CYNERGISTEK, INC - FORM 10-Q

Attached files

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EX-32.1 - EXHIBIT 32.1 - CYNERGISTEK, INC	ex321.htm
EX-31.1 - EXHIBIT 31.1 - CYNERGISTEK, INC	ex311.htm
EX-31.2 - EXHIBIT 31.2 - CYNERGISTEK, INC	ex312.htm
EX-10.1 - EXHIBIT 10.1 - CYNERGISTEK, INC	ex101.htm
EXCEL - IDEA: XBRL DOCUMENT - CYNERGISTEK, INC	Financial_Report.xls

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2015

[ ] 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

(Issuer’s telephone number)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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 þ 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 o No þ

The number of shares of the issuer's common stock, $0.001 par value, outstanding as of May 14, 2015 was 24,220,109.

AUXILIO, INC.

FORM 10-Q

TABLE OF CONTENTS

	Page
PART I - FINANCIAL INFORMATION

Item 1 Financial Statements:

Condensed Consolidated Balance Sheets
as of March 31, 2015 (unaudited) and December 31, 2014	3

Condensed Consolidated Statements of Operations
for the Three Months Ended March 31, 2015 and 2014 (unaudited)	4

Condensed Consolidated Statement of Stockholders’ Equity
for the Three Months Ended March 31, 2015 (unaudited)	5

Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 2015 and 2014 (unaudited)	6

Notes to Unaudited Condensed Consolidated Financial Statements	8

Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations	16

Item 3 Quantitative and Qualitative Disclosure about Market Risk	21

Item 4 Controls and Procedures	21

PART II - OTHER INFORMATION

Item 1A Risk Factors	22

Item 6 Exhibits	22

Signatures	23

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PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

AUXILIO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

	MARCH 31, 2015			DECEMBER 31, 2014
	(unaudited)

ASSETS
Current assets:
Cash and cash equivalents	$	5,105,615		$	4,743,395
Accounts receivable, net		7,304,223			6,808,183
Supplies		1,095,430			1,066,132
Prepaid and other current assets		409,506			214,105
Total current assets		13,914,774			12,831,815

Property and equipment, net		273,720			215,747
Deposits		34,413			34,413
Intangible assets, net		1,212,500			1,265,000
Goodwill		2,473,656			2,473,656
Total assets	$	17,909,063		$	16,820,631

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable and accrued expenses	$	8,677,621		$	7,417,361
Accrued compensation and benefits		1,299,932			1,447,132
Line of credit		200,000			200,000
Deferred revenue		807,512			921,771
Current portion of capital lease obligations		75,209			55,546
Total current liabilities		11,060,274			10,041,810

Long-term liabilities:
Notes payable to related parties, net of discount of $3,701 and $30,189 at March 31, 2015 and December 31, 2014, respectively		49,243			333,534
Capital lease obligations less current portion		99,488			49,822
Total long-term liabilities		148,731			383,356

Commitments and contingencies

Stockholders' equity:
Common stock, par value at $0.001, 33,333,333 shares authorized, 23,752,536 and 23,623,619 shares issued and outstanding at March 31, 2015 and December 31, 2014, respectively		23,754			23,625
Additional paid-in capital		26,913,512			26,576,506
Accumulated deficit		(20,237,208	)		(20,204,666	)
Total stockholders’ equity		6,700,058			6,395,465
Total liabilities and stockholders’ equity	$	17,909,063		$	16,820,631

The accompanying notes are an integral part of these condensed consolidated financial statements.

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AUXILIO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

	Three Months Ended March 31,
	2015			2014
Revenues	$	13,847,915		$	10,244,574
Cost of revenues		11,715,594			8,504,940
Gross profit		2,132,321			1,739,634
Operating expenses:
Sales and marketing		742,071			508,210
General and administrative expenses		1,386,343			1,201,874
Total operating expenses		2,128,414			1,710,084
Income from operations		3,907			29,550
Other income (expense):
Interest expense		(34,049	)		(98,823	)
Total other income (expense)		(34,049	)		(98,823	)
Loss before provision for income taxes		(30,142	)		(69,273	)
Income tax expense		2,400			1,600
Net loss	$	(32,542	)	$	(70,873	)

Net loss per share:
Basic	$	(0.00	)	$	(0.00	)
Diluted	$	(0.00	)	$	(0.01	)

Number of weighted average shares:
Basic		23,681,559			20,658,573
Diluted		23,681,559			22,258,573

The accompanying notes are an integral part of these condensed consolidated financial statements.

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AUXILIO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
THREE MONTHS ENDED MARCH 31, 2015
(UNAUDITED)


					Additional					Total
	Common Stock				Paid-in		Accumulated			Stockholders’
	Shares		Amount		Capital		Deficit			Equity
Balance at December 31, 2014		23,623,619	$	23,625	$	26,576,506	$	(20,204,666	)	$	6,395,465
Stock compensation expense for options and warrants granted to employees and directors		-		-		53,922		-			53,922
Stock compensation expense for restricted stock issued to key employee		-		-		25,378		-			25,378
Conversion of note payable to common stock		128,917		129		257,706		-			257,835
Net loss		-		-		-		(32,542	)		(32,542	)
Balance at March 31, 2015		23,752,536	$	23,754	$	26,913,512	$	(20,237,208	)	$	6,700,058

The accompanying notes are an integral part of these condensed consolidated financial statements.

