,500
-----------
Total fair value of purchase price $ 2,544,696
===========
Assets Purchased:
Accounts receivable $ 158,178
Supplies 158,514
Prepaids 30,788
Deposits 27,355
Property and equipment 52,793
Intangible assets:
Non-compete agreements 300,000
Customer relationships 850,000
Backlog 350,000
Goodwill 1,547,017
-----------
Total assets purchased $ 3,474,645
===========
Less Liabilities Assumed:
Bank overdraft $ (21,067)
Accounts payable (391,944)
Deferred revenue (216,938)
Deferred tax liabilities (300,000)
-----------
Total liabilities assumed $ (929,949)
===========
The combination is being accounted for as a purchase as defined by Statement of
Financial Accounting Standards No. 141, Business Combinations. The final
allocation of the excess purchase price over net tangible assets was determined
based on an independent appraisal of the assets purchased. The values assigned
to intangible assets, aside from goodwill, are subject to amortization. The
intangible assets were assigned the following lives for amortization purposes:
Life in
Intangible Assets Years
- ----------------- --------
Non-compete agreements 2.75
Customer relationships 5.00
Backlog 5.00
F-27
Goodwill was not assigned a life and will be tested at least annually for
impairment.
During the year ended December 31, 2005, 100,002 shares of the Company's common
stock was returned to the Company, and as a result, goodwill was reduced by
$30,000.
The following unaudited pro forma financial information presents the
consolidated operations of the Company as if the acquisition had occurred as of
the beginning of 2004. This information is provided for the illustrative
purposes only, and is not necessarily indicative of the operating results that
would have occurred had the acquisition been consummated at the beginning of
2004, nor is it necessarily indicative of any future operating results. The
weighted average shares outstanding have been calculated to include the shares
issued in the acquisition as if the acquisition took place at the beginning of
2004.
2004
-------------
Revenues $ 7,891,691
=============
Net income (loss) from continuing operations $ 223,558
=============
Income (loss) per share
Basic $ 0.02
Diluted $ 0.02
(3) Discontinued Operations
In March 2004, the Company entered into an agreement with Workstream, Inc.
whereby the Company sold to Workstream the following: accounts receivable,
certain computer equipment, customer list, existing customer contracts, the
PeopleView name, and the technology and product offerings that had been recently
revised and improved, including ClimateSight(TM), SkillSight(TM),
PerformanceSight(TM), ComplianceSight(TM) and HCM TOOLS(TM), essentially the
operations of e-Perception Technologies, Inc.
The original agreement called for the Company to receive cash consideration of
$300,000, of which $50,000 was subject to certain "hold back" conditions.
Additionally, the Company was to receive 350,000 shares of Workstream common
stock, of which 50,000 shares were subject to certain "hold back" conditions,
and a warrant to purchase an additional 50,000 shares at an exercise price of
$3.00 per share. Pursuant to an Addendum to the original Agreement, the final
consideration the Company received was cash of $250,000, 246,900 shares of
Workstream common stock, and a warrant to purchase an additional 50,000 shares
at an exercise price of $3.00 per share.
(4) Accounts Receivable
A summary as of December 31, 2005 is as follows:
Trade $ 486,328
Earned and uninvoiced revenue 29,505
Allowance for doubtful accounts (27,009)
---------
$ 488,824
=========
F-28
(5) Property and Equipment
A summary as of December 31, 2005 is as follows:
Furniture and fixtures $ 37,687
Computers and office equipment 259,568
Fleet equipment 74,557
Leasehold improvements 25,202
---------
397,014
Less accumulated depreciation and
amortization (186,152)
---------
$ 210,862
=========
Depreciation and amortization expense for property, equipment, and improvements
amounted to $84,423 and $47,264 for the years ended December 31, 2005 and 2004,
respectively.
(6) Intangible Assets and Goodwill
SFAS No. 142 requires that amortization of goodwill and indefinite life
intangibles be discontinued and replaced with periodic review and analysis for
possible impairment. Intangible assets with definite lives must be amortized
over their estimated useful lives.
During 2004, as a result of the acquisition of TMG, intangible assets of
$3,047,017 were acquired. This amount was reduced by $30,000 in 2005 for the
return of stock issued in conjunction with acquisition that were subsequently
determined to be unearned. A third party valuation was obtained to determine how
much, if any, of the excess of purchase price over assets acquired and
liabilities assumed should be allocated to identifiable intangible assets versus
goodwill.
The following intangible assets with definite lives were identified and are
being amortized:
Customer relationships 850,000
Backlog 350,000
-----------
1,200,000
Less accumulated amortization (515,656)
-----------
$ 684,344
===========
In 2005, management evaluated the intangible assets and their respective useful
lives. It was determined by management that the non-compete agreements no longer
held value due, and as a result, the unamortized balance related to the
non-compete agreements was accelerated and charged to expense in 2005. The
amortization schedule of all other amortizable intangible assets did not change.
Amortization expense for intangible assets amounted to $482,564 and
$333,092 for the years ended December 31, 2005 and 2004, respectively. The
estimated aggregate amortization expense for each of the five succeeding
years is as follows:
December 31
2006 255,206
2007 238,165
2008 190,973
Accumulated amortization for the year ended December 31, 2005 is as
follows:
Customer relationships 340,000
Backlog 175,654
--------
Total $515,654
========
F-29
(7) Notes Payable
As part of the acquisition of TMG, the Company entered into note payable
agreements with the stockholders of TMG. Two of the notes did not bear interest
and were paid in full in 2005. The third agreement bears interest at 8% per
annum. This note was paid in full in 2005.
(8) Line of Credit
On December 28, 2004, the Company entered into a Revolving Loan and Security
Agreement (the Revolving Loan) with Michael D. Vanderhoof, a director of the
Company. Under the agreement, (i) the Company can borrow up to $500,000, (ii)
cash is advanced to the Company by Mr. Vanderhoof upon six (6) business days
advance written notice, (iii) interest accrues daily upon any unpaid principal
balance at the rate of eight percent (8%) per annum, (iv) accrued interest is
payable in full on a monthly basis and (v) the outstanding principal balance is
due and payable in full on December 10, 2005. The Revolving Loan is secured by
all of the Company's inventory, accounts receivable, equipment, cash, deposit
accounts, securities, intellectual property, chattel paper, general intangibles
and instruments, now existing or hereafter arising, and all proceeds thereof. In
consideration for entering into the Revolving Loan, Mr. Vanderhoof also received
warrants to purchase 50,000 shares of the Company's common stock equal to 10% of
the highest amount outstanding at an exercise price of $2.00 per share. As of
March 31, 2005, the Company had borrowed $500,000 under the Revolving Loan.
During the three months ended March 31, 2005, the Company issued 50,000 warrants
to Mr. Vanderhoof, with a fair value of $65,648. The fair value of the warrants
was determined using the Black-Scholes option-pricing model, with the following
assumptions: (i) no expected dividends; (ii) a risk free interest rate of 2.75%;
(iii) expected volatility of 80.47%; and (iv) an expected life of the warrants
of five years. In accordance with APB 14, "Accounting for Convertible Debt and
Debt Issued with Stock Purchase Warrants," the Company has compared the relative
fair value of the warrants and the face value of the note and has allocated a
value of $58,029. Such amount was recorded as a discount against the carrying
value of the note and was amortized to interest expense over the life of the
note using the straight-line interest method. In April 2005, the Company paid in
full all outstanding principal balance under the Revolving Loan, and all
remaining unamortized discount was immediately expensed.
