CYNERGISTEK, INC - FORM 10-Q

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EX-31.1 - EXHIBIT 31.1 - CYNERGISTEK, INC	ex311.htm
EX-31.2 - EXHIBIT 31.2 - CYNERGISTEK, INC	ex312.htm
EX-32.1 - EXHIBIT 32.1 - CYNERGISTEK, INC	ex321.htm
EX-10.1 - EXHIBIT 10.1 - CYNERGISTEK, INC	ex101.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________

FORM 10-Q

__________________

(Mark One)

[X]

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

[ ]

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission file number 000-27507

__________________

AUXILIO, INC.

(Exact name of registrant as specified in its charter)

__________________

Nevada (State or other jurisdiction of incorporation or organization)	88-0350448 (I.R.S. Employer Identification No.)
26300 La Alameda, Suite 100 Mission Viejo, California 92691 (Address of principal executive offices, zip code)
(949) 614-0700 (Registrant’s telephone number, including area code) __________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicated by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined by Section 12b-2 of the Exchange Act). Yes oNo þ.

The number of shares of the issuer's common stock, $0.001 par value, outstanding as of August 15, 2011 was 19,403,318.

AUXILIO, INC.

FORM 10-Q

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION			1

	ITEM 1.	FINANCIAL STATEMENTS.	1

	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS		5

	ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.	9

	ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	14

	ITEM 4.	CONTROLS AND PROCEDURES.	14

PART II - OTHER INFORMATION			14

	ITEM 1A.	RISK FACTORS.	15

	ITEM 6.	EXHIBITS.	19

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PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

AUXILIO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	JUNE 30, 2011			DECEMBER 31, 2010
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	1,783,366		$	2,249,907
Accounts receivable, net		1,012,171			1,160,251
Supplies		666,939			687,845
Prepaid and other current assets		177,006			331,483
Total current assets		3,639,482			4,429,486

Property and equipment, net		206,121			234,975
Deposits		28,013			28,013
Goodwill		1,517,017			1,517,017
	$	5,390,633		$	6,209,491

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	2,563,144		$	2,538,828
Accrued compensation and benefits		734,176			772,532
Deferred revenue		252,324			255,802
Advances on convertible debt offering		375,000			-
Current portion of capital lease obligations		52,345			41,776
Total current liabilities		3,976,989			3,608,938

Capital lease obligations, noncurrent		74,071			79,524

Commitments and contingencies		-			-

Stockholders' equity:
Common stock, par value at $0.001, 33,333,333 shares authorized, 19,336,651 and 19,336,651 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively		19,338			19,338
Additional paid-in capital		20,669,945			20,417,584
Accumulated deficit		(19,349,710	)		(17,915,893	)
Total stockholders' equity		1,339,573			2,521,029
Total liabilities and stockholders’ equity	$	5,390,633		$	6,209,491

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AUXILIO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months						Six Months
	Ended June 30,						Ended June 30,
	2011			2010			2011			2010
Revenues	$	4,803,793		$	3,587,851		$	9,486,894		$	7,286,473
Cost of revenues		4,019,128			2,797,753			8,358,340			5,453,583

Gross profit		784,665			790,098			1,128,554			1,832,890

Operating expenses:
Sales and marketing		467,265			316,858			825,406			637,267
General and administrative expenses		884,013			825,563			1,728,653			1,539,297

Total operating expenses		1,351,278			1,142,421			2,554,059			2,176,564

Loss from operations		(566,613	)		(352,323	)		(1,425,505	)		(343,674	)

Other income (expense):
Interest expense		(3,292	)		(1,109	)		(6,528	)		(1,566	)
Interest income		209			134			616			148

Total other income (expense)		(3,083	)		(975	)		(5,912	)		(1,418	)

Loss before provision for income taxes		(569,696	)		(353,298	)		(1,431,417	)		(345,092	)

Income tax expense		-			-			(2,400	)		(2,400	)

Net loss	$	(569,696	)	$	(353,298	)	$	(1,433,817	)	$	(347,492	)

Net loss per share:
Basic	$	(.03	)	$	(.02	)	$	(.07	)	$	(.02	)
Diluted	$	(.03	)	$	(.02	)	$	(.07	)	$	(.02	)

Number of weighted average shares:
Basic		19,336,651			19,237,365			19,336,651			19,143,743
Diluted		19,336,651			19,237,365			19,336,651			19,143,743

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AUXILIO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

SIX MONTHS ENDED JUNE 30, 2011

(UNAUDITED)

	Common Stock
	Shares		Amount		Additional Paid-in Capital		Accumulated Deficit			Total Stockholders' Equity
Balance at December 31, 2010		19,336,651	$	19,338	$	20,417,584	$	(17,915,893	)	$	2,521,029
Stock compensation expense for options and warrants granted to employees and directors		-		-		191,992		-			191,992
Restricted stock granted for marketing services		-		-		60,369		-			60,369
Net loss				-		-		(1,433,817	)		(1,433,817	)
Balance at June 30, 2011		19,336,651	$	19,338	$	20,669,945	$	(19,349,710	)	$	1,339,573

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AUXILIO, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Six Months Ended June 30,
	2011			2010
Cash flows from operating activities:
Net loss	$	(1,433,817	)	$	(347,492	)
Adjustments to reconcile net loss to net cash (used for) provided by operating activities:
Depreciation		67,071			150,520
Stock compensation expense for warrants and options issued to employees and consultants		191,992			130,716
Fair value of restricted stock granted for marketing services		60,369			-