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AUXILIO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

	Three Months Ended March 31,
	2015			2014
Cash flows from operating activities:
Net loss	$	(32,542	)	$	(70,873	)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation		35,772			24,169
Amortization of intangible assets		52,500			-
Stock compensation expense for warrants and options issued to employees and directors		53,922			200,602
Stock compensation expense for restricted stock issued to key employee		25,378			-
Interest expense related to accretion of debt discount costs		26,488			35,250
Interest expense related to amortization of loan acquisition costs		-			21,926
Changes in operating assets and liabilities:
Accounts receivable		(496,040	)		264,602
Supplies		(29,298	)		(72,034	)
Prepaid and other current assets		(195,401	)		(13,100	)
Accounts payable and accrued expenses		1,260,260			174,051
Accrued compensation and benefits		(147,200	)		(425,588	)
Deferred revenue		(114,259	)		(19,789	)
Net cash provided by operating activities		439,580			119,216
Cash flows from investing activities:
Purchases of property and equipment		-			(14,682	)
Net cash used for investing activities		-			(14,682	)
Cash flows from financing activities:
Payments on capital leases		(24,416	)		(20,839	)
Payments on notes payable to related parties		(52,944	)		-
Net cash used for financing activities		(77,360	)		(20,839	)
Net increase in cash and cash equivalents		362,220			83,695
Cash and cash equivalents, beginning of period		4,743,395			4,668,624
Cash and cash equivalents, end of period	$	5,105,615		$	4,752,319

The accompanying notes are an integral part of these condensed consolidated financial statements.

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AUXILIO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)

	Three Months Ended March 31,
	2015		2014
Supplemental disclosure of cash flow information:

Interest paid	$	7,561	$	42,313

Income taxes paid	$	100,050	$	49,460

Non-cash investing and financing activities:

Property and equipment acquired through capital leases	$	93,745	$	-

Conversion of note payable to related party into restricted common stock	$	257,835	$	-

Conversion of note payable into common stock	$	-	$	100,000

The accompanying notes are an integral part of these condensed consolidated financial statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2015 AND 2014

(UNAUDITED)

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of Auxilio, Inc. and its subsidiaries (the “Company”, “we”, “us” or “Auxilio”) have been prepared in accordance with generally accepted accounting principles of the United States of America (“GAAP”) for interim financial statements pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, these financial statements do not include all of the information and notes required by GAAP for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, as filed with the Securities and Exchange Commission (“SEC”) on March 30, 2015.

The unaudited condensed consolidated financial statements included herein reflect all adjustments (which include only normal, recurring adjustments) that are, in the opinion of management, necessary to state fairly our financial position and results of operations as of and for the periods presented. The results for such periods are not necessarily indicative of the results to be expected for the full year.

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

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

We have performed an evaluation of subsequent events through the date of filing these financial statements with the SEC.

2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

On May 28, 2014, the FASB issued ASU 2014-09 regarding ASC Topic 606, Revenue from Contracts with Customers. The standard provides principles for recognizing revenue for the transfer of promised goods or services to customers with the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance will be effective for our fiscal year 2018, subject to the issuance of guidance from the SEC. Early adoption is not permitted. We are evaluating the accounting, transition and disclosure requirements of the standard and cannot currently estimate the financial statement impact it will have upon adoption.

Additionally, from time to time, new accounting pronouncements are issued that we adopt as of the specified effective date. Unless otherwise discussed in these financial statements and notes or in our financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2014, we believe the impact of any other recently issued standards that are not yet effective are either not applicable to us at this time or will not have a material impact on our consolidated financial statements upon adoption.

3. OPTIONS AND WARRANTS

Below is a summary of Auxilio stock option and warrant activity during the three month period ended March 31, 2015:

Options	Shares			Weighted Average Exercise Price		Weighted Average Remaining Term in Years		Aggregate Intrinsic Value
Outstanding at December 31, 2014		4,886,829		$	1.05
Granted		107,750			1.22
Exercised		-			-
Cancelled		(85,250	)		1.97
Outstanding at March 31, 2015		4,909,329		$	1.04		4.73	$	1,067,294
Exercisable at March 31, 2015		4,294,048		$	1.02		4.13	$	914,741

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Warrants	Shares		Weighted Average Exercise Price		Weighted Average Remaining Term in Years		Aggregate Intrinsic Value
Outstanding at December 31, 2014		2,208,565	$	1.11
Granted		-		-
Exercised		-		-
Cancelled		-		-
Outstanding at March 31, 2015		2,208,565	$	1.11		4.59	$	314,084
Exercisable at March 31, 2015		1,508,565	$	1.16		3.10	$	209,084

During the three months ended March 31, 2015, we granted a total of 107,750 options to employees to purchase shares of our common stock at an exercise price of $1.22 per share. The exercise price equals the fair value of our stock on the grant date. The fair value of the options was determined using the Black-Scholes option-pricing model. The assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 0.11%; (ii) estimated volatility of 54.98%; (iii) dividend yield of 0.0%; and (iv) expected life of the options of three years. These options have graded vesting annually over three years starting March 2015.

