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EX-31.1 - EXHIBIT 31.1 - CYNERGISTEK, INCex311.htm
EX-31.2 - EXHIBIT 31.2 - CYNERGISTEK, INCex312.htm
EX-23.1 - EXHIBIT 23.1 - CYNERGISTEK, INCex231.htm
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EX-10.31 - EXHIBIT 10.31 - CYNERGISTEK, INCex1031.htm
EX-10.32 - EXHIBIT 10.32 - CYNERGISTEK, INCex1032.htm
EX-32.1 - EXHIBIT 32.1 - CYNERGISTEK, INCex321.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.20549
FORM 10-K
 
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2015.
 
[  ] TRANSITION REPORT PURSUANT TO 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
88-0350448
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer
Identification No.)
 
27271 Las Ramblas, Suite 200, Mission Viejo, California  92691
(Address of principal executive offices) (Zip Code)
 
(949) 614-0700
(Registrant's telephone number, including area code)
 
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
 
Common Stock, $.001 par value
(Title of Class)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] No [X]
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [  ] No [X]
 
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 [X]  No [  ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data 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 [X]  No [  ]
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [  ]
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act.
 

 
Large accelerated filer 
Accelerated filer 
Non-accelerated filer 
Smaller reporting company  ý
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes [  ]  No [X]
 
The aggregate market value of the registrant's common stock, $0.001 par value per share ("Common Stock"), held by non-affiliates of the registrant on June 30, 2015, the last business day of the registrant's most recently completed second fiscal quarter, was approximately $21.0 million (based on the average bid price of the Common Stock on that date). Shares of Common Stock held by each officer and director and each person known to the registrant to own 10% or more of the outstanding voting securities of the registrant were excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not a determination for other purposes. The registrant has one class of securities, its Common Stock.
 
As of March 30, 2016, the registrant had 24,452,085 shares of Common Stock outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE.
 
Part III incorporates by reference certain information from the registrant's definitive proxy statement (the "Proxy Statement") for the 2016 Annual Meeting of Stockholders to be filed on or before April 8, 2016.
 


AUXILIO, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2015
 
TABLE OF CONTENTS
 
 
Page
Cautionary Note Regarding Forward-Looking Statements
1
PART I
 
1
ITEM 1.
BUSINESS
1
ITEM 1A.
RISK FACTORS
3
ITEM 1B.
UNRESOLVED STAFF COMMENTS
9
ITEM 2.
PROPERTIES
9
ITEM 3.
LEGAL PROCEEDINGS
9
ITEM 4.
MINE SAFETY DISCLOSURES
9
PART II
10
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
10
ITEM 6.
SELECTED FINANCIAL DATA
11
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
11
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
16
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
16
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
17
ITEM 9A.
CONTROLS AND PROCEDURES
17
ITEM 9B.
OTHER INFORMATION
17
PART III
18
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
18
ITEM 11.
EXECUTIVE COMPENSATION
18
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
18
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
18
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
18
PART IV
19
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
19


Cautionary Note Regarding Forward-Looking Statements
 
From time to time, we and our representatives may provide information, whether orally or in writing, including certain statements in this Annual Report on Form 10-K (this "Annual Report"), which are deemed to be "forward-looking" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that concern matters that involve risks and uncertainties which could cause actual results to differ materially from those projected in the forward-looking statements. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995 (the "Litigation Reform Act") and are based on our beliefs as well as assumptions made by us using information currently available. All statements other than statements of historical fact contained in this Annual Report, including statements regarding future events, our future financial performance, our future business strategy and the plans and objectives of management for future operations, are forward-looking statements. The words "anticipate," "believe," "estimate," "expect," "intend," "will," "should" and similar expressions, as they relate to us, are intended to identify forward-looking statements. Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended or using other similar expressions. In accordance with the provisions of the Litigation Reform Act, we are making investors aware that such forward-looking statements, because they relate to future events, are by their very nature subject to many important factors that could cause actual results to differ materially from those contemplated by the forward-looking statements contained in this Annual Report, any exhibits to this Annual Report and other public statements we make. Such factors are set forth in the "Business" section, the "Risk Factors" section, the "Legal Proceedings" section, the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section and other sections of this Annual Report, as well as in our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. We expressly disclaim any intent or obligation to update any forward-looking statements after the date hereof to conform such statements to actual results or to changes in our opinions or expectations, except as required by applicable law.
 
PART I
 
ITEM 1. BUSINESS.
 