Changes in operating assets and liabilities:
Accounts receivable		148,080			80,361
Supplies		20,906			7,870
Prepaid and other current assets		154,477			(135,127	)
Deposits		-			15,779
Accounts payable and accrued expenses		24,316			267,883
Accrued compensation and benefits		(38,356	)		105,445
Deferred revenue		(3,478	)		(51,852	)
Net cash (used for) provided by operating activities		(808,440	)		224,103

Cash flows from investing activities:
Purchases of property and equipment		(10,185	)		(54,312	)
Net cash (used for) investing activities		(10,185	)		(54,312	)

Cash flows from financing activities:
Net proceeds from issuance of common stock		-			117,964
Proceeds from advances on convertible debt offering		375,000			-
Payments on capital leases		(22,916	)		(3,499	)
Net cash provided by financing activities		352,084			114,465

Net (decrease) increase in cash and cash equivalents		(466,541	)		284,256
Cash and cash equivalents, beginning of period		2,249,907			1,781,586
Cash and cash equivalents, end of period	$	1,783,366		$	2,065,842

Supplemental disclosure of cash flow information:
Interest paid	$	6,528		$	1,552
Income taxes paid	$	1,117		$	-
Property and equipment acquired through capital leases	$	38,217		$	68,991

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SIX MONTHS ENDED JUNE 30, 2011 AND 2010

(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 U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, these financial statements do not include all of the information and notes required by GAAP for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, as filed with the SEC on March 30, 2011.

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 GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. As a result, actual results could differ from those estimates.

For the six months ended June 30, 2011, the Company’s cash reserves combined with the cash generated from revenues was sufficient to cover its operating expenses. However, no assurances can be given that the Company can continue to generate sufficient revenues. The Company believes that the availability of funds from equity offerings, the growth of its customer base and cost containment efforts will enable the Company to generate positive operating cash flows and to continue its operations.

The financial services industry and the U.S. economy as a whole have been experiencing a period of substantial turmoil and uncertainty characterized by unprecedented intervention by the United States federal government and the failure, bankruptcy, or sale of various financial and other institutions. The impact of these events on our business and the severity of the current economic crisis is uncertain. It is possible that the current crisis in the global credit markets, the financial services industry and the U.S. economy may adversely affect our business, vendors and prospects as well as our liquidity and financial condition. As a result no assurances can be given as to the Company’s ability to increase its customer base and generate positive cash flows. 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 that would be detrimental to the Company’s business operations and business development activities. These courses of action may be detrimental to the Company’s business prospects and result in material changes 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.

The accompanying financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.

The Company has performed an evaluation of subsequent events through the date of filing these financial statements with the SEC.

2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In September 2009, the FASB issued authoritative guidance (ASU 2009-13) regarding multiple-deliverable revenue arrangements that address how to separate deliverables and how to measure and allocate consideration to one or more units of accounting. Specifically, the guidance requires that consideration be allocated among multiple deliverables based on relative selling prices. The guidance establishes a selling price hierarchy of (1) vendor-specific objective evidence, (2) third-party evidence and (3) estimated selling price. This guidance is effective for annual periods beginning after June 15, 2010. The Company adopted this guidance effective January 1, 2011. Adoption resulted in no significant effect on its consolidated financial position and results of operations.

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From time to time, new accounting pronouncements are issued by the FASB that we adopt as of the specified effective date. Unless otherwise discussed in these financial statements and notes or in the financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2010, we believe the impact of any other recently issued standards that are not yet effective are either not applicable to us at this time or will not have a material impact on our consolidated financial statements upon adoption.

3. OPTIONS AND WARRANTS

Below is a summary of Auxilio stock option and warrant activity during the six-month period ended June 30, 2011:

Options	Shares			Weighted Average Exercise Price		Weighted Average Remaining Term in Years		Aggregate Intrinsic Value
Outstanding at December 31, 2010		5,218,909		$	1.01
Granted		318,000			0.85
Exercised		-			-
Cancelled		(352,007	)		0.60
Outstanding at June 30, 2011		5,184,902		$	1.03		6.49	$	218,155
Exercisable at June 30, 2011		3,522,902		$	1.08		5.35	$	178,348

Warrants	Shares			Weighted Average Exercise Price		Weighted Average Remaining Term in Years		Aggregate Intrinsic Value
Outstanding at December 31, 2010		3,362,708		$	1.36
Granted		300,000			0.94
Exercised		-			-
Cancelled		(250,000	)		0.55
Outstanding at June 30, 2011		3,412,708		$	1.39		2.48	$	125,650
Exercisable at June 30, 2011		1,437,708		$	1.35		2.48	$	125,650

During the six months ended June 30, 2011, the Company granted a total of 318,000 options to its employees and directors to purchase shares of the Company’s common stock at an exercise price range of $0.71 to $1.01 per share. The exercise price for these options equals the fair value of the Company’s stock on the grant date. The options have graded vesting annually over three years starting in January 2011 through June 2011. The fair value of the options was determined using the Black-Scholes option-pricing model. The assumptions used to calculate the fair value are as follows: (i) risk-free interest rate of 0.09% to 0.19%; (ii) estimated volatility of 80.95% to 81.95%; (iii) dividend yield of 0.0%; and (iv) expected life of the options of three years.