For the three months ended March 31, 2015 and 2014, stock-based compensation expense recognized in the statement of operations was as follows:

	2015		2014
Cost of revenues	$	33,294	$	127,164
Sales and marketing		9,264		15,075
General and administrative expenses		36,742		58,363
Total stock based compensation expense	$	79,300	$	200,602

4. RESTRICTED STOCK

In July 2014, in connection with our acquisition of the common stock of Delphiis, Inc., we issued 400,000 shares of restricted stock to a key employee as part of his employment agreement. The shares vest as follows:

Vesting Date	Shares
July 1, 2016		100,000
July 1, 2017		100,000
July 1, 2018		100,000
July 1, 2019		100,000

The stock compensation expense recognized for these shares totaled $15,066 for the three months ended March 31, 2015.

5. NET LOSS PER SHARE

Basic net loss per share is calculated using the weighted average number of shares of our common stock issued and outstanding during a certain period, and is calculated by dividing net loss by the weighted average number of shares of our common stock issued and outstanding during such period. Diluted net loss per share is calculated using the weighted average number of common and potentially dilutive common shares outstanding during the period, using the as-if converted method for secured convertible notes, and the treasury stock method for options and warrants. Diluted net loss per share does not include potentially dilutive securities because such inclusion in the computation would be anti-dilutive.

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

	Three Months Ended March 31,
	2015			2014
Numerator:
Net loss	$	(32,542	)	$	(70,873	)
Effects of dilutive securities:
Convertible notes payable		-			(42,524	)
Loss after effects of conversion of note payable	$	(32,542	)	$	(113,397	)

Denominator:
Denominator for basic calculation weighted average shares		23,681,559			20,658,573

Dilutive common stock equivalents:
Convertible notes payable		-			1,600,000
Denominator for diluted calculation weighted average shares		23,681,559			22,258,573

Net loss per share:
Basic net loss per share	$	(0.00	)	$	(0.00	)
Diluted net loss per share	$	(0.00	)	$	(0.01	)

6. INTANGIBLE ASSETS

Intangible assets consist of the following:

	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Useful Life (years)
Acquired technology	$	900,000	$	(67,500	)	$	832,500		10
Customer relationships		400,000		(60,000	)		340,000		5
Trademarks		50,000		(25,000	)		25,000		1.5
Non-compete agreements		20,000		(5,000	)		15,000		3
Total intangible assets	$	1,370,000	$	(157,500	)	$	1,212,500

Please see Note 15, Stock Purchase Agreement – Delphiis, Inc., below for further discussion of the origin of these intangible assets.

7. ACCOUNTS RECEIVABLE

A summary of accounts receivable is as follows:

	March 31, 2015			December 31, 2014
Trade receivables	$	8,365,984		$	8,105,330
Unapplied advances and unbilled revenue		(1,061,761	)		(1,297,147	)
Allowance for doubtful accounts		-			-
Total accounts receivable	$	7,304,223		$	6,808,183

8. LINE OF CREDIT

On May 4, 2012, we entered into a Loan and Security Agreement (the “Loan and Security Agreement”) with Avidbank Corporate Finance, a Division of Avidbank (“Avidbank”). On April 26, 2013, we amended the Loan and Security Agreement with Avidbank (the “Avidbank Amendment”). On April 25, 2014, we again amended the Loan and Security Agreement with Avidbank (the “Second Avidbank Amendment”). Under the Second Avidbank Amendment, the term of the revolving line-of-credit of up to $2.0 million extended through April 25, 2015, at an interest rate of prime plus 1.0% per

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annum. This line of credit was further extended through June 25, 2015 under the Third Amendment to the Loan and Security Agreement. As of March 31, 2015 the interest rate was 4.25%. There will be no minimum interest payable with respect to any calendar quarter. The amount available to us at any given time is the lesser of (a) $2.0 million, or (b) the amount available under our borrowing base (80% of our eligible accounts, minus (1) accrued client lease payables, and minus (2) accrued equipment pool liability). While there are outstanding credit extensions, our adjusted EBITDA shall be positive, as measured on a quarterly basis; provided however that our adjusted EBITDA may be an adjusted EBITDA loss of up to $200,000 for any single quarter so long as we achieve a positive adjusted EBITDA for the prior quarter and subsequent quarter. The foregoing description is qualified in its entirety by reference to the Third Amendment to the Loan and Security Agreement between Avidbank Corporate Finance and Auxilio, Inc., which is found as Exhibit 10.1 to this Form 10-Q. We were in compliance with all of the Avidbank agreement covenants as of March 31, 2015 and December 31, 2014.

In connection with our entry into the Loan and Security Agreement, we granted Avidbank (a) a general, first-priority security interest in all of our assets, equipment and inventory, and (b) a security interest in all of our intellectual property under an Intellectual Property Security Agreement. As additional consideration for the Loan and Security Agreement, we issued Avidbank a 5-year warrant to purchase up to 72,098 shares of our common stock at an exercise price of $1.387 per share. The foregoing descriptions are qualified in their entirety by reference to the respective agreements. These agreements are found in our Form 8-K filed on May 9, 2012 as Exhibits 10.1, 10.2, 10.3 and 10.4.

Interest charges associated with the Avidbank line of credit, including amortization of the discounts and loan acquisition costs totaled $2,124 and $5,250, respectively, for the three months ended March 31, 2015 and 2014, respectively.