In November 2005, the Company entered into a Loan and Security Agreement (the
Loan) with Cambria Investment Fund, L.P. Michael D. Vanderhoof, a director of
the Company is a principal in Cambria Investment Fund. Under the agreement, (i)
the Company can borrow up to $500,000, (ii) cash is advanced in $50,000
increments to the Company by Cambria Investment Fund L.P. upon request, (iii)
interest accrues daily upon any unpaid principal balance at the rate of twelve
percent (12%) per annum, (iv) accrued interest is payable in full on a quarterly
basis and (v) the outstanding principal balance is due and payable in full on
March 15, 2007. The Loan is secured by all of the Company's inventory, accounts
receivable, equipment, cash, deposit accounts, securities, intellectual
property, chattel paper, general intangibles and instruments, now existing or
hereafter arising, and all proceeds thereof. In the event that the Company
completes any future public or private placement offering which results in net
proceeds in excess of $3,000,000, Cambria Investment Fund L.P. may demand
repayment of the Loan. In consideration for entering into the Loan, Cambria
Investment Fund L.P. also receives warrants to purchase up to 250,000 shares of
the Company's common stock at the market price upon execution, with 75,000
shares vesting upon the execution of the warrant agreement and 17,500 shares
vesting for every multiple of $50,000 borrowed under the Revolving Loan
Agreement with the Company. The fair value of the warrant for the 75,000 shares
issued in connection with the execution of the warrant agreement was $69,551.
The fair value of the warrant was determined using the Black-Scholes
option-pricing model, with the following assumptions: (i) no expected dividends;
(ii) a risk free interest rate of 3.98%; (iii) expected volatility of 56.93%;
and (iv) an expected life of the warrants of five years. Such amount was
recorded as interest expense. As of December 31, 2005, there were no borrowings
from this loan and Security Agreement.
(9) Long-Term Debt
The Company has an unsecured note payable to a vendor payable in monthly
installments of $2,104 including interest. The loan was due June 2004. The
outstanding balance was $16,626 and $18,467 at December 31, 2005 and 2004,
respectively.
F-30
(10) Equity Transactions
In February 2005, the Company commenced a private placement offering of up to
2,500,000 shares of its common stock at a purchase price of $2.00 per share. The
Company closed the offering on July 30, 2005, selling 1,619,750 shares,
receiving net proceeds of $2,967,327. Total costs relating to the private
placement offering were $431,618, which amount includes an expense of $159,445
relating to the fair value of the warrants issued to the selling group. The fair
market value of the warrants was determined using the Black Scholes pricing
model (See note 11 for the fair value assumptions used).
On May 12, 2004, stockholders approved a proposal to amend the Company's
Articles of Incorporation effecting a one-for-three (1:3) reverse split of the
Company's common stock and to reduce the number of shares of authorized common
stock from 100,000,000 shares to 33,333,333 shares. All references to common
stock/shares are reflected post split.
In March 2004, the Company initiated a private placement of its common
stock at a purchase price of $0.30 per share. As of May 15, 2004, the Company
closed the offering, selling 1,733,833 shares, with net proceeds of $520,150.
In December 2004, 318,993 warrants were exercised for total proceeds of
$239,245.
(11) Warrants
The warrant activities for the years ended December 31, 2004 and 2005
follow:
Weighted
Average
Number Exercise
of Shares Price
------------ ------------
Outstanding at January 1, 2004 510,948 $ 1.29
Granted in 2004 1,045,000 $ 0.82
Exercised in 2004 (318,993) $ 0.75
------------ ------------
Outstanding at December 31, 2004 1,236,955 $ 1.04
============ ============
Granted in 2005 254,580 $ 2.28
Exercised in 2005 (3,000) $ 0.75
Cancelled in 2005 (90,000) $ 1.30
------------ ------------
Outstanding at December 31, 2005 1,398,535 $ 1.25
============ ============
Warrants exercisable at December 31, 2004 196,955 $ 2.18
============ ============
Warrants exercisable at December 31, 2005 845,202 $ 1.44
============ ============
The following tables summarize information about warrants outstanding and
exercisable at December 31, 2005:
Exercisable
Weighted Outstanding Warrants
Average Warrants Weighted
Range of Number of Remaining in Weighted Number of Average
Exercise Shares Contractual Life Average Warrants Exercise
Prices Outstanding in Years Exercise Price Exercisable Price
- -----------------------------------------------------------------------------------------
$0.30 to $0.75 689,067 3.20 $ 0.33 355,733 $ 0.36
$1.20 to $1.95 490,417 3.55 $ 1.79 270,417 $ 1.66
$2.00 to $2.75 179,580 4.21 $ 2.50 179,580 $ 2.50
$3.00 to $12.00 39,472 0.91 $ 4.90 39,472 $ 4.90
- -------------------------------------------------------------------------------------------
$0.30 to $12.00 1,398,535 3.39 $ 1.25 845,202 $ 1.44
===========================================================================================
During 2005, the Board of Directors approved and issued 129,580 warrants related
to the Private Placement at an exercise price of $2.00 per share, with a fair
market value of $159,445. The fair value of the warrants 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 2.75% to
3.26%; (ii) estimated volatility range of 71.85% to 80.47% (iii) dividend yield
of 0.0%; and (iv) expected life of the options of five years.
F-31
In February 2005, a member of the Company's Board of Directors exercised
warrants for 3,000 shares of the Company's common stock at an exercise price of
$0.75.
On December 10, 2004, the Company issued a warrant agreement to Paul T. Anthony,
Chief Financial Officer, to purchase 330,000 shares of the Company's common
stock at an exercise price of $1.95 per share, which was equal to the fair
market value of the Company's common stock on the date of issuance. The warrants
do not begin vesting for a minimum of one year, while certain shares only vest
pursuant to certain earnings targets being achieved, and accordingly, the
intrinsic value measurement will be made when the earnings targets are met.
During 2004, the Board of Directors approved and issued warrant agreements to
purchase 710,000 shares of the Company's common stock to three officers at an
exercise price of $0.30 per share, which is equal to the price the Company sold
shares in a private placement. The warrants granted are restricted from vesting
for a minimum of one year, while certain shares only vest pursuant to certain
earning targets being achieved, and accordingly, the intrinsic value measurement
will be made when and if the earnings targets are met.
The Company granted a warrant agreement to purchase 5,000 shares in April 2004
to a "finder" whom introduced the Company to Workstream. The fair market value
of the warrants was calculated using the Black Scholes pricing model with the
following assumptions: risk-free interest rate of 1.21%; estimated volatility of
205.30%; dividend yield of 0.0%; and expected life of the options of one year.
The expense recorded equaled $3,137.
(12) Stock Option Plans:
Effective June 15, 2000, the Company adopted the 2000 Stock Option Plan under
which all employees may be granted options to purchase shares of the Company's
authorized but unissued common stock. The maximum number of shares of the
Company's common stock available for issuance under the Plan was 183,333 shares.
As of December 31, 2002, the maximum number of shares available for future
grants under the Plan was 104,583. Under the Plan, the option exercise price was
equal to the fair market value of the Company's common stock at the date of
grant. Options expire no later than 10 years from the grant date and generally
vest within five years. In 2001, the Company elected to fully vest all
outstanding options.
In October 2001, the Company approved the 2001 Stock Option Plan under which all
employees may be granted options to purchase shares of the Company's authorized
but unissued common stock. The maximum number of shares of the Company's common
stock available for issuance under the Plan was 450,000 shares. As of December
31, 2002, the remaining number of shares available for future grants under the
Plan was 16,583 shares. Under the Plan, the option exercise price was equal to
the fair market value of the Company's common stock at the date of grant.
Options expire no later than 10 years from the grant date and generally vest
within five years.