In November 2008, the Company entered into a five year joint marketing agreement with Sodexo Operations, LLC, (“Sodexo”) to provide Auxilio’s document services to Sodexo’s healthcare customer base in the United States. Sodexo will invest in sales and marketing resources and assist the Company with marketing their document services to Sodexo’s US healthcare customer base of more than 1,600 hospitals. Under the terms of the agreement the Company expects to provide Sodexo with warrants to purchase up to two million shares of the Company’s common stock at a price of $1.50 per share. The first 150,000 warrants vested in June 2009. An additional 175,000 vested in July 2010 upon the signing of a new customer contract. The balance of the warrants will vest in increments of between 75,000 and 500,000 shares dependent on the size and number of the new customer contracts that the Company enters into as a direct result of this agreement. The expense associated with these performance based warrants will be recognized when they are earned.

For the three and six months ended June 30, 2011 and 2010, stock-based compensation expense recognized in the statement of operations as follows:

	Three Months Ended June 30,				Six months Ended June 30,
	2011		2010		2011		2010
Cost of revenues	$	38,028	$	29,457	$	74,151	$	52,562
Sales and marketing		4,969		9,553		9,861		(3,975	)
General and administrative expense		63,217		42,338		107,980		82,129
Total stock based compensation expense	$	106,214	$	81,348	$	191,992	$	130,716

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4. RESTRICTED STOCK

On May 11, 2011 the Company amended the joint marketing agreement with Sodexo. Under the revised agreement, Sodexo will provide additional sales and marketing resources and will expand the marketing effort directed towards existing or potential Sodexo hospital clients. The term of the agreement is extended to December 31, 2014. Upon signing the amended agreement, the Company granted 200,000 shares of restricted stock to Sodexo. These shares vest as follows: 66,667 immediately, 66,667 on May 11, 2013 and 66,666 on May 11, 2014. The immediately vested shares resulted in a charge to marketing expense of $54,667. The cost of the remaining shares will be recognized over the vesting periods using the current market price of the stock at each periodic reporting date and considering any potential impairment. For the three months ended June 30, 2011, the cost recognized for these unvested shares totaled $5,702. Sodexo will be granted additional restricted stock for new sales resulting from these efforts. In addition, Sodexo will receive a quarterly commission based on actual revenues derived from these new accounts over the life of the contract along with an annual marketing fee based on total revenues received by the Company, excluding for certain existing accounts. Through June 30, 2011, no additional restricted stock has been granted.

5. NET (LOSS) PER SHARE

Basic net loss per share is calculated using the weighted average number of shares of the Company’s common stock issued and outstanding during a certain period, and is calculated by dividing the net loss by the weighted average number of shares of the Company’s common stock issued and outstanding during such period. Diluted net loss per share is calculated using the weighted average number of common and potentially dilutive common shares outstanding during the period, using the as-if converted method for secured convertible notes, and the treasury stock method for options and warrants. Options and warrants were not included in the computation of diluted net loss per share because inclusion would have been anti-dilutive.

The following table sets forth the computation of basic and diluted net (loss) per share:

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Numerator:
Net loss	$	(569,696	)	$	(353,298	)	$	(1,433,817	)	$	(347,492	)
Denominator:
Denominator for basic calculation weighted average shares		19,336,651			19,237,365			19,336,651			19,143,743
Dilutive common stock equivalents:
Options and warrants		-			-			-			-
Denominator for diluted calculation weighted average shares		19,336,651			19,237,365			19,336,651			19,143,743

Net loss per share:
Basic net loss per share	$	(.03	)	$	(.02	)	$	(.07	)	$	(.02	)
Diluted net loss per share	$	(.03	)	$	(.02	)	$	(.07	)	$	(.02	)

6. ACCOUNTS RECEIVABLE

A summary as of June 30, 2011 is as follows:

Trade receivable	$	1,254,483
Customer advances		(242,312	)
Allowance for doubtful accounts		-
Total accounts receivable	$	1,012,171

7. ADVANCES ON CONVERTIBLE DEBT OFFERING

Through June 30, 2011, the Company had accepted $375,000 in advances on a convertible debt offering. The offering did not close until July 29, 2011. As of June 30, 2011 the Company has not recognized the cost of finder’s fees, the fair value of warrants, or any other related cost associated with the offering. These costs will be recorded effective with closing of the convertible debt offering on July 29, 2011 at which time interest charges will also begin to accrue.

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8. EMPLOYMENT AGREEMENTS

On August 5, 2009, the Board of Directors appointed Mr. Joseph J. Flynn as President and Chief Executive Officer (“CEO”) effective August 31, 2009. Mr. Flynn has served as a member of the Board of Directors since 2003. He previously held the position of President and CEO for the Company from 2003 to 2006, having resigned to take a position as the Vice President of the Sport Group for the Nielsen Company. In connection with his appointment as President and CEO, the Company and Mr. Flynn entered into an Executive Employment Agreement, effective as of August 31, 2009 (the “Flynn Employment Agreement”). The Flynn Employment Agreement provides that Mr. Flynn will be employed by the Company as President and CEO, for an initial term beginning on August 31, 2009 and ending on December 31, 2011, at an initial base salary of $250,000, up to $100,000 per year incentive compensation and options for 250,000 shares as more specifically set forth in the Flynn Employment Agreement. Upon termination of Mr. Flynn’s employment by the Company other than for cause or by Mr. Flynn for good reason, the Company shall continue paying Mr. Flynn’s salary for six (6) months and accelerate the vesting of Company options and/or warrants issued to Mr. Flynn.