9. NOTES PAYABLE – RELATED PARTIES

We assumed debt totaling $463,723 when we acquired Delphiis, Inc. effective July 1, 2014 (see Note 15). In July 2014, we paid $100,000 to the note holders upon Delphiis’s collection of $100,000 from accounts receivable outstanding as of June 30, 2014. For the remaining $363,723 we have outstanding promissory notes payable to an employee and another principal who were majority owners of Delphiis, Inc. The notes bear interest at the rate of 4% per annum, upon which we are to make quarterly interest-only payments on the total principal amount outstanding at the end of each calendar quarter. The notes mature on July 31, 2016 and contain no prepayment penalty. Pursuant to the terms of the notes, we will accelerate payment on fifty percent (50%) of the outstanding amount due under such notes at such time as Delphiis, Inc. achieves $1,500,000 of bookings measured from the date of the Agreement, and the remaining fifty percent (50%) will be paid at such time as Delphiis, Inc. achieves $4,000,000 of bookings measured from July 1, 2014.

In February 2015, Delphiis reached the first bookings target of $1,500,000 resulting in payment and vesting of 50% of the outstanding debt. On February 19, 2015, a holder of $257,835 of the notes agreed to convert the principal amount of his note into 257,835 shares of our common stock. Since Delphiis had reached the $1,500,000 bookings target, on February 24, 2015, we issued 128,917 of the shares to the note holder. The remaining $128,918 of his note was converted to restricted stock units and shares will be issued at the earlier of the achievement of the $4,000,000 of bookings target is reached, or July 31, 2016. The foregoing summary of the note conversion is qualified in its entirety by reference to the full context of the Note Conversion Agreement which is found as Exhibit 99.1 to our 8-K filing on February 27, 2015.

Interest expense on the notes, including amortization of the discount, for the three months ended March 31, 2015 totaled $28,676.

10. CONVERTIBLE NOTES PAYABLE

Effective July 29, 2011, we closed on a private offering of secured convertible promissory notes and warrants (“Units”) for gross proceeds of $1,850,000. Each of the Units consisted of (i) a $5,000 secured convertible promissory note (each a “Note” and collectively “Notes”) and (ii) a warrant (each a “Warrant” and collectively “Warrants”) to purchase 1,000 shares of our common stock at an exercise price of $1.50 per share. The Notes matured July 29, 2014 and were secured by our tangible and intangible assets, subject to the senior security interest of AvidBank, as discussed in the immediately preceding note. The Notes accrued interest at a rate of eight percent (8%) per annum, compounded annually, and the interest on the outstanding balance of the Notes was payable no later than thirty (30) days following the close of each calendar quarter. The Notes were convertible into 1,850,000 shares of common stock. The Warrants expire April 29, 2016 and are exercisable to purchase up to 370,000 shares of our common stock. We additionally granted piggyback registration rights to the investors in this offering. Several members of our Board at the time, including John Pace, Michael Joyce, Mark St. Clare and Michael Vanderhoof, participated in the offering.

We also agreed to pay Cambria Capital, LLC a placement fee of $149,850 in sales commissions, reimbursement for costs associated with the placement of the Units and to issue a warrant to purchase up to 199,800 shares of common stock exercisable at a price of $1.50 per share. Cambria Capital, LLC is an affiliate of Michael Vanderhoof, a member of the

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Board. The engagement of Cambria Capital, LLC, the payment of the placement fee and the issuance of the warrant to Cambria Capital, LLC were approved by a majority of the disinterested members of the Board. We additionally granted piggyback registration rights to Cambria Capital, LLC that are the same as those afforded to the investors in the offering.

The holders of the Notes elected to convert all of the principal into 1,850,000 shares of common stock with 150,000 shares converted during 2012 and 2013, 150,000 shares converted from March 2014 to June 2014 and the remaining 1,550,000 shares converted in July 2014. The warrants remain outstanding until their exercise or expiration.

Interest charges associated with the convertible notes payable, including amortization of the discounts and loan acquisition costs totaled $90,888 for the three months ended March 31, 2014.

11. EMPLOYMENT AGREEMENTS

Effective January 1, 2014, we entered into a new employment agreement Joseph J. Flynn, our President and Chief Executive Officer (“CEO”) since 2009 (the “Flynn Agreement”). The Flynn Agreement provides that Mr. Flynn will continue his employment as our President and CEO. The Flynn Agreement has a term of two years, provides for an annual base salary of $275,000, and will automatically renew for subsequent twelve month terms unless either party provides advance written notice to the other that such party does not wish to renew the agreement for a subsequent twelve months. Mr. Flynn also receives the customary employee benefits available to our employees. Mr. Flynn is also entitled to receive a bonus of up to $150,000 per year, the achievement of which is based on Company performance metrics. Further, the Flynn Agreement revised the vesting schedule of warrants granted to Mr. Flynn in January 2013. The revision spreads the vesting date of the remaining 300,000 unvested shares from 150,000 on January 1, 2015 and 150,000 on January 1, 2016 to 100,000 on January 1, 2015, 100,000 on January 1, 2016 and 100,000 on January 1, 2017. The warrants will vest contingent with the achievement of certain financial performance metrics of the Company for calendar years 2015 and 2016. The calendar year 2014 performance metrics were not met and as such, they did not vest. We may terminate Mr. Flynn’s employment under the Flynn Agreement without cause at any time on thirty days advance written notice, at which time Mr. Flynn would receive severance pay for twelve months and be fully vested in all options and warrants granted to date. The foregoing summary of the Flynn Agreement is qualified in its entirety by reference to the full context of the employment agreement which is found as Exhibit 10.2 to our 10-Q filing on May 14, 2014.