In May 2003, the stockholders approved the PeopleView, Inc. 2003 Stock Option
Plan (the 2003 Plan). The 2003 Plan was the successor to the Company's existing
2000 Stock Option Plan and 2001 Stock Option Plan (together, the Predecessor
Plans). The 2003 Plan became effective immediately upon stockholder approval at
the Annual Meeting on May 15, 2003, and all outstanding options under the
Predecessor Plans were incorporated into the 2003 Plan at that time. On May 15,
2003, 567,167 shares had been granted pursuant to the Predecessor Plans, with
66,166 shares available to grant. On May 15, 2003, stockholders approved 833,333
shares for the 2003 plan. Together with the Predecessor Plans, 899,500 shares
were available to grant, and 567,167 had been granted. The Predecessor Plans
terminated, and no further option grants will be made under the Predecessor
Plans. However, all outstanding options under the Predecessor Plans continue to
be governed by the terms and conditions of the existing option agreements for
those grants except to the extent the Board or Compensation Committee elects to
extend one or more features of the 2003 Plan to those options. As of December
31, 2003, the remaining number of shares available for future grants under the
2003 Plan was 751,916 shares. Under the Plan, the option exercise price was
equal to the fair market value of the Company's common stock at the date of
grant. Options expire no later than 10 years from the grant date and generally
vest within five years.
F-32
In May 2004, the stockholders approved the Auxilio, Inc. 2004 Stock
Incentive Plan (the 2004 Plan). The 2004 Plan is the successor to the Company's
existing 2000 Stock Option Plan, 2001 Stock Option Plan, and the 2003 Stock
Option Plan (together, the Predecessor Plans). The 2004 Plan became effective
immediately upon stockholder approval at the Annual Meeting on May 12, 2004, and
all outstanding options under the Predecessor Plans were incorporated into the
2004 Plan at that time. On May 12, 2004, 714,750 shares had been granted
pursuant to the Predecessor Plans, with 751,987 shares available to grant. On
May 12, 2004, stockholders approved 2,000,000 shares for the 2004 plan. Together
with the Predecessor Plans, 3,466,667 shares were available to grant, and
714,750 had been granted. The Predecessor Plans terminated, and no further
option grants will be made under the Predecessor Plans. However, all outstanding
options under the Predecessor Plans continue to be governed by the terms and
conditions of the existing option agreements for those grants except to the
extent the Board or Compensation Committee elects to extend one or more features
of the 2004 Plan to those options. As of December 31, 2005, the remaining number
of shares available for future grants under the 2004 Plan was 1,458,170 shares.
Under the Plan, the option exercise price is equal to the fair market value of
the Company's common stock at the date of grant. Options expire no later than 10
years from the grant date and generally vest within five years.
In August 2005, in payment to an individual for professional services
rendered, the Company granted 23,250 options to purchase shares of the Company's
common stock at an exercise price of $1.91 per share, which exercise price
equals the fair value of the stock issued on the grant date. The options have
immediate vesting. The fair value of the options of $18,200 was recorded as
expense in August 2005. The fair value 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 3.48%; (ii) estimated volatility
of 71.87% (iii) dividend yield of 0.0%; and (iv) expected life of the options of
two years.
Additional information with respect to these Plans' stock option activity is as
follows:
Weighed
Number Average
of Shares Exercise Price
---------- --------------
Outstanding at January 1, 2004 714,750 $ 1.23
Granted 971,663 0.99
Cancelled (324,833) 1.38
---------- --------------
Outstanding at December 31, 2004 1,361,580 1.07
Granted 939,667 1.96
Cancelled (292,750) 1.23
---------- --------------
Outstanding at December 31, 2005 2,008,497 $ 1.48
========== ==============
Options exercisable at December 31, 2004 152,739 $ 1.29
========== ==============
Options exercisable at December 31, 2005 458,083 $ 1.20
========== ==============
The following table summarizes information about stock options outstanding and
exercisable at December 31, 2005:
Weighted Exercisable
Average Outstanding Options
Remaining in Options Weighted
Range of Number of Contractual Weighted Number of Average
Exercise Shares Life Average Options Exercise
Prices Outstanding in Years Exercise Price Exercisable Price
- ------------------------------------------------------------------------------------
$0.75 to $0.90 879,496 7.97 $ 0.84 336,166 $ 0.81
$1.02 to $1.84 319,167 9.11 $ 1.70 65,000 $ 1.60
$1.90 to $2.00 764,167 9.20 $ 1.99 23,250 $ 1.91
$3.00 to $6.75 45,667 6.85 $ 3.82 33,667 $ 3.84
- ------------------------------------------------------------------------------------
$0.75 to $6.75 2,008,497 8.59 $ 1.48 458,083 $ 1.20
====================================================================================
F-33
(13) Income Taxes
For the years ended December 31, 2005 and 2004, the components of income tax
expense (benefit) from continuing operations are as follows:
2005 2004
--------- ---------
Current provision:
Federal $ -- $ 13,100
State 3,200 5,240
--------- ---------
3,200 18,340
--------- ---------
Deferred benefit:
Federal -- (234,395)
State -- (66,105)
--------- ---------
-- (300,500)
--------- ---------
Income tax expense (benefit) $ 3,200 $(282,160)
========= =========
Realization of deferred tax assets is dependent on future earnings, if any, the
timing and amount of which is uncertain. Accordingly, a valuation allowance, in
an amount equal to the net deferred tax asset as of December 31, 2005 and 2004
has been established to reflect these uncertainties. As of December 31, 2005 and
2004 the deferred tax asset before valuation allowances is approximately
$3,270,000 and $2,446,600, respectively, for federal income tax purposes, and
$508,100 and $162,500, respectively for state income tax purposes.
Total income tax benefit in 2004, including taxes associated with discontinued
operations, was $268,160 with $14,000 being allocated to discontinued operations
and a tax benefit of $282,160 allocated to the income from continuing operations
in 2004.
Income tax provision amounted to an expense of $3,200 and a benefit of $268,160
for the years ended December 31, 2005 and 2004, respectively (an effective rate
of (0.1%) for 2005 and (120%) for 2004). A reconciliation of the provision
(benefit) for income taxes with amounts determined by applying the statutory
U.S. federal income tax rate to income before income taxes is as follows:
2005 2004
----------- -----------
Computed tax at federal statutory rate of 34% $(1,140,900) $ 246,700
State taxes, net of federal benefit 2,000 (38,500)
Non deductible items 20,800 8,300
Other (47,700) 61,600
Change in valuation allowance 1,169,000 (547,500)
----------- -----------
$ 3,200 $ (269,400)
=========== ===========
The 2004 deferred tax benefit arises principally from the revision of the
purchase accounting for the acquisition of The Mayo Group related to the
allocation of $1,500,000 of the purchase price to intangible assets other than
goodwill. In applying the guidance of SFAS 109, the Company established a
deferred tax liability of approximately $300,000, related to the revision of the
purchase accounting price allocation. The Company anticipates that it will elect
consolidated filing for tax purposes, thus allowing for the realization of
approximately $300,000 of deferred tax benefit.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
F-34
2005 2004
----------- -----------
Deferred tax assets:
Allowance for doubtful accounts $ 11,600 $ 4,500
Accrued salaries/vacation 92,800 71,700
Accrued equipment pool 44,900 141,700
State taxes 1,100 2,600
Stock options 123,600 --
Net operating loss carryforwards 3,985,700 2,634,100
----------- -----------
Total deferred tax assets 4,259,700 2,854,600
----------- -----------
Deferred tax liabilities:
Depreciation 59,500 12,100
Amortization of intangibles 293,200 233,400
Other 128,900 --
----------- -----------
Total deferred tax liabilities 481,600 245,500
----------- -----------
Net deferred assets before valuation allowance 3,778,100 2,609,100
Valuation allowance (3,778,100) (2,609,100)
----------- -----------
Net deferred tax assets $ -- $ --
=========== ===========
At December 31, 2005, the Company has available unused net operating loss
carryforwards of approximately $10,200,000 for federal and $5,700,000 for state
that may be applied against future taxable income and that, if unused, expire
beginning in 2015 through 2025.