The Compensation Committee set Mr. Flynn’s base salary at $261,250 for the fiscal year ending December 31, 2011. Mr. Flynn may also earn up to $100,000 in annual bonus, with 33.33% payout for closing six new customer contracts before the end of 2011, 33.33% for hitting revenue targets and 33.33% payout for achieving gross margin targets. In addition, Mr. Flynn will participate in a bonus and option pool that will be allocated at the Board’s discretion based on obtaining new contracts specifically, for every new contract beyond six contracts in 2011, a pool of $25,000 and 25,000 options should be granted with a strike price for the options on the day they are earned, the date in which the contracts are signed and delivered.

On April 2, 2010, the Company entered into an employment agreement with Mr. Paul T. Anthony, CFO of the Company since 2004, to the serve as Executive Vice President (“EVP”) and CFO. As EVP and CFO, Mr. Anthony, the Company CFO since 2005 continues to report to the CEO and has duties and responsibilities assigned by the CEO. The employment agreement was effective January 1, 2010, has a term of two years, and provides for an annual base salary of $203,500. The agreement will automatically renew for subsequent 12 month terms unless either party provides advance written notice to the other that such party does not wish to renew the agreement for a subsequent 12 months. Mr. Anthony also receives the customary employee benefits paid by the Company. Mr. Anthony is also entitled to receive a bonus of up to $60,000 per year, the achievement of which is based on Company performance metrics. The Company may terminate Mr. Anthony’s employment under this agreement without cause at any time on thirty days advance written notice, at which time Mr. Anthony would receive severance pay for six months and be fully vested in all options and warrants granted to date.

The CEO set Mr. Anthony’s base salary at $212,658 for the fiscal year ending December 31, 2011. Mr. Anthony may also earn up to $60,000 in annual bonus, with 33.33% payout for closing six new customer contracts before the end of 2011, 33.33% for hitting revenue targets and 33.33% payout for achieving gross margin targets. In addition, Mr. Anthony will participate in a bonus and option pool that will be allocated at the Board’s discretion based on obtaining new contracts specifically, for every new contract beyond six contracts in 2011, a pool of $25,000 and 25,000 options should be granted with a strike price for the options on the day they are earned, the date in which the contracts are signed and delivered.

9. CONCENTRATIONS

Cash Concentrations

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

Major Customers

The Company's two largest customers accounted for approximately 43% of the Company's revenues for the six months ended June 30, 2011. Accounts receivable for these customers totaled approximately $75,000 as of June 30, 2011 which is 8% of the Company’s accounts receivable balance. The Company's five largest customers accounted for approximately 82% of the Company's revenues for the six months ended June 30, 2010.

10. SEGMENT REPORTING

The Company has adopted ASC 280, “Segment Reporting”. Since the Company operates in one business segment based on the Company’s integration and management strategies, segment disclosure has not been presented.

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11. GOODWILL

The Company performed an impairment test of goodwill as of December 31, 2010, determining that its estimated fair value based on its market capitalization was greater than the Company’s carrying amount including goodwill. The Company did not perform step 2 because the fair value was greater than the carrying amount.

Although the Company has experienced a net loss for the six months ended June 30, 2011, these losses were a direct result of operating expenses related to improved sales efforts that recently resulted in Auxilio closing six new recurring revenue contracts. As a result, management did not feel it was necessary to perform an interim impairment test.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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

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

Readers should carefully review the risk factors described below under the heading “Risk Factors” and in other documents we file from time to time with the SEC, including our Form 10-K for the fiscal year ended December 31, 2010. Our filings with the SEC, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those filings, pursuant to Sections 13(a) and 15(d) of the Exchange Act, are available free of charge at www.auxilioinc.com, when such reports are available at the SEC web site.

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 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 Auxilio’s current operations.

Auxilio now provides total outsourced document managed services and related financial and business processes exclusively for major healthcare facilities. Our proprietary services and unique processes assist hospitals, and health systems with strategic direction and services that reduce print related 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 IT department heads to determine the best possible long term strategy for managing the millions of documents produced by their facilities on an annual basis. Auxilio’s print management programs help our clients achieve measurable savings and a fully outsourced print management process. Auxilio’s target market includes medium to large hospitals and healthcare systems which include multiple hospitals.

Our common stock currently trades on the OTC Bulletin Board under the stock symbol “AUXO”.

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Where appropriate, references to “Auxilio,” the “Company,” “we,” “us” or “our” include Auxilio, Inc. and Auxilio Solutions, Inc.

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 (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. We evaluate these estimates on an on-going basis, including those estimates related to customer programs and incentives, 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 we believe to be reasonable under the circumstances. The results of these estimates form the basis for our judgments about the carrying values of assets and liabilities which are not readily apparent from other sources. As a result, actual results may differ from these estimates under different assumptions or conditions.

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

·	Revenue recognition

Revenues from equipment sales transactions are deemed earned when the equipment is delivered and accepted by the customer. For equipment that is to be placed at the customer’s location at a future date, revenue is deferred until that equipment is actually placed. Service and supply revenue is earned monthly during the term of the various contracts, as services and supplies are provided.

·	Deferred revenue

We enter into arrangements that include multiple deliverables, which typically consist of the sale of equipment and a support services contract. We account for each element within an arrangement with multiple deliverables as separate units of accounting. Revenue is allocated to each unit of accounting under the guidance of ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements which provides criteria for separating consideration in multiple-deliverable arrangements by establishing a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable is based on vendor-specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. A vendor is required to determine its best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a standalone basis. This ASU does not permit the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method, which allocates any discount in the overall arrangement proportionally to each deliverable based on its relative selling price.