Effective January 1, 2014, we entered into a new employment agreement with Paul T. Anthony, our Chief Financial Officer (“CFO”) since 2004 (the “Anthony Agreement”). The Anthony Agreement provides that Mr. Anthony will continue to serve as our EVP and CFO. The Anthony Agreement has a term of two years, and provides for an annual base salary of $225,000. The 2014 Anthony Agreement will automatically renew for subsequent twelve month terms unless either party provides advance written notice to the other that such party does not wish to renew the agreement for a subsequent twelve months. Mr. Anthony also receives the customary employee benefits available to our employees. Mr. Anthony is also entitled to receive a bonus of up to $108,000 per year, the achievement of which is based on Company performance metrics. Further, the Anthony Agreement revised the vesting schedule of warrants granted to Mr. Anthony in January 2013. The revision spreads the vesting date of the remaining 200,000 unvested shares from 100,000 on January 1, 2015 and 100,000 on January 1, 2016 to 66,667 on January 1, 2015, 66,667 on January 1, 2016 and 66,666 on January 1, 2017. The warrants will vest contingent with the achievement of certain financial performance metrics of the Company for calendar years 2015 and 2016. The calendar year 2014 performance metrics were not met and as such, they did not vest. We may terminate Mr. Anthony’s employment under the Anthony Agreement without cause at any time on thirty days advance written notice, at which time Mr. Anthony would receive severance pay for twelve months and be fully vested in all options and warrants granted to date. The foregoing summary of the Anthony Agreement is qualified in its entirety by reference to the full context of the employment agreement which is found as Exhibit 10.3 to our 10-Q filing on May 14, 2014.

12. CONCENTRATIONS

Cash Concentrations

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

Major Customers

Our two largest customers accounted for approximately 34% of our revenues for the three months ended March 31, 2015 and our three largest customers accounted for approximately 43% of our revenues for the three months ended March 31, 2014. Our largest customers had net accounts receivable totaling approximately $2,600,000 and $2,800,000 as of March 31, 2015 and December 31, 2014, respectively.

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13. SEGMENT REPORTING

Based on our integration and management strategies, we operate in a single business segment. For the periods presented, all revenues were derived from domestic operations.

14. GOODWILL

We performed an impairment test of goodwill as of December 31, 2014, determining that its estimated fair value based on its market capitalization was greater than our carrying amount including goodwill. We did not perform step 2 since the fair value was greater than the carrying amount.

Although the Company has experienced a net loss for the three months ended March 31, 2015, the net cash provided by operating activities totaled $439,580. No other triggering events were noted during the three months ended March 31, 2015, therefore management did not feel it was necessary to perform an interim impairment test.

15. STOCK PURCHASE AGREEMENT – DELPHIIS, INC.

As previously disclosed in our Current Report on Form 8-K, filed with the SEC, on July 8, 2014, on July 7, 2014 we entered into a Stock Purchase Agreement (the “Agreement”) with Delphiis, Inc., a California corporation (“Delphiis”), certain stockholders of Delphiis (the “Stockholders”), and Mike Gentile, as seller representative (“Gentile”). By agreement of the parties, the effective date of the Agreement was July 1, 2014.

Pursuant to the Agreement, we acquired 100% of the issued and outstanding shares of common stock (the “Shares”) of Delphiis from the Stockholders. The purchase price paid for the Shares consisted of three components: the Securities Consideration, the Cash Consideration, and the Debt Assumption.

The Securities Consideration consisted of 930,406 shares of our common stock, which was the number of shares having an aggregate value of $1,250,000, with the price per share equal to the average of the closing price of our common stock on the OTC Markets for the 20 most recent trading days prior to the closing date, rounded up to the nearest whole number of shares.

-	The Cash Consideration was equal to $1,000,000.

The Debt Assumption was equal to $463,723 which was owed by Delphiis to Gentile and two other parties. By way of background, of such amount, $363,723 is represented by certain amended and restated promissory notes (the “Notes”) dated of even date with the Agreement, which bear interest at the rate of 4% per annum, and pursuant to which Delphiis was to make quarterly interest-only payments on the total principal amount outstanding at the end of each calendar quarter. The Notes have a maturity date which is 24 months from the date of the Agreement and contain no prepayment penalty. Pursuant to the terms of the Notes, Delphiis will accelerate payment on (i) fifty percent (50%) of the outstanding amount due under such Notes at such time as Delphiis achieves $1,500,000 of bookings measured from the date of the Agreement, and (ii) the remaining fifty percent (50%) will be paid at such time as Delphiis achieves $4,000,000 of bookings measured from the date of the Agreement, all as set forth in the Notes. Delphiis also agreed to pay the remaining $100,000 to Gentile and the other noteholders upon Delphiis’s collection of $100,000 from accounts receivable outstanding as of June 30, 2014. Pursuant to the Agreement, Auxilio, as the sole owner of Delphiis, agreed to assume the obligations of Delphiis and to make the payments pursuant to the terms of the Notes.

The allocation of the purchase price of the assets acquired and liabilities assumed based on their fair values was as follows:

Acquired technology	$	900,000
Customer relationships		400,000
Trademarks		50,000
Non-compete agreements		20,000
Goodwill		956,639
Other assets received		376,775
Deferred revenue		(154,089	)
Notes payable		(424,000	)
Other liabilities assumed		(113,325	)
Total	$	2,012,000

Purchased identifiable intangible assets are amortized on a straight-line basis over the respective useful lives. Our estimated useful life of the identifiable intangible assets acquired ranges from 1.5 to 10 years. We recognized goodwill of $956,639.