Utilization of the net operating loss carryforwards may be subject to a
substantial annual limitation due to ownership change limitations provided by
the Internal Revenue Code of 1986. The annual limitation may result in the
expiration of net operating loss carryforwards before utilization.
(14) Retirement Plan
The Company sponsors a 401(k) plan (the Plan) for the benefits of employees who
are at least 21 years of age. The Company's management determines, at its
discretion, the annual and matching contribution. The Company elected not to
contribute to the Plan for the years ended December 31, 2005 and 2004.
(15) Commitments
Leases
On January 28, 2004, the Company executed an early termination agreement for a
lease agreement related to office space previously occupied in Temecula,
California. The Company provided the deposit to the landlord as its payment for
early termination.
The Company leases its Mission Viejo facility under a noncancellable operating
lease. The lease expires in January 2010. Rent expense for the years ended
December 31, 2005 and 2004 totaled $285,492 and $154,004, respectively. Future
minimum lease payments under non-cancelable operating leases during subsequent
years are as follows:
F-35
----------------------------------------
December 31 Payments
----------------------------------------
2006 $ 205,468
----------------------------------------
2007 164,131
----------------------------------------
2008 168,134
----------------------------------------
2009 172,138
----------------------------------------
2010 28,690
----------------------------------------
Total $ 738,561
-----------------------------===========
Employment Agreements
On December 10, 2004, the Company entered into an employment agreement with Paul
T. Anthony, to serve as Chief Financial Officer and Corporate Secretary,
effective January 3, 2005. Mr. Anthony's agreement has a term of two years, and
provides for a base annual salary of $155,000. Mr. Anthony received warrants and
may receive an annual bonus if certain earnings and revenue targets are
accomplished. On March 15, 2006, the Company entered in to a new employment
agreement with Mr. Anthony. This new agreement is effective January 1, 2006, has
a term of two years, and provides for a base annual salary of $170,000. Mr.
Anthony received 75,000 options and may receive an annual bonus if certain
earnings and revenue targets are accomplished.
On September 14, 2004, the Company presented to the two other original founders
(owners) of The Mayo Group, Mr. Nickell and Mr. Davis, an Amendment to
Employment Agreement and Modification of Merger Agreement, whereby the
Contingent Securities representing 461,009 shares, and Contingent Cash
Consideration of $82,979 due and payable to both would be released and paid.
In July 2004, the Company entered into a Severance Agreement and Mutual Release
of All Claims with Alan Mayo, one of the three original founders of The Mayo
Group. Pursuant to the agreement, the Company arranged for a private sale of all
the common stock Mr. Mayo received in the April 1, 2004 transaction with the
Company including the contingent shares released to him as part of this
agreement. The Company agreed to pay salary, bonus, and contingent consideration
amounts pursuant to an employment agreement, in increments. Such amounts have
been accounted for in the financial statements. The Company has made an accrual
of $465,000 for the compensation due to Mr. Mayo pursuant to the employment
agreement and has included this amount as part of the cost of the acquisition.
Included in the acquisition was total cash contingency of $45,000 and a note
payable in the amount of $315,000 that was also being held in contingency. Of
these contingency amounts, Mr. Mayo was owed $277,020 or 76.95%, which was
equivalent to his ownership percentage of The Mayo Group. As consideration for
Mr. Mayo entering into the Severance Agreement and Mutual Release of All Claims,
the Company and Mr. Mayo agreed that all contingent payments (cash, stock and
note) due and payable to Mr. Mayo would be released to Mr. Mayo. In doing so,
the Company agreed to pay Mr. Mayo $138,510 at execution of the agreement, and
pay the balance of $138,510 on April 1, 2005. The Company pledged a portion of
the Workstream shares it owns as collateral security for the performance of the
note.
The Company entered into an employment agreement with Joseph Flynn to serve as
its Chief Executive Officer, effective April 1, 2004. Mr. Flynn's agreement has
a term of two years and provides for a base annual salary of $165,000. Mr. Flynn
may receive an annual bonus if certain earnings and revenue targets are
accomplished. On March 14, 2006, the Company entered in to a new employment
agreement with Mr. Flynn. This new agreement is effective January 1, 2006, has a
term of two years, and provides for a base annual salary of $180,000. Mr. Flynn
received 100,000 options and may receive an annual bonus if certain earnings and
revenue targets are accomplished.
Effective April 1, 2004, the Company entered into an employment agreement with
Etienne Weidemann, to serve as President and Chief Operating Officer. Mr.
Weidemann's agreement has a term of two years, and provides for a base annual
salary of $160,000. Mr. Weidemann may receive an annual bonus if certain
earnings and revenue targets are accomplished. On March 15, 2006, the Company
entered in to anew employment agreement with Mr. Weidemann. This new agreement
is effective January 1, 2006, has a term of two years, and provides for a base
annual salary of $175,000. Mr. Weidemann received 80,000 options and may receive
an annual bonus if certain earnings and revenue targets are accomplished.
F-36
Effective April 1, 2004, the Company entered into an employment agreement with
James P. Stapleton, to serve as Chief Operating Officer. Mr. Stapleton's
agreement has a term of two years, and provides for a base annual salary of
$145,000. Mr. Stapleton may receive an annual bonus if certain earnings and
revenue targets are accomplished. Mr. Stapleton resigned his position in
December 2004.
(16) Major Customers
For the year ended December 31, 2005, two customers represented a total of 74%
of revenues. As of December 31, 2005, accounts receivable due from these
customers total approximately $134,000.
For the year ended December 31, 2004, one customer represented a total of 65% of
revenues. No amounts were due from this customer as of December 31, 2004.
(17) Related Party Transactions
In November 2005, the Company entered into a Loan and Security Agreement (the
"Loan") with Cambria Investment Fund, L.P. Michael D. Vanderhoof, a director of
the Company is a principal in Cambria Investment Fund. Under the agreement, the
Company can borrow up to $500,000. Cambria Investment Fund L.P. also receives
warrants to purchase up to 250,000 shares of the Company's common stock at the
market price upon execution, with 75,000 shares vesting upon the execution of
the warrant agreement and 17,500 shares vesting for every multiple of $50,000
borrowed under the Revolving Loan Agreement with the Company. As of December 31,
2005 the Company had no borrowings under this agreement. The fair value of the
warrant for the 75,000 shares issued in connection with the execution of the
warrant agreement was $69,551. The fair value of the warrant was determined
using the Black-Scholes option-pricing model (See note 8 for the fair value
assumptions used). Such amount was recorded as interest expense.
On December 28, 2004, Auxilio entered into a Revolving Loan and Security
Agreement with Mr. Michael D. Vanderhoof. Mr. Vanderhoof is a director of the
Company. Under the agreement, the Company can borrow up to $500,000. As of March
31, 2005, the Company had borrowed $500,000 under the Revolving Loan. During the
three months ended March 31, 2005, the Company issued 50,000 warrants to Mr.
Vanderhoof, with a fair value of $65,648. The fair market value of the warrants
was determined using the Black Scholes pricing model (See note 8 for the fair
value assumptions used).
In June of 2004 the Company entered in to a consulting agreement with John D.
Pace, a director, to provide support in the Company's sales efforts with major
healthcare facilities as well as consulting services related to the Company's
operations. The agreement terminates June 1, 2006. Mr. Pace receives $1,000 per
day for his services not to exceed three days per month and $1,500 per day for
each additional day worked during a given month. In addition, Mr. Pace receives
commission at a rate of 5% of the gross profit for any business closed through
introductions made by Mr. Pace. The commission will be paid 25% in the form of
Auxilio's common stock (priced at prevailing market values) and 75% in cash.
Total compensation to Mr. Pace in 2005 was $61,704.