·	Accounts receivable valuation and related reserves

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

·	New customer implementation costs

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

·	Impairment of intangible assets

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The Company performs an impairment test of goodwill at least annually or on an interim basis if any triggering events occur that would merit another test. The impairment test compares the Company’s estimate of its fair value based on its market capitalization to the Company’s carrying amount including goodwill. To date, the Company has not had to perform step 2 of the impairment test because the fair value has exceeded the carrying amount.

·	Stock-based compensation

The Company recognizes stock-based compensation as an expense in accordance with ASC Topic 718 “Share-Based Payments” (“ASC 718”) and values the equity securities based on the fair value of the security on the date of grant. Stock option awards are valued using the Black-Scholes option-pricing model. 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.

·	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.

You should refer to our Annual Report on Form 10-K filed on March 30, 2011 for a complete discussion of our critical accounting policies.

RESULTS OF OPERATIONS

For the Three Months Ended June 30, 2011 Compared to the Three Months Ended June 30, 2010

Revenue

Revenue increased by $1,215,942 to $4,803,793 for the three months ended June 30, 2011, as compared to the same period in 2010. The increase is a result of the addition of six new recurring revenue contracts between March 2010 and December 2010. Meanwhile we have maintained all our current customers, though we have negotiated lower rates for some of them. Equipment sales for the three months ended June 30, 2011 were approximately $80,591 as compared to approximately $45,804 for the same period in 2010. We expect that equipment revenue will remain low in the future as we focus on recurring service revenues.

Cost of Revenue

Cost of revenue consists of print related equipment, parts, supplies and salaries and expenses of field services personnel. Cost of revenue was $4,019,128 for the three months ended June 30, 2011, as compared to $2,797,753 for the same period in 2010. The increase in the cost of revenue for the first quarter of 2011 is attributed primarily to the addition of six new recurring revenue contracts between March 2010 and December 2010. During 2011 we incurred approximately $500,000 in additional staffing and approximately $50,000 in additional travel related costs in connection with the support and operation of new customers. Service and supply costs increased by approximately $670,000 primarily as a result of our new customers, but partially offset by a reduction in our per unit supplies costs in 2011. We cannot be sure this trend of lower per unit supply costs will continue. Equipment costs, which includes equipment provided under the recurring service contracts and equipment sold, increased by approximately $90,000 in 2011, primarily as a result of the increase in new customers.

We expect higher cost of revenues at the start of our engagement with most new customers. In addition to the costs associated with implementing our services, we absorb our new customer’s legacy contracts with third-party vendors. As we implement our programs we strive to improve upon these legacy contracts thus reducing costs over the term of the contract. We anticipate this trend to continue but anticipate overall increase in cost of revenues sold as a result of the expansion of our customer base.

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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 $467,265 for the three months ended June 30, 2011, as compared to $316,858 for the same period in 2010. Included in sales and marketing costs for the three months ended June 30, 2011 is a charge of $60,369 in connection with restricted stock granted to Sodexo for marketing services under a joint marketing agreement. There is no similar charge in 2010. Aside from this cost, sales and marketing expenses for the second quarter of 2011 are higher due to a more aggressive sales and marketing effort to obtain new clients.

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 $58,450 to $884,013 for the three months ended June 30, 2011, as compared to $825,563 for the same period in 2010. Salary expense decreased approximately $60,000 in the second quarter of 2011 primarily due to severance costs charged in 2010. Offsetting this, legal and consulting fees increased approximately $120,000 in connection with the development of operational training tools, statutory filings, the drafting and adoption of the new stock incentive plan and investor relations.

Other Income (Expense)

Interest expense for the three months ended June 30, 2011 was $3,292, compared to $1,109 for the same period in 2010. The increase is a result of financing more computer equipment. Interest income is derived from short-term interest-bearing securities and money market accounts. Interest income for the three months ended June 30, 2011 was $209, as compared to $134 for the same period in 2010, primarily due to nominal interest rates for invested cash.

Income Tax Expense

There was no income tax expense for the three months ended June 30, 2011 or 2010.

For the Six Months Ended June 30, 2011 Compared to the Six Months Ended June 30, 2010

Revenue

Revenue increased $2,200,421 to $9,486,894 for the six months ended June 30, 2011, as compared to the same period in 2010. The increase is a result of the addition of six new recurring revenue contracts between March 2010 and December 2010. Meanwhile we have maintained all our current customers, though we have negotiated lower rates for some of them. Equipment sales for the six months ended June 30, 2011 were approximately $217,747 as compared to approximately $140,129 for the same period in 2010. We expect that equipment revenue will remain low in the future as we focus on recurring service revenues.

Cost of Revenue

Cost of revenue consists of print related equipment, parts, supplies and salaries and expenses of field services personnel. Cost of revenue increased $2,904,757 to $8,358,340 for the six months ended June 30, 2011, as compared to $5,453,583 for the same period in 2010. The increase in the cost of revenue for 2011 is attributed primarily to the addition of six new recurring revenue contracts between March 2010 and December 2010. During 2011 we incurred approximately $1,070,000 in additional staffing and approximately $50,000 in additional travel related costs in connection with the support and operation of new customers. Service and supply costs increased by approximately $1,450,000 primarily as a result of our new customers, but partially offset by a reduction in our per unit supplies costs in 2011. We cannot be sure this trend of lower per unit supply costs will continue. Equipment costs, which includes equipment provided under the recurring service contracts and equipment sold, increased by approximately $190,000 in 2011, primarily as a result of the increase in new customers.