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Goodwill is recognized as we expect to be able to realize synergies between the two companies, primarily our ability to provide market and reach for the Delphiis products and services to Auxilio’s customers.

The Company incurred approximately $98,000 in legal, accounting and other professional fees related to this acquisition, all of which were expensed during the nine months ended September 30, 2014.

Escrow Agreement

In connection with the Agreement, we entered into an escrow agreement with the Stockholders and Colonial Stock Transfer (the “Escrow Agent”), pursuant to which we deposited $100,000 of the Cash Consideration into an escrow to be held by the Escrow Agent to cover any indemnification claims made pursuant to the Agreement. If no indemnification claims have been made prior to July 7, 2015, the Escrow Agent will release the escrowed funds to the Stockholders.

Employment Agreement

In connection with the Agreement, we entered into an employment agreement with Mr. Gentile (the “Gentile Employment Agreement”), pursuant to which Gentile was employed to serve as our Executive Vice President of Innovation and Security. The initial term of the Gentile Employment Agreement is for three years (unless sooner terminated), and automatically renews for subsequent twelve-month periods unless either party determines to not renew. Gentile’s base annual salary will be $200,000, and Gentile will be eligible to receive incentive compensation. Pursuant to the Gentile Employment Agreement, Gentile will also receive 400,000 shares of our common stock, vesting as follows: 100,000 shares will vest 2 years from the date of the Gentile Employment Agreement; 100,000 shares will vest 3 years from the date of the Gentile Employment Agreement; 100,000 shares will vest 4 years from the date of the Gentile Employment Agreement; and 100,000 shares will vest 5 years from the date of the Gentile Employment Agreement.

Pro Forma Information

The following supplemental unaudited pro forma information presents the combined operating results of the Company and the acquired business during the three months ended March 31, 2015 and 2014, as if the acquisition had occurred at the beginning of each of the periods presented. The pro forma information is based on the historical financial statements of the Company and that of the acquired business. Amounts are not necessarily indicative of the results that may have been attained had the combinations been in effect at the beginning of the periods presented or that may be achieved in the future.

	Three Months Ended March 31,
	2015			2014
Pro forma revenue	$	13,847,915		$	10,501,082
Pro forma net income (loss)	$	(32,542	)	$	6,278
Pro forma basic net income (loss) per share	$	(0.00	)	$	0.00
Pro forma diluted net income per share	$	(0.00	)	$	0.00

16. SUBSEQUENT EVENT

On April 6, 2015, Auxilio entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Redspin, Inc., a California corporation (“Redspin”) and certain owners of Redspin, to acquire substantially all of the assets of Redspin. A copy of the Purchase Agreement was filed as an exhibit to the Current Report on Form 8-K filed with the SEC on April 6, 2015. On April 7, 2015, the Company completed its acquisition of substantially all of Redspin’s assets (the “Acquired Assets”) and assumption of certain of Redspin’s liabilities in an asset purchase transaction (the “Transaction”) pursuant to the terms and conditions of the Purchase Agreement.

As a result of the consummation of the Purchase Agreement, on April 7, 2015, in consideration of the Acquired Assets, the Company paid Redspin $2,050,000 in cash, less a holdback of $200,000 to cover any indemnification claims made pursuant to the Transaction, and issued 452,284 shares of the Company’s restricted common stock, par value $0.001, which was the number of shares having an aggregate value of $500,000, with the price per share equal to the average of the closing price of Auxilio common stock on the OTC Markets for the 20 most recent trading days prior to the date of the Purchase Agreement, rounded up to the nearest whole number of shares (the “Securities Consideration”). The Company also agreed to pay a cash Earn-out Payment and the Employee Bonus Shares, as each are defined in the Purchase Agreement, upon the achievement of certain earnings targets in the first year following the date of the Purchase Agreement. If no indemnification claims have been made prior to June 30, 2016, the Company’s secretary will release the holdback funds to Redspin.

In connection with the Purchase Agreement, Auxilio and Daniel Berger (“Berger”), CEO of Redspin, entered into an employment agreement (the “Berger Employment Agreement”), pursuant to which Berger was employed to serve as

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Executive Vice President of Auxilio. The initial term of the Berger Employment Agreement is for two years (unless sooner terminated), and automatically renews for subsequent twelve-month periods unless either party determines to not renew. Berger’s base annual salary will be $250,000, and Berger will be eligible to receive incentive compensation, consistent with that generally offered to executives of the Company. In addition, Auxilio and John Abraham (“Abraham”), Founder of Redspin, entered into an independent contractor agreement (the “Abraham Agreement”), pursuant to which Abraham was retained to perform the work assigned by the Company. The term of the Abraham Agreement is for two years (unless sooner terminated). In consideration for such services, the Company agreed to pay Abraham $10,000 per month.

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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 in other documents we file from time to time with the SEC, including our Form 10-K for the fiscal year ended December 31, 2014. 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 via the EDGAR system maintained by the SEC at www.sec.gov.

OVERVIEW

We provide total outsourced document and 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. Our 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. Our document image management programs help our clients achieve measurable savings and a fully outsourced document image management process.

