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By Ken Nagy, CFA

On March 28, 2013, Auxilio, Inc., (OTC:AUXO) the Mission Viejo, California based Managed Print Services (MPS) company for the health care industry, reported its year end 2012 results.

A powerful year resulted in a 63.2 percent year over year jump in sales, with revenue expanding $13.801 million to $35.647 million from $21.845 million for the 12 months ended December 31, 2011.

Auxilio’s strength in its year over year revenues was primarily a result of the 2011 and early 2012 signing of eight new or expanded contracts, including the December 2011 signing of the Catholic Health East contract, the largest in Auxilio’s history.

Similarly, during the year the Company added the largest number of new hospitals to its national hospital portfolio and successfully completed the largest number of implementations of its MPS program in a single year.

Cost of revenue for the year, which consists of document imaging equipment, parts, supplies and salaries and expenses of field services personnel, jumped to $31.018 million for the for the full year ended December 31, 2012 as compared to $19.131 million for the same period in 2011.

As a result, fiscal 2012 gross margin improved year over year to 13 percent from 12.4 percent for the full year ended December 31, 2011.

Although gross margin improved year over year, it’s important to note that gross margin is negatively impacted by new contracts, which at the onset, translate to higher costs associated with absorbing new customer’s legacy contracts in advance of anticipated revenue.

As Auxilio implements its programs, it attempts to improve upon these contracts, therefore reducing costs over the term of the contract.

Again, while the upfront costs associated with bringing on new accounts will continue, management expects to partially offset those costs with accelerated growth and quicker ramp up of new accounts.

Total operating expenses increased year over year by $1.068 million to $6.259 million but improved to only 17.6 percent of revenues compared to operating expenses of 23.8 percent of revenues during 2011.

Auxilio reported a net loss of $2.381 million, which was a year over year improvement of $209,776 from a net loss of $2.591 million during the fiscal year ended December 31, 2011.

The improvement in net loss was primarily a result of higher revenues and improved margins offset by $636,373 in additional other expenses during fiscal 2012.

Based on the weighted average number of basic and diluted common shares of 19.589 million shares, basic and diluted net loss per share resulted in a net loss of $0.12 per basic and diluted share during the full year ended December 31, 2012. This compares to a basic and diluted net loss per share of $0.13 on a weighted average number of basic and diluted shares of 19.376 million shares during fiscal 2011.

It should be noted that during the fourth quarter of 2012, Auxilio had positive income from operations and exceeded its expectations for revenue growth for the calendar year 2012.

As a result of those milestones and the Company’s ability to remain focused on reducing start up costs, while making improvement to margins, management is confident in its ability to reach positive income from operations during 2013.

The Company’s balance sheet improved with, Auxilio having $2.190 million of cash and equivalents and a working capital deficit of $25,084 during the period ended, December 31, 2012. This compares to cash and equivalents of $1.323 million and a working capital deficit of $944,977 for the quarter ended September30, 2012.

By adding new accounts and expanding existing accounts and driving contracts toward profitability, the Company has made significant progress on its growth objectives.

At into the Catholic Health East contract and up through the end of 2012, Auxilio doubled the size of its national portfolio to over 80 hospitals with more than 1600 affiliated care entities across the United States. Furthermore, Auxilio now manages the process and production of over 1.5 billion documents per year for more than 50,000 devices from multiple manufactures and more than 250,000 caregivers, physicians and health care employees across the country.

As a result of these implementations, the Company is seeing a reduction in its start up costs per hospital and an improvement in its margins which will support the Company’s efforts to reach positive cash flow from operations in 2013.

Similarly, Auxilio implemented its MPS program into 40 hospitals within 12 months.

This is significant as this new revenue adds to the cash flow from the Company’s legacy accounts moving Auxilio that much closer to cash flow positive from operations.

Auxilio now operates on-site in 22 states throughout the nation representing more than 26,000 patient beds in over 80 hospitals.

Along the same lines the Company’s MPS offerings continue to be in high demand as health care systems and hospitals increasingly search for solutions to reduce costs and enhance efficiencies.

With its exclusive focus on the healthcare industry, the Healthcare Information Technology (HITECH) portion of the American Recovery and Reinvestment Act of 2009 (ARRA) offers Auxilio a unique growth opportunity.

The HITECH portion of the bill includes nearly $20 billion of reimbursement incentives to those providers achieving “Meaningful Use” for the implementation of an Electronic Medical Record System.

The funding begins in 2012 for those who achieved “Meaningful Use” in 2011 and Medicare will begin applying penalties to hospital and physicians who fail to adopt Electronic Medical Record Systems starting in 2015.

Auxilio’s unshared position as the only managed print service provider in the U.S. dedicated exclusively to the health care industry and hospitals allows it to tap into HITECH incentives indirectly by bringing a unique exposure and knowledge in assisting customers in the preparation of electronic records management and the complex compliance requirements of the ‘meaningful use’ criteria federal mandates.

As Hospitals and IT departments are pressured to further reduce cost and enhance efficiencies as well as act quickly on cost cutting measures to comply with these EHR (Electronic Health Records) mandates, it leads to shorter sales cycles for Auxilio.

Similarly, the continued trend of high levels of consolidation within the healthcare industry should work to the Company’s advantage.

As healthcare systems consolidate and become larger, the need to streamline cost and increase efficiencies also grows, presenting a strong demand driver for Auxilio’s MPS solutions.

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