We expect higher cost of revenues at the start of our engagement with most new customers. In addition to the costs associated with implementing our services, we absorb our new customer’s legacy contracts with third-party vendors. As we implement our programs we strive to improve upon these legacy contracts thus reduce costs over the term of the contract. We anticipate this trend to continue but anticipate overall increase in cost revenues sold as a result of the expansion of our customer base.

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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 $825,406 for the six months ended June 30, 2011, as compared to $637,267 for the same period in 2010. Included in sales and marketing costs for the six months ended June 30, 2011 is a charge of $60,369 in connection with restricted stock granted to Sodexo for marketing services under a joint marketing agreement. There is no similar charge in 2010. Aside from this cost, sales and marketing expenses for the second quarter of 2011 are higher due to a more aggressive sales and marketing effort to obtain new clients.

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 $189,356 to $1,728,653 for the six months ended June 30, 2011, as compared to $1,539,297 for the same period in 2010. Salary increases in 2011 were offset by severance costs incurred in 2010. Legal fees increased approximately $100,000 in connection with statutory filings and drafting stock option plan and investor relations consulting fees increased by approximately $70,000.

Other Income (Expense)

Interest expense for the six months ended June 30, 2011 was $6,528, compared to $1,566 for the same period in 2010. The increase is a result of financing more computer equipment. Interest income is primarily derived from short-term interest-bearing securities and money market accounts. Interest income for the six months ended June 30, 2011 was $616, as compared to $148 for the same period in 2010, primarily due to nominal interest rates for invested cash.

Income Tax Expense

Income tax expense for the six months ended June 30, 2011 of $2,400 represents the minimum amount due for state filing purposes. Income tax expense for the six months ended June 30, 2010 of $2,400 also represents the minimum amount due for state filing purposes.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2011, our cash and cash equivalents were $1,783,366 and our negative working capital was $337,507. Our principal cash requirements are for operating expenses, including equipment, supplies, employee costs, and capital expenditures and funding of the operations. Our primary sources of cash are service and equipment sale revenues, convertible debt offerings, exercising of warrants and the sale of common stock.

During the six months ended June 30, 2011, our cash used for operating activities amounted to $808,440, as compared to cash provided by operating activities of $224,103 for the same period in 2010. The difference in cash from operating activities was primarily due to the costs incurred to implement our new recurring revenue contracts, more aggressive sales and marketing effort to obtain new clients and legal and consulting fees in connection with the development of operational training tools, statutory filings, the drafting and adoption of the new stock incentive plan and investor relations.

We have and expect to continue to close additional recurring revenue contracts to new customers throughout 2011. Since we expect higher cost of revenues at the start of our engagement with most new customers, we may seek additional financing, which may include debt and/or equity financing or funding through third party agreements. In July 2011, we closed on a private offering of secured convertible notes and warrants with gross proceeds of $1,850,000. There can be no assurance that any additional financing will be available on acceptable terms, if at all. Any equity financing may result in dilution to existing stockholders and any debt financing may include restrictive covenants. Management believes that cash generated from debt and/or equity financing arrangements along with funds from operations will be sufficient to sustain our business operations over the next twelve months.

OFF-BALANCE SHEET ARRANGEMENTS

Our off-balance sheet arrangements consist primarily of conventional operating leases, purchase commitments and other commitments arising in the normal course of business, as further discussed below under “Contractual Obligations and Commercial Commitments.” As of June 30, 2011, we did not have any other relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

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CONTRACTUAL OBLIGATIONS AND CONTINGENT LIABILITIES AND COMMITMENTS

As of June 30, 2011, expected future cash payments related to contractual obligations and commercial commitments were as follows:

	Payments Due by Period
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Capital leases	$	138,930	$	62,967	$	75,962	$	-	$	-
Operating leases		684,788		154,564		321,410		208,814		-
Total	$	823,718	$	217,531	$	397,372	$	208,814	$	-

RECENT DEVELOPMENTS

On May 11, 2011 the Company amended the joint marketing agreement with Sodexo. Under the revised agreement, Sodexo will provide additional sales and marketing resources and will expand the marketing effort directed towards existing or potential Sodexo hospital clients. The term of the agreement is extended to December 31, 2014. Upon signing the amended agreement, the Company granted 200,000 shares of restricted stock to Sodexo. These shares vest as follows: 66,667 immediately, 66,667 on May 11, 2013 and 66,666 on May 11, 2014. Sodexo will be granted additional restricted stock for new sales resulting from these efforts. In addition, Sodexo will receive a quarterly commission based on actual revenues derived from these new accounts over the life of the contract along with an annual marketing fee based on total revenues received by the Company, excluding for certain existing accounts. Through June 30, 2011, no additional restricted stock has been granted.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4. CONTROLS AND PROCEDURES.

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

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934), as of the end of the period covered by this Quarterly Report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including each of such officers as appropriate to allow timely decisions regarding required disclosure.

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

PART II - OTHER INFORMATION

ITEM 1A. RISK FACTORS.

This Quarterly Report on Form 10-Q, including the discussion and analysis of our financial condition, and results of operations set forth above, contains certain forward-looking statements. Forward-looking statements set forth estimates of, or our expectations or beliefs regarding, our future financial performance. Those estimates, expectations and beliefs are based on current information and are subject to a number of risks and uncertainties that could cause our actual operating results and financial performance in the future to differ, possibly significantly, from those set forth in the forward-looking statements contained in this Quarterly Report and, for that reason, you should not place undue reliance on those forward-looking statements. Those risks and uncertainties include, although they are not limited to, the following:

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WE FACE SUBSTANTIAL COMPETITION FROM BETTER ESTABLISHED COMPANIES THAT MAY HAVE SIGNIFICANTLY GREATER RESOURCES WHICH COULD LEAD TO REDUCED SALES OF OUR PRODUCTS AND SERVICES.