Through our recent acquisition of Delphiis, Inc., we now provide IT Advisory and Managed Services, in addition to IT Risk Management SaaS technology solutions. These services help to ensure enterprise-wide IT security.

Our target market includes medium to large hospitals, health plans and healthcare systems.

Our common stock currently trades on the OTCQB under the stock symbol “AUXO”.

Where appropriate, references to “Auxilio,” the “Company,” “we,” “us” or “our” include Auxilio, Inc. and its wholly-owned subsidiaries, Auxilio Solutions, Inc., a California corporation, and Delphiis, Inc., also a California corporation.

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 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.

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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 and deferred revenue

The Company derives its revenue from four sources: (1) managed print services revenue; (2) multi-function device (MFD) equipment revenue; (3) software subscription services revenue, which are comprised of subscription fees from customers accessing the Company’s enterprise cloud computing services and customers purchasing additional ongoing managed services beyond the standard support that is included in the basic software subscription fees; and (4) consulting services such as process mapping, project management and implementation services.

The Company commences revenue recognition when all of the following conditions are satisfied:

• there is persuasive evidence of an arrangement;

• the service has been or is being provided to the customer;

• the collection of the fees is reasonably assured; and

• the amount of fees to be paid by the customer is fixed or determinable.

Managed Print Services and MFD Equipment Revenue

Revenue is recognized pursuant to ASC Topic 605, “Revenue Recognition” (“ASC 605”). Monthly service and supply revenue is earned monthly during the term of the contract, as services and supplies are provided. Revenues from equipment sales transactions are earned when there is persuasive evidence of an arrangement, delivery has occurred, the sales price has been determined and collectability has been reasonably assured. For equipment that is to be placed at a customer’s location at a future date, revenue is deferred until the placement of such equipment.

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 FASB ASC Topic 605-25, 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 (“VSOE”) if available, third-party evidence if VSOE is not available, or estimated selling price if neither VSOE nor third-party evidence is available. We are required to determine the 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. We generally do not separately sell MFD equipment or service on a standalone basis. Therefore, we do not have VSOE for the selling price of these units. As we purchase the equipment, we have third-party evidence of the cost of this element. We estimate the proceeds from the arrangement to allocate to the service unit based on historical cost experiences. Based on the relative costs of each unit to the overall cost of the arrangement, we utilize the same relative percentage to allocate the total arrangement proceeds.

Software Subscriptions and Managed Services Revenue

Software subscriptions and managed services revenues are recognized ratably over the contract terms beginning on the commencement date of each contract, which is the date the Company’s service is made available to customers.

Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on whether the revenue recognition criteria have been met.

The Company’s software subscription service arrangements are non-cancelable and do not contain refund-type provisions.

Consulting Service Revenues

The majority of the Company’s consulting services contracts are on a time and material basis. When these services are not combined with subscription revenues as a single unit of accounting, these revenues are recognized as the services are rendered for time and material contracts, and when the milestones are achieved and accepted by the customer for fixed price contracts.

· 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.

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· 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

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 our estimate of our fair value based on its market capitalization to the Company’s carrying amount including goodwill. We have not had to perform step 2 of the impairment test because the fair value has exceeded the carrying amount. For other intangible assets with definite lives, we compare future undiscounted cash flow forecasts prepared by management to the carrying value of the related intangible asset group to determine if there is impairment.

· Stock-based compensation

Under the fair value recognition provisions of the authoritative guidance, stock-based compensation cost granted to employees is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service or performance period, which is the vesting period. Stock options and warrants issued to consultants and other non-employees as compensation for services to be provided to us are accounted for based upon the fair value of the services provided or the estimated fair value of the option or warrant, whichever can be more clearly determined. We currently use the Black-Scholes option pricing model to determine the fair value of stock options. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, the expected term of the award, the risk-free interest rate and any expected dividends. Compensation cost associated with grants of restricted stock units are also measured at fair value. We evaluate the assumptions used to value restricted stock units on a quarterly basis. When factors change, including the market price of the stock, share-based compensation expense may differ significantly from what has been recorded in the past. If there are any modifications or cancellations of the underlying unvested securities, we may be required to accelerate, increase or cancel any remaining unearned share-based compensation expense.

· 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.

Reference is made to our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 filed on March 30, 2015 for a discussion of our critical accounting policies.

RESULTS OF OPERATIONS

For the Three Months Ended March 31, 2015 Compared to the Three Months Ended March 31, 2014

Revenue

Revenue increased by $3,603,341 to $13,847,915 for the three months ended March 31, 2015, as compared to the same period in 2014. Of this increase, approximately $1,000,000 is a result of the addition of new recurring service revenue contracts. We added approximately $1,200,000 in consulting revenues and software subscriptions from our newly acquired company, Delphiis, Inc. We anticipate more overall revenue growth as a result of the expansion of our customer base. Equipment sales for 2015 were approximately $1,800,000 as compared to approximately $400,000 in 2014. Equipment revenues in 2015 were primarily from copier fleet refresh activities at customers which were not needed in 2014 as these fleet refreshes are typically done every five years at any one customer facility.

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Cost of Revenue

Cost of revenue consists of document imaging equipment, parts, supplies and salaries and expenses of direct labor and indirect support staff. Cost of revenue was $11,715,594 for the three months ended March 31, 2015, as compared to $8,504,940 for the same period in 2014. The increase in the cost of revenues in 2015 is attributed primarily to the addition of new recurring service revenue contracts. We incurred approximately $1,200,000 in additional staffing, including contract labor, approximately $100,000 of additional travel costs and approximately $700,000 in additional service and supply costs, primarily as a result of our new customers. Equipment costs increased by approximately $1,300,000 in 2015, primarily as a result of the increase in equipment revenues from the copier fleet refresh activities.