(18) Subsequent Events
In April 2006, the Company entered into a $3,000,000 Fixed Price Convertible
Note (the "Note") agreement with Laurus Master Fund (LMF). The term of the Note
is for three years at an interest rate of Wall Street Journal prime plus 2.0%.
The fixed conversion price to convert the Note to equity will be set at a
premium to the average closing price of the Company's common stock for the 10
days prior to the closing of the transaction based on a tiered schedule whereby
the first third of the investment amount will have a fixed conversion price
equal to a 103% premium, the next third will have a fixed conversion price equal
to a 109% premium, and the last third will have a fixed conversion price equal
to a 118% premium. The Company shall reduce the principal Note by 1/60th per
month starting 90 days after the closing, payable in cash or registered stock.
F-37
The Company will file a registration statement for the Company's common stock
underlying the investment and all the underlying warrants with the SEC within 60
days of funding and will attempt to have the registration declared effective
within 180 days of funding. The Company shall provide a first lien on all assets
of the Company. The Company will have the option of redeeming any outstanding
principal of the Note by paying to the LMF 120% of such amount, together with
accrued but unpaid interest under this Note. LMF earns fees in the amount of
3.5% of the total investment amount at the time of closing. LMF also receives
warrants to purchase shares of the Company's common stock in an amount equal to
26% coverage of the investment amount. The exercise price of the warrants will
be set at a 120% premium to the average closing price of the Company's common
stock for the 10 days prior to the closing of the transaction. The warrants will
have a term of seven years. In addition, the Company will pay fees to LMF of
$40,000 plus any additional due diligence costs deemed necessary and approved by
the Company in advance.
In March 2006, the Company borrowed $250,000 from Cambria Investment Fund L.P.
under the Revolving Loan Agreement. This borrowing earned Cambria the right to
receive warrants to purchase 87,500 shares of the Company's common stock at
$1.80, as 17,500 shares vest for every multiple of $50,000 borrowed under the
Revolving Loan Agreement with the Company. The fair value of the warrant for the
87,500 shares issued in connection with the borrowing was $128,970. The fair
value of the warrant was determined using the Black-Scholes option-pricing
model, with the following assumptions: (i) no expected dividends; (ii) a risk
free interest rate of 4.51%; (iii) expected volatility of 90.41%; and (iv) an
expected life of the warrants of five years. In accordance with APB 14,
"Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants,"
the Company has compared the relative fair value of the warrants and the face
value of the note and has allocated a value of $85,079. Such amount was recorded
as a discount against the carrying value of the note and will be amortized to
interest expense over the life of the note using the straight-line interest
method. In April 2006, the Company paid in full all outstanding principal
balance under the Revolving Loan Agreement.
F-38
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under the Nevada General Corporation Law and our Articles of
Incorporation, as amended, and our Bylaws, our directors will have no personal
liability to us or our stockholders for monetary damages incurred as the result
of the breach or alleged breach by a director of his "duty of care." This
provision does not apply to the directors' (i) acts or omissions that involve
intentional misconduct or a knowing and culpable violation of law, (ii) acts or
omissions that a director believes to be contrary to the best interests of the
corporation or its stockholders or that involve the absence of good faith on the
part of the director, (iii) approval of any transaction from which a director
derives an improper personal benefit, (iv) acts or omissions that show a
reckless disregard for the director's duty to the corporation or its
stockholders in circumstances in which the director was aware, or should have
been aware, in the ordinary course of performing a director's duties, of a risk
of serious injury to the corporation or its stockholders, (v) acts or omissions
that constituted an unexcused pattern of inattention that amounts to an
abdication of the director's duty to the corporation or its stockholders, or
(vi) approval of an unlawful dividend, distribution, stock repurchase or
redemption. This provision would generally absolve directors of personal
liability for negligence in the performance of duties, including gross
negligence.
The effect of this provision in our Articles of Incorporation and Bylaws
is to eliminate the rights of our Company and our stockholders (through
stockholder's derivative suits on behalf of our Company) to recover monetary
damages against a director for breach of his fiduciary duty of care as a
director (including breaches resulting from negligent or grossly negligent
behavior) except in the situations described in clauses (i) through (vi) above.
This provision does not limit nor eliminate the rights of our Company or any
stockholder to seek non-monetary relief such as an injunction or rescission in
the event of a breach of a director's duty of care. In addition, our Bylaws
provide that if the Nevada General Corporation Law is amended to authorize the
future elimination or limitation of the liability of a director, then the
liability of the directors will be eliminated or limited to the fullest extent
permitted by the law, as amended. The Nevada General Corporation Law grants
corporations the right to indemnify their directors, officers, employees and
agents in accordance with applicable law.
Insofar as indemnification for liabilities under the Securities Act of
1933 may be permitted to our directors, officers and controlling persons
pursuant to the provisions described above, or otherwise, we have been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by us of
expenses incurred or paid by our director, officer or controlling person in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, we will, unless in the opinion of our counsel the matter as been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth an estimate of the costs and expenses
payable by the registrant in connection with the issuance and distribution of
the common stock being registered.
- -------------------------------------------------------------------------------
SEC registration fee $ 517.47
- -------------------------------------------------------------------------------
Legal fees and expenses 45,000.00
- -------------------------------------------------------------------------------
Accountants' fees and expenses 30,000.00
- -------------------------------------------------------------------------------
Miscellaneous 5,000.00
- -------------------------------------------------------------------------------
Total $ 80,517.47
============
- -------------------------------------------------------------------------------
All amounts except the SEC registration fee are estimated. All of the expenses
set forth above are being paid by us.
II-1
ITEM 26. RECENT SALE OF UNREGISTERED SECURITIES
In April 2006, the Company entered into a $3,000,000 Fixed Price
Convertible Note (the "Note") agreement with Laurus Master Fund (LMF). The term
of the Note is for three years at an interest rate of Wall Street Journal prime
plus 2.0%. In consideration for entering into the Loan, LMF also received
warrants to purchase up to 478,527 shares of the Company's common stock. The
Note and Warrant were offered and sold in reliance upon exemptions from
registration pursuant to Section 4(2) under the Securities Act and Rule 506
promulgated thereunder.
On February 2, 2006, the Company issued 499,000 options to directors and
employees of the Company at an exercise price of $1.40, which exercise price
equals the fair market value of the common stock underlying such options on the
date of grant. The offering was made in reliance on Rule 701 under the
Securities Act of 1933, as amended (the "Securities Act") and the regulations
promulgated thereunder.
On November 23, 2005, the Company entered into a Loan and Security
Agreement (the Loan) with Cambria Investment Fund, L.P. Michael D. Vanderhoof, a
director of the Company, is a principal in Cambria Investment Fund L.P. Under
the agreement, the Company can borrow up to $500,000. The Loan is secured by all
of the Company's inventory, accounts receivable, equipment, cash, deposit
accounts, securities, intellectual property, chattel paper, general intangibles
and instruments, now existing or hereafter arising, and all proceeds thereof. In
consideration for entering into the Loan, Cambria Investment Fund L.P. also
received warrants to purchase up to 250,000 shares of the Company's common stock
at the market price upon execution, with 75,000 shares vesting upon the
execution of the warrant agreement and 17,500 shares vesting for every multiple
of $50,000 borrowed under the Revolving Loan Agreement with the Company. The
warrant was offered and sold in reliance upon exemptions from registration
pursuant to Section 4(2) under the Securities Act and Rule 506 promulgated
thereunder. The fair value of the vested warrant to purchase 75,000 shares
issued upon execution was $69,557. In March 2006, the Company borrowed $250,000
on this Loan. In April 2006, the Company paid all amounts owing under the
Revolving Loan Agreement and terminated the Agreement.