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:

·	greater name recognition and larger marketing budgets and resources;

·	established marketing relationships and access to larger customer bases;

·	substantially greater financial, technical and other resources; and

·	larger technical and support staffs.

As a result, our competitors may be able to respond more quickly than us 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.

RISKS RELATED TO OUR BUSINESS

WE ARE DEPENDENT UPON OUR VENDORS TO CONTINUE SUPPLYING US WITH EQUIPMENT, PARTS, SUPPLIES, AND SERVICES AT COMPARABLE TERMS AND PRICE LEVELS AS OUR 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 ARE DEPENDENT 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 two largest customers represent approximately 43% of our revenues for the six months ended June 30, 2011. 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 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 MAY BE UNABLE TO RECRUIT AND RETAIN OUR SENIOR MANAGEMENT AND OTHER KEY PERSONNEL ON WHOM WE ARE DEPENDENT.

We are highly dependent upon senior management and key personnel, and we do not carry any insurance policies on such persons. In particular, we are highly dependent upon Joseph J. Flynn, our Chief Executive Officer, and Paul T. Anthony, our Chief Financial Officer. The loss of any member of our senior management, or our inability to attract, retain and motivate the additional highly-skilled employees and consultants that our business requires, could substantially hurt our business, prospects, financial condition and results of operations. In addition, we rely on the ability of our management team to work together effectively. If our management team fails to work together effectively, our business could be harmed.

THE MARKET MAY NOT ACCEPT OUR PRODUCTS AND SERVICES AND WE MAY NOT BE ABLE TO CONTINUE OUR BUSINESS OPERATIONS; OR, IF THE MARKET IS RECEPTIVE TO OUR PRODUCTS BUT NOT OUR SERVICES, OUR REVENUES AND PROFITABILITY WILL BE HARMED.

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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. Even if our products and services achieve market acceptance, our products and services may fail to address the market’s requirements adequately.

In addition, if we are able to sell our products but are unable to provide ongoing services, our revenues and profitability will be harmed. Our services are integral to the successful deployment of our solutions. If we do not effectively service and support our customers, our revenues and operating results would be harmed.

WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE AND, IF SUCH CAPITAL IS NOT AVAILABLE ON TERMS ACCEPTABLE TO US OR AVAILABLE TO US AT ALL, WE MAY BE UNABLE TO CONTINUE OUR BUSINESS OPERATIONS.

We may need capital in the future to continue our business operations or to expand. If we need capital, we cannot be certain that it will be available on terms acceptable to us or available to us at all. In the event we need to raise capital, we may not be able to:

·	develop or enhance our service offerings;

·	take advantage of future opportunities; or

·	respond to customers and competition.

If we cannot obtain additional capital and continue or expand our business, we may be unable to effectively compete in our industry.

WE MAY NOT BE ABLE TO MAINTAIN OUR CURRENT RATE OF GROWTH AND, AS A RESULT, OUR PROFITABILITY MAY SUFFER.

To continue to be successful, we may need to implement additional management information systems, develop further our operating, administrative, financial and accounting systems and controls and maintain close coordination among our executive, finance, marketing, sales and operations organizations. Any failure to maintain our current rate of growth may result in a decline of our profitability.

RISKS RELATED TO THE MARKET FOR OUR SECURITIES

BECAUSE THE PUBLIC MARKET FOR SHARES OF OUR COMMON STOCK IS LIMITED, SHAREHOLDERS MAY BE UNABLE TO RESELL THEIR SHARES OF COMMON STOCK.

Currently, there is only a limited public market for our Common Stock on the OTCBB and our shareholders may be unable to resell their shares of Common Stock. Currently, the average daily trading volume of our Common Stock is not significant, and it may be more difficult for you to sell your shares in the future, if at all.

The development of an active trading market depends upon the existence of willing buyers and sellers who are able to sell shares of our Common Stock as well as market makers willing to create a market in such shares. Under these circumstances, the market bid and ask prices for the shares may be significantly influenced by the decisions of the market makers to buy or sell the shares for their own account. Such decisions of the market makers may be critical for the establishment and maintenance of a liquid public market in our Common Stock. Market makers are not required to maintain a continuous two-sided market and are free to withdraw quotations at any time. We cannot assure our stockholders that an active public trading market for our Common Stock will develop or be sustained.

OUR STOCK PRICE MAY BE VOLATILE AND OUR COMMON STOCK COULD DECLINE IN VALUE, RESULTING IN LOSS TO OUR SHAREHOLDERS.

The market for our Common Stock is volatile, having ranged in the last twelve months from a low of $0.52 to a high of $1.25 on the OTCBB. 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 shares of our Common Stock:

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·	fluctuations in our quarterly revenues and earnings or those of our competitors;

·	variations in our operating results compared to levels expected by the investment community;

·	announcements concerning us or our competitors;

·	announcements of technological innovations;

·	sale of shares or short-selling efforts by traders or other investors;

·	market conditions in the industry; and

·	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. In addition, the highly volatile nature of our stock price may cause investment losses for our stockholders. In the past, securities class action litigation has often been brought against companies following periods of volatility in the market price of their securities. If securities class action litigation is brought against us, such litigation could result in substantial costs while diverting management’s attention and resources.