Gross margin decreased to 15% of revenue for the three months ended March 31, 2015 as compared to 17% for the same period in 2014. We have implemented services at two new customers in the last five months and recent growth will result in additional implementations costs over the next 12 months. 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 customers’ legacy contracts with third-party vendors. As we implement our programs, we strive to improve upon these legacy contracts and thus reduce costs over the term of the contract. Given the varying expiration dates of these vendor contracts and the amount of savings being specific to each arrangement, we cannot predict our anticipated profit margins as these legacy contracts approach renewal. We anticipate this trend to continue but anticipate an overall increase in cost revenues sold as a result of the expansion of our customer base.

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 $742,071 for the three months ended March 31, 2015, as compared to $508,210 for the same period in 2014. We doubled our sales and marketing staff headcount in the first quarter of 2015 as compared to the same period in 2014 to expand our geographical reach and support the sales effort with the new Delphiis business. This resulted in additional salary and related costs of approximately $200,000.

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 $184,469 to $1,386,343 for the three months ended March 31, 2015, as compared to $1,201,874 for the three months ended March 31, 2014. The increase in general and administrative expenses is attributed to approximately $50,000 in amortization of intangible assets from the acquisition of Delphiis, Inc., an increase in professional fees of approximately $80,000 related to due diligence efforts related to the acquisition of Redspin and an increase in travel expenses of approximately $50,000, mostly related to supporting this acquisition.

Other Income (Expense)

Interest expense for the three months ended March 31, 2015 was $34,050, compared to $98,823 for the same period in 2014. The reduction is due to the reduction in the average borrowings on the bank line of credit and the conversion of $1,700,000 of debt to equity in July 2014.

Income Tax Expense

Income tax expense for each of the three months ended March 31, 2015 and March 31, 2014, was $2,400 and $1,600 respectively, which represents the respective provisions for state income taxes.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2015, our cash and cash equivalents were $5,105,615 and our working capital was $2,854,500. 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, our bank line of credit, the exercise of options and warrants and the sale of common stock.

During the three months ended March 31, 2015, our cash provided by operating activities amounted to $439,580, as compared to $119,216 provided by operating activities for the same period in 2014. The increase in cash provided by operating activities in 2015 is primarily due an increase in accounts payable as we await validation of expense for new client vendors.

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We expect to continue to establish recurring revenue contracts to new customers throughout 2015 which we expect to have higher cost of revenues at the start of the engagements with most new customers. In addition, we plan to continue to grow our recent strategy to diversify our business into the data security industry. As a result of these two factors, we may seek additional financing, which may include debt and/or equity financing or funding through third party agreements. In May 2012, we entered into an asset-based line of credit agreement with a financial institution. This facility provides for borrowings up to $2,000,000 not to exceed 80% of eligible receivables. We may seek additional financing; however there can be no assurance that 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. Management believes that cash flows from operations together with cash reserves and our bank line of credit availability will allow us to complete these transactions without disrupting operations.

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 Contingent Liabilities and Commitments.” As of March 31, 2015, 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.

CONTRACTUAL OBLIGATIONS AND CONTINGENT LIABILITIES AND COMMITMENTS

As of March 31, 2015, 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
Note payable to related party	$	57,107	$	2,775	$	54,332	$	-	$	-
Capital leases		192,448		87,891		104,557		-		-
Operating leases		118,910		118,910		-		-		-
Total	$	368,465	$	209,576	$	158,889	$	-	$	-

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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 15d-15(e) under the Securities Exchange Act of 1934, as amended (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 Chief Executive Officer and Chief Financial Officer, 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 Exchange Act), 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 Exchange Act 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.

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PART –II - OTHER INFORMATION

ITEM 1A. RISK FACTORS.

As of the date of this filing, there have been no material changes to the Risk Factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, filed with the SEC on March 30, 2015 (the “2014 Form 10-K”). The Risk Factors set forth in the 2014 Form 10-K should be read carefully in connection with evaluating our business and in connection with the forward-looking statements contained in this Quarterly Report on Form 10-Q. Any of the risks described in the 2014 Form 10-K could materially adversely affect our business, financial condition or future results and the actual outcome of matters as to which forward-looking statements are made. These are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

ITEM 6. EXHIBITS.

No.	Item
10.1	Third Amendment to the Loan and Security Agreement between Avidbank Corporate Finance and Auxilio, Inc., April 24, 2015
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 *.
101**	Interactive Data File

* 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 of 1933 or the Securities Exchange Act of 1934.

** Pursuant to Rule 406T of Regulation S-T, this XBRL information will not be deemed “filed” for the purpose of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liability of that section, nor will it be deemed filed or made a part of a registration statement or prospectus for purposes of Sections 11 and 12 of the Securities Act of 1933, or otherwise subject to liability under those sections.

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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: May 15, 2015	By:	/s/ Joseph J. Flynn
		Joseph J. Flynn
		Chief Executive Officer
		(Principal Executive Officer)




Date: May 15, 2015		/s/ Paul T. Anthony
		Paul T. Anthony Chief Financial Officer
		(Principal Accounting Officer)

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