In August 2005, in payment to an individual for professional services
rendered, the Company granted 23,250 options to purchase shares of the Company's
common stock at an exercise price of $1.91 per share, which exercise price
equals the fair value of the stock issued on the grant date. The options have
immediate vesting. The offering was made in reliance on Section 4(2) under the
Securities Act and Rule 506 of Regulation D promulgated thereunder.
In February 2005, the Company initiated a private placement of up to
2,500,000 shares of its common stock at a purchase price of $2.00 per share. On
July 31, 2005, the Company closed the offering, selling 1,619,750 shares, with
net proceeds of $2,967,327. The offering was made in reliance on Section 4(2)
under the Securities Act of 1933 and Rule 506 of Regulation D promulgated
thereunder.
On December 28, 2004, Auxilio entered into a Revolving Loan and Security
Agreement with Mr. Michael D. Vanderhoof. Mr. Vanderhoof is a director of the
Company. Under the agreement, the Company could borrow up to $500,000 (the
Revolving Loan). The Revolving Loan was secured by all of the Company's
inventory, accounts receivable, equipment, cash, deposit accounts, securities,
intellectual property, chattel paper, general intangibles and instruments, now
existing or hereafter arising, and all proceeds thereof. In consideration for
the making of the Revolving Loan, Mr. Vanderhoof also received a warrant to
purchase 50,000 common shares of the Company in a number equal to 10% of the
highest amount outstanding at an exercise price of $2.00 per share. During 2005,
the Company borrowed $500,000 and issued 50,000 warrants in connection with the
Revolving Loan. The fair value of the warrants was determined using the
Black-Scholes option-pricing model. In accordance with APB 14, "Accounting for
Convertible Debt and Debt Issued with Stock Purchase Warrants," the Company has
compared the relative fair value of the warrants and the face value of the note
and has allocated a value of $58,029 to the warrants. Such amount was recorded
as a discount against the carrying value of the note and was amortized to
interest expense over the life of the note using the straight-line interest
method. In April 2005, the Company paid in full the outstanding principal
balance under the Revolving Loan, and the remaining unamortized discount was
immediately expensed. The Revolving Loan expired December 10, 2005. The warrantd
issued in connection with the Revolving Loan The warrant were offered and sold
in reliance upon exemptions from registration pursuant to Section 4(2) under the
Securities Act and Rule 506 promulgated thereunder
II-2
On December 10, 2004, the Company issued a warrant agreement to Paul T.
Anthony, Chief Financial Officer, to purchase 330,000 shares of the Company's
common stock at an exercise price of $1.95 per share, which was equal to the
fair market value of the Company's common stock on the date of issuance. The
warrants do not begin vesting for a minimum of one year, while certain shares
only vest pursuant to certain earnings targets being achieved, and accordingly,
the intrinsic value measurement will be made when the earnings targets are met.
The warrant was offered and sold in reliance upon exemptions from registration
pursuant to Section 4(2) under the Securities Act and Rule 506 promulgated
thereunder.
II-3
During 2004, the Board of Directors approved and issued warrant agreements
to purchase 710,000 shares of the Company's common stock to three officers at an
exercise price of $0.30 per share, which is equal to the price the Company sold
shares in a private placement. The warrants granted are restricted from vesting
for a minimum of one year, while certain shares only vest pursuant to certain
earning targets being achieved, and accordingly, the intrinsic value measurement
will be made when the earnings targets are met. The warrants were offered and
sold in reliance upon exemptions from registration pursuant to Section 4(2)
under the Securities Act and Rule 506 promulgated thereunder
On April 1, 2004, the Company completed the acquisition of Alan Mayo and
Associates, Inc. (doing business as "The Mayo Group" and referred to herein as
TMG). The purchase price for the acquisition of TMG was equal to $255,000 in
cash and 1,700,030 shares of the Company's common stock, all payable upon the
closing. In addition, upon closing the Company deposited (a) $45,000 and 300,005
shares of common stock in an indemnity escrow account, (b) 2,000,035 shares of
common stock in an escrow account as contingency for certain performance goals,
and (c) a note payable in the amount of $315,000 due April 15, 2005, which note
was also subject to certain contingent performance goals. All contingent amounts
from the original agreement have subsequently been paid (both cash and stock).
Therefore the foregoing amounts are included in the purchase price as is
required under Statement of Financial Accounting Standards No. 141 (SFAS 141).
In addition to the above amounts, the Company has included severance payments
totaling $465,500. Other acquisition costs totaling $264,174 were incurred
during the twelve months ended December 31, 2004 and have been included in the
purchase price. All of the Company's operations after April 1, 2004 are the
operations of TMG. The Company obtained a formal valuation and determined that
of the $3,013,929 excess purchase price of assets acquired and liabilities
assumed, $1,500,000 could be allocated to non-compete agreements, customer
relationships and backlog. These intangible assets are being amortized on a
straight-line basis over 3-5 years. The shares of common stock issued in
connection with the acquisition were offered and sold in reliance upon
exemptions from registration pursuant to Section 4(2) under the Securities Act
and Rule 506 promulgated thereunder.
In March 2004, the Company initiated a private placement of its common
stock at a purchase price of $0.30 per share. On May 15, 2004, the Company
closed the offering, selling 1,733,833 shares, with net proceeds of $520,150.
The offering was made in reliance on Section 4(2) under the Securities Act and
Rule 506 of Regulation D promulgated thereunder.
II-4
ITEM 27. EXHIBITS
No. Item
- --------------------------------------------------------------------------------
2.1 Agreement and Plan of Reorganization dated as of November 20,
2001, by and between the Company and e-Perception, Inc.
(incorporated by reference to Exhibit 1.1 to the Registrant's Form
8-K filed on January 24, 2002).
- --------------------------------------------------------------------------------
2.2 Agreement and Plan of Merger, dated April 1, 2004, by and between
Auxilio, Inc., PPVW Acquisition Corporation, and Alan Mayo &
Associates, Inc. (filed as Exhibit 2.1 to the Registrant's Form
8-K filed on April 16, 2004).
- --------------------------------------------------------------------------------
3.1 Certificate of Incorporation (incorporated by reference to Exhibit
3.1 to the Registrant's Form 10-KSB filed on April 19, 2005)
- --------------------------------------------------------------------------------
3.2 Bylaws (incorporated by reference to Exhibit 2 to the Registrant's
Form 10-SB filed on October 1, 1999).
- --------------------------------------------------------------------------------
4.1 Subscription Agreement, dated as of January 9, 2002, by and among
the Company and each of the stockholders of e-Perception, Inc.
(incorporated by reference to Exhibit 1.1 to the Registrant's Form
8-K filed on January 24, 2002).
- --------------------------------------------------------------------------------
5.1 Opinion of Stradling Yocca Carlson & Rauth, a Professional
Corporation. *
- --------------------------------------------------------------------------------
10.1 2000 Stock Option Plan (incorporated by reference to Exhibit 10.1
to the Registrant's Form 10-KSB filed on April 19, 2005).
- --------------------------------------------------------------------------------
10.2 2001 Stock Option Plan (incorporated by reference to Exhibit 10.2
to the Registrant's Form 10-KSB filed on April 19, 2005).
- --------------------------------------------------------------------------------
10.3 2003 Stock Option Plan (incorporated by reference to Exhibit 10.3
to the Registrant's Form 10-KSB filed on April 19, 2005).
- --------------------------------------------------------------------------------
10.4 2004 Stock Option Plan (incorporated by reference to Exhibit 3.1
to the Registrant's Form 10-KSB filed on April 19, 2005).
- --------------------------------------------------------------------------------
10.5 Standard Office Lease by and between Arden Realty Limited
Partnership and e-Perception Technologies, Inc. (incorporated by
reference to Exhibit 10.1 to the Registrant's Form 10-QSB filed on
May 15, 2002).