THERE ARE A LARGE NUMBER OF SHARES OF COMMON STOCK THAT MAY BE ISSUED OR SOLD, AND IF SUCH SHARES ARE ISSUED OR SOLD, THE MARKET PRICE OF OUR COMMON STOCK MAY DECLINE.

As of June 30, 2011, approximately 19,336,651 shares of our Common Stock were outstanding.

If all warrants and options outstanding as of June 30, 2011 are exercised prior to their expiration, up to approximately 8.6 million additional shares of Common Stock could become freely tradable. Such sales of substantial amounts of Common Stock in the public market could adversely affect the prevailing market price of our Common Stock and could also make it more difficult for us to raise funds through future offerings of Common Stock.

FUTURE SALES OF RESTRICTED STOCK COULD ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK AND OUR ABILITY TO OBTAIN ADDITIONAL FINANCING.

Although our Common Stock is currently quoted on the OTCBB, 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 of our Common Stock. During the year ended December 31, 2009, we sold 1,416,667 shares of our Common Stock to finance our operations. Such a large “over-hang” of stock eligible for sale in the public market may have the effect of depressing the market price of our Common Stock, and make it difficult for us to obtain debt or equity financing, if we are able to obtain such financing at all.

IF OUR COMMON STOCK IS DETERMINED TO BE A “PENNY STOCK,” A BROKER-DEALER MAY FIND IT MORE DIFFICULT TO TRADE OUR COMMON STOCK AND AN INVESTOR MAY FIND IT MORE DIFFICULT TO ACQUIRE OR DISPOSE OF OUR COMMON STOCK IN THE SECONDARY MARKET.

Our Common Stock may be subject to the so-called “penny stock” rules. The SEC has adopted regulations that define a “penny stock” to be any equity security that has a market price per share of less than $5.00, subject to certain exceptions, such as any securities listed on a national securities exchange. For any transaction involving a “penny stock,” unless exempt, the rules impose additional sales practice requirements on broker-dealers, subject to certain exceptions. If our Common Stock is determined to be a “penny stock,” a broker-dealer may find it more difficult to trade our common stock and an investor may find it more difficult to acquire or dispose of our common stock on the secondary market.

WE DO NOT INTEND TO PAY DIVIDENDS.

We have never declared or paid any cash dividends on our Common Stock. We do not anticipate paying dividends on our Common Stock in the foreseeable future. We may not have sufficient funds to legally pay dividends. Even if funds are legally available to pay dividends, we may nevertheless decide in our sole discretion not to pay dividends and to retain any future earnings to fund growth.

OTHER RISKS

IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US EVEN IF DOING SO WOULD BE BENEFICIAL TO OUR SHAREHOLDERS.

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Some provisions of our Articles of Incorporation, as amended, and Bylaws, as well as some provisions of Nevada or California law, may discourage, delay or prevent third parties from acquiring us, even if doing so would be beneficial to our shareholders.

AS A PUBLIC COMPANY, WE ARE SUBJECT TO COMPLEX LEGAL AND ACCOUNTING REQUIREMENTS THAT WILL REQUIRE US TO INCUR SIGNIFICANT EXPENSES.

As a public company, we are subject to numerous legal and accounting requirements that do not apply to private companies. The cost of compliance with many of these requirements is material, not only in absolute terms but, more importantly, in relation to the overall scope of the operations of a small company. The cost of such compliance may prove to be a substantial competitive disadvantage vis-à-vis our privately held and larger public competitors.

THE IMPACT OF THE DETERIORATION OF THE GLOBAL CREDIT MARKETS, FINANCIAL SERVICES INDUSTRY AND U.S. ECONOMY MAY CONTINUE TO NEGATIVELY AFFECT OUR BUSINESS AND OUR ABILITY TO OBTAIN CAPITAL, IF NEEDED.

The deterioration in the global credit markets, the financial services industry and the U.S. economy as a whole have resulted in a period of substantial turmoil and uncertainty characterized by unprecedented intervention by the United States federal government and the failure, bankruptcy, or sale of various financial and other institutions. The impact of these events on our business and the severity of the current economic crisis is uncertain. It is possible that the current crisis in the global credit markets, the financial services industry and the U.S. economy may adversely affect our business, vendors and prospects as well as our liquidity and financial condition. As a result no assurances can be given as to our ability to increase our customer base and generate positive cash flows. Although we have been able to raise additional working capital through convertible note agreements and private placement offerings of our common stock, we may not be able to continue this practice in the future or we may not be able to obtain additional working capital through other debt or equity financings. In the event that sufficient capital cannot be obtained, we may be forced to significantly reduce operating expenses to a point that would be detrimental to our business operations and business development activities. These courses of action may be detrimental our business prospects and result in material charges 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 may experience dilution of their investments.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

ITEM 6. EXHIBITS.

No.	Item
10.1	Auxilio, Inc. Amendment to 2011 Stock Incentive Plan

31.1	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.

31.2	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.

32.1	Certification of the CEO and CFO pursuant to Rule 13a-14(b) and Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350*.

* In accordance with Item 601(b)(32)(ii) of Regulation S-K, this exhibit shall not be deemed “filed” for the purposes of Section 18 of the Securities and Exchange Act of 1934 or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act or the Securities Exchange Act of 1934.

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SIGNATURES

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

	AUXILIO, INC.

Date: August 15, 2011	By:	/s/ Joseph J. Flynn
		Joseph J. Flynn
		Chief Executive Officer
		(Principal Executive Officer)



Date: August 15, 2011	By:	/s/ Paul T. Anthony
		Paul T. Anthony
		Chief Financial Officer
		(Principal Accounting Officer)

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