- --------------------------------------------------------------------------------
10.6 Asset Purchase Agreement between Workstream USA, Inc., Workstream,
Inc. and PeopleView, Inc. dated March 8,. 2004 (incorporated by
reference to Exhibit 2.1 to the Registrant's Form 8-K filed on
April 2, 2004).
- --------------------------------------------------------------------------------
10.7 Addendum dated as of May 27, 2004 to Asset Purchase Agreement
dated March 17th, 2004 between Workstream Inc. Workstream USA,
Inc. and PeopleView, Inc. (incorporated by reference to Exhibit
2.1 to the Registrant's Form 8-K/A filed on August 3, 2004).
- --------------------------------------------------------------------------------
10.8 Revolving Loan and Security Agreement between Auxilio, Inc. and
Michael D. Vanderhoof (incorporated by reference to Exhibit 10.1
to the Registrant's Form 8-K filed on December 29, 2004).
- --------------------------------------------------------------------------------
II-5
- --------------------------------------------------------------------------------
10.9 Standard Office Lease agreement by and between Auxilio, Inc and
McMorgan Institutional Real Estate Fund I, LLC. dated October 13,
2004 (incorporated by reference to Exhibit 10.13 to the
Registrant's Form 10-KSB filed on April 19, 2005).
- --------------------------------------------------------------------------------
10.10 Loan and Security Agreement between Auxilio, Inc. and Cambria
Investment Fund, L.P. (incorporated by reference to Exhibit 10.1
to the Registrant's Form 8-K filed on November 28, 2005).
- --------------------------------------------------------------------------------
10.11 Executive Employment Agreement between Registrant and Joseph J
Flynn, Chief Executive Officer dated March 14, 2006 (incorporated
by reference to Exhibit 10.1 to the Registrant's Form 8-K filed on
March 22, 2006).
- --------------------------------------------------------------------------------
10.12 Executive Employment Agreement between Registrant and Etienne
Weidemann, President and Chief Operating Officer dated March 15,
2006 (incorporated by reference to Exhibit 10.2 to the
Registrant's Form 8-K filed on March 22, 2006).
- --------------------------------------------------------------------------------
10.13 Executive Employment Agreement between Registrant and Paul T.
Anthony, Chief Financial Officer and Corporate Secretary dated
March 15, 2006 (incorporated by reference to Exhibit 10.3 to the
Registrant's Form 8-K filed on March 22, 2006).
- --------------------------------------------------------------------------------
10.14 Securities Purchase Agreement dated as of April 7, 2006, between
Auxilio, Inc. and Laurus Master Fund, Ltd. (incorporated by
reference to Exhibit 10.1 to the Registrant's Form 8-K filed on
April 13, 2006).
- --------------------------------------------------------------------------------
10.15 Secured Convertible Term Note dated as of April 7, 2006 issued by
Auxilio, Inc. to Laurus Master Fund, Ltd. (incorporated by
reference to Exhibit 10.2 to the Registrant's Form 8-K filed on
April 13, 2006).
- --------------------------------------------------------------------------------
10.16 Common stock Purchase Warrant dated as of April 7, 2006 issued by
Auxilio, Inc. to Laurus Master Fund, Ltd. (incorporated by
reference to Exhibit 10.3 to the Registrant's Form 8-K filed on
April 13, 2006).
- --------------------------------------------------------------------------------
10.17 Master Security Agreement dated as of April 7, 2006, between
Auxilio, Inc. and Laurus Master Fund, Ltd. (incorporated by
reference to Exhibit 10.4 to the Registrant's Form 8-K filed on
April 13, 2006).
- --------------------------------------------------------------------------------
10.18 Registration Rights Agreement dated as of April 7, 2006, between
Auxilio, Inc. and Laurus Master Fund, Ltd. (incorporated by
reference to Exhibit 10.5 to the Registrant's Form 8-K filed on
April 13, 2006).
- --------------------------------------------------------------------------------
14 Registrants Code of Ethics (incorporated by reference to Exhibit
14.1 to the Registrant's Form 10-KSB filed on April 14, 2004).
- --------------------------------------------------------------------------------
16.1 Letter regarding change in certifying accountants dated February
14, 2002 (incorporated by reference to Exhibit 16 to the
Registrant's Form 8-K filed on February 15, 2002).
- --------------------------------------------------------------------------------
16.2 Letter regarding change in certifying accountants dated December
22, 2005 (incorporated by reference to Exhibit 16.1 to the
Registrant's Form 8-K/A filed on January 24, 2006).
- --------------------------------------------------------------------------------
21.1 Subsidiaries (incorporated by reference to Exhibit 21.1 to the
Registrant's Form 10-KSB filed on April 16, 2006).
- --------------------------------------------------------------------------------
II-6
- --------------------------------------------------------------------------------
23.1 Consent of Haskell & White LLP.*
- --------------------------------------------------------------------------------
23.2 Consent of Stonefield Josephson, Inc. *
- --------------------------------------------------------------------------------
23.2 Consent of Stradling Yocca Carlson & Rauth (included in the
opinion filed as Exhibit 5.1).*
- --------------------------------------------------------------------------------
24.1 Power of Attorney.**
- --------------------------------------------------------------------------------
*- Filed herewith.
**- Previously filed.
ITEM 28. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to directors, officers and controlling
persons of the registrant pursuant to any provision of the certificate of
incorporation, bylaws, contract arrangements, statute, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933, and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the registrant issuer will, unless in the opinion
of its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act of 1933, and will
be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) It will file, during any period in which it offers or sells
securities, a post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) Include any additional or changed material information on the
plan of distribution;
(2) For determining liability under the Securities Act of 1933, it will
treat each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be the
initial bona fide offering; and
(3) It will file a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the offering.
(4) For determining any liability under the Securities Act of 1933, it
will treat the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the small business issuer under Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933, as part of this registration statement
as of the time the Commission declared it effective.
(5) For determining any liability under the Securities Act of 1933, it
will treat each post-effective amendment that contains a form of prospectus as a
new registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial bona
fide offering of those securities.
II-7
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form SB-2 and authorized this
Amendment No. 1 to registration statement to be signed on its behalf by the
undersigned, in the City of Mission Viejo, California, on August 14, 2006.
AUXILIO, INC.
By: /s/ Joseph J. Flynn
---------------------------------------
Joseph J. Flynn, Chairman and CEO
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to registration statement has been signed below by the
following persons in the capacities and on the dates indicated.
- --------------------------------------------------------------------------------
Name Title Date
- --------------------------------------------------------------------------------
/s/ Joseph J. Flynn Chairman, CEO, Director and August 14, 2006
- ------------------- Principal Executive Officer
Joseph J. Flynn
- --------------------------------------------------------------------------------
/s/ Etienne L. Weidemann* Director, President and Chief August 14, 2006
- ------------------------- Operating Officer
Etienne L. Weidemann
- --------------------------------------------------------------------------------
/s/ Paul Anthony* Executive Vice-President, Chief August 14, 2006
- ----------------- Financial Officer and Principal
Paul Anthony Accounting and Financial Officer
- --------------------------------------------------------------------------------
/s/ Edward B. Case* Director August 14, 2006
- -------------------
Edward B. Case
- --------------------------------------------------------------------------------
/s/ Robert L. Krakoff* Director August 14, 2006
- ----------------------
*
Robert L. Krakoff
- --------------------------------------------------------------------------------
/s/ John D. Pace* Director August 14, 2006
- -----------------
John D. Pace
- --------------------------------------------------------------------------------
/s/ Max Poll* Director August 14, 2006
- -------------
Max Poll
- --------------------------------------------------------------------------------
/s/ Michael Vanderhoof* Director August 14, 2006
- -----------------------
Michael Vanderhoof
- --------------------------------------------------------------------------------
* Pursuant to a power-of-attorney granted to Joseph J. Flynn on July 6, 2006
to sign on the respective person's behalf, individually and in each
capacity stated above, all amendments and post-effective amendments to
this registration statement and to file the same, with all exhibits
thereto and any other documents in connection therewith, with the
Securities and Exchange Commission under the Securities Act of 1933, as
amended.
II-8
EXHIBIT INDEX
- --------------------------------------------------------------------------------
2.1 Agreement and Plan of Reorganization dated as of November 20,
2001, by and between the Company and e-Perception, Inc.
(incorporated by reference to Exhibit 1.1 to the Registrant's Form
8-K filed on January 24, 2002).
- --------------------------------------------------------------------------------
2.2 Agreement and Plan of Merger, dated April 1, 2004, by and between
Auxilio, Inc., PPVW Acquisition Corporation, and Alan Mayo &
Associates, Inc. (filed as Exhibit 2.1 to the Registrant's Form
8-K filed on April 16, 2004).
- --------------------------------------------------------------------------------
3.1 Certificate of Incorporation (incorporated by reference to Exhibit
3.1 to the Registrant's Form 10-KSB filed on April 19, 2005)
- --------------------------------------------------------------------------------
3.2 Bylaws (incorporated by reference to Exhibit 2 to the Registrant's
Form 10-SB filed on October 1, 1999).
- --------------------------------------------------------------------------------
4.1 Subscription Agreement, dated as of January 9, 2002, by and among
the Company and each of the stockholders of e-Perception, Inc.
(incorporated by reference to Exhibit 1.1 to the Registrant's Form
8-K filed on January 24, 2002).
- --------------------------------------------------------------------------------
5.1 Opinion of Stradling Yocca Carlson & Rauth, a Professional
Corporation. *
- --------------------------------------------------------------------------------
10.1 2000 Stock Option Plan (incorporated by reference to Exhibit 10.1
to the Registrant's Form 10-KSB filed on April 19, 2005).
- --------------------------------------------------------------------------------
10.2 2001 Stock Option Plan (incorporated by reference to Exhibit 10.2
to the Registrant's Form 10-KSB filed on April 19, 2005).
- --------------------------------------------------------------------------------
10.3 2003 Stock Option Plan (incorporated by reference to Exhibit 10.3
to the Registrant's Form 10-KSB filed on April 19, 2005).
- --------------------------------------------------------------------------------
10.4 2004 Stock Option Plan (incorporated by reference to Exhibit 3.1
to the Registrant's Form 10-KSB filed on April 19, 2005).
- --------------------------------------------------------------------------------
10.5 Standard Office Lease by and between Arden Realty Limited
Partnership and e-Perception Technologies, Inc. (incorporated by
reference to Exhibit 10.1 to the Registrant's Form 10-QSB filed on
May 15, 2002).
- --------------------------------------------------------------------------------
10.6 Asset Purchase Agreement between Workstream USA, Inc., Workstream,
Inc. and PeopleView, Inc. dated March 8,. 2004 (incorporated by
reference to Exhibit 2.1 to the Registrant's Form 8-K filed on
April 2, 2004).
- --------------------------------------------------------------------------------
10.7 Addendum dated as of May 27, 2004 to Asset Purchase Agreement
dated March 17th, 2004 between Workstream Inc. Workstream USA,
Inc. and PeopleView, Inc. (incorporated by reference to Exhibit
2.1 to the Registrant's Form 8-K/A filed on August 3, 2004).
- --------------------------------------------------------------------------------
10.8 Revolving Loan and Security Agreement between Auxilio, Inc. and
Michael D. Vanderhoof (incorporated by reference to Exhibit 10.1
to the Registrant's Form 8-K filed on December 29, 2004).
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10.9 Standard Office Lease agreement by and between Auxilio, Inc and
McMorgan Institutional Real Estate Fund I, LLC. dated October 13,
2004 (incorporated by reference to Exhibit 10.13 to the
Registrant's Form 10-KSB filed on April 19, 2005).
- --------------------------------------------------------------------------------
10.10 Loan and Security Agreement between Auxilio, Inc. and Cambria
Investment Fund, L.P. (incorporated by reference to Exhibit 10.1
to the Registrant's Form 8-K filed on November 28, 2005).
- --------------------------------------------------------------------------------
10.11 Executive Employment Agreement between Registrant and Joseph J
Flynn, Chief Executive Officer dated March 14, 2006 (incorporated
by reference to Exhibit 10.1 to the Registrant's Form 8-K filed on
March 22, 2006).
- --------------------------------------------------------------------------------
10.12 Executive Employment Agreement between Registrant and Etienne
Weidemann, President and Chief Operating Officer dated March 15,
2006 (incorporated by reference to Exhibit 10.2 to the
Registrant's Form 8-K filed on March 22, 2006).
- --------------------------------------------------------------------------------
10.13 Executive Employment Agreement between Registrant and Paul T.
Anthony, Chief Financial Officer and Corporate Secretary dated
March 15, 2006 (incorporated by reference to Exhibit 10.3 to the
Registrant's Form 8-K filed on March 22, 2006).
- --------------------------------------------------------------------------------
10.14 Securities Purchase Agreement dated as of April 7, 2006, between
Auxilio, Inc. and Laurus Master Fund, Ltd. (incorporated by
reference to Exhibit 10.1 to the Registrant's Form 8-K filed on
April 13, 2006).
- --------------------------------------------------------------------------------
10.15 Secured Convertible Term Note dated as of April 7, 2006 issued by
Auxilio, Inc. to Laurus Master Fund, Ltd. (incorporated by
reference to Exhibit 10.2 to the Registrant's Form 8-K filed on
April 13, 2006).
- --------------------------------------------------------------------------------
10.16 Common stock Purchase Warrant dated as of April 7, 2006 issued by
Auxilio, Inc. to Laurus Master Fund, Ltd. (incorporated by
reference to Exhibit 10.3 to the Registrant's Form 8-K filed on
April 13, 2006).
- --------------------------------------------------------------------------------
10.17 Master Security Agreement dated as of April 7, 2006, between
Auxilio, Inc. and Laurus Master Fund, Ltd. (incorporated by
reference to Exhibit 10.4 to the Registrant's Form 8-K filed on
April 13, 2006).
- --------------------------------------------------------------------------------
10.18 Registration Rights Agreement dated as of April 7, 2006, between
Auxilio, Inc. and Laurus Master Fund, Ltd. (incorporated by
reference to Exhibit 10.5 to the Registrant's Form 8-K filed on
April 13, 2006).
- --------------------------------------------------------------------------------
14 Registrants Code of Ethics (incorporated by reference to Exhibit
14.1 to the Registrant's Form 10-KSB filed on April 14, 2004).
- --------------------------------------------------------------------------------
16.1 Letter regarding change in certifying accountants dated February
14, 2002 (incorporated by reference to Exhibit 16 to the
Registrant's Form 8-K filed on February 15, 2002).
- --------------------------------------------------------------------------------
16.2 Letter regarding change in certifying accountants dated December
22, 2005 (incorporated by reference to Exhibit 16.1 to the
Registrant's Form 8-K/A filed on January 24, 2006).
- --------------------------------------------------------------------------------
21.1 Subsidiaries (incorporated by reference to Exhibit 21.1 to the
Registrant's Form 10-KSB filed on April 16, 2006).
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
23.1 Consent of Haskell & White LLP.*
- --------------------------------------------------------------------------------
23.2 Consent of Stonefield Josephson, Inc. *
- --------------------------------------------------------------------------------
23.2 Consent of Stradling Yocca Carlson & Rauth (included in the
opinion filed as Exhibit 5.1).*
- --------------------------------------------------------------------------------
24.1 Power of Attorney.**
- --------------------------------------------------------------------------------
*- Filed herewith.
**- Previously filed.