Introduction
 
Auxilio, Inc. (including our subsidiaries, Auxilio Solutions, Inc. and Delphiis, Inc.; referred to collectively in this Annual Report, as "Auxilio," the "Company," "we," "our" and "us") is engaged in the business of providing fully outsourced print management services and cyber security professional services primarily to the healthcare industry, and also to financial institutions, gaming and other industries. Auxilio was incorporated in Nevada on August 29, 1995, under the name Corporate Development Centers, Inc. As a result of a series of transactions, we changed our name to "Auxilio, Inc." in April 2004. Our principal executive offices are located at 27271 Las Ramblas, Suite 200, Mission Viejo, California 92691.
 
For more information on Auxilio and our products and services, please see the section entitled "Principal Products or Services" below or visit our website at www.auxilioinc.com. The inclusion of our Internet address in this Annual Report does not include or incorporate by reference into this Annual Report any information on our website. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports and other filings with the Securities and Exchange Commission (the "SEC") are generally available through the EDGAR system maintained by the SEC at www.sec.gov.
 
Background
 
Auxilio, Inc., a Nevada corporation, was incorporated on August 29, 1995.  On April 1, 2004, we acquired Alan Mayo and Associates, Inc. dba The Mayo Group ("TMG"), a managed print company. TMG provided outsourced print management services to healthcare facilities throughout California, which services we provide as the successor-in-interest to TMG. After we acquired TMG, we changed our name to "Auxilio, Inc." and changed the name of TMG's former subsidiary to "Auxilio Solutions, Inc." Effective July 1, 2014, we acquired Delphiis, Inc., a California corporation, which provides IT security consulting services.  On April 7, 2015, we acquired certain assets of Redspin, Inc. which provides IT security consulting services. Our Common Stock currently trades on the OTCQB under the symbol "AUXO."
 
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Principal Products and Services
 
We are engaged in the business of providing fully-outsourced managed print services and IT security consulting services primarily to the healthcare industry, and also to financial institutions, gaming and other industries. Our business is operated throughout the United States.
 
Our managed print service group  provides workflow solutions, and is a risk-free program with guaranteed savings. We assume all costs related to print environments through customized streamlined and seamless integration of services at predictable fixed rates. Our on-site staff creates manageable, dependable print management programs by managing the back-office processes of our hospital clients. The process is initiated through a detailed proprietary assessment. The assessment is a strategic, operational and financial analysis that is performed at the customer's premises using a combination of proprietary processes and innovative technology for data collection and report generation. After the assessment and upon engagement, we charge the customer on a per print basis. This charge covers the entire print management process and includes placement of a highly trained on-site resident team.
 
Our data security group is built on four pillars to serve the most common security needs in healthcare: Security Process and Program Development, Regulatory and Penetration Assessments, Incident and Breach Response and Delphiis™ IT Risk Manager SaaS Solution. Through our proven and prescriptive methodology we help build the foundation needed to ensure the confidentiality, integrity and security of patient health information (PHI). And our software application suite streamlines how hospitals and health systems perform annual and on-going risk assessments on their business associates, clinics, projects and hospitals.
 
Competition
 
We operate in a highly competitive market. The majority of the competition in the healthcare industry market for print management services comes from the large photocopy/multi-functional digital device manufacturers such as Xerox, Canon, Konica Minolta, Ricoh and Sharp. The competitive landscape also contains a number of regional and local equipment dealers and distributors that exist in the communities in which the hospitals serve. In addition, we compete with in-house departments performing the functions that we are seeking to have them outsource to us.
 
The majority of the competition in the healthcare industry market for data security services comes from large or niche consulting and technology firms such as Accenture, Leidos Health, Dell Secureworks, Accuvant, and Coal Fire.
 
Nevertheless, our analysis of the competitive landscape shows a very strong opportunity for fully-outsourced managed print services and data security services to the healthcare industry, and we believe that we have a strong competitive position in the marketplace due to a number of important factors:
 
· We are primarily focused on the healthcare industry. We are not aware of any other vendor/service provider which has a majority of its business dedicated to solving issues within the healthcare provider industry with the expertise and knowledge base that we have.  This is unmatched in the market.
 
· By focusing solely on the hospital campus, we enjoy much lower turn-around times for service, greater up-sell opportunities and a much deeper service relationship with the customer.
 
· We have technology that is revolutionizing the way in which healthcare providers perform their annual HIPAA analysis, regulatory and on-going risk assessments, by making it fast, effective and affordable for both the assessor and responder.
 
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· We believe that we are the only provider offering a unique approach to managed security services.  We can deploy a knowledgeable resource allocated 100% to perform a predefined security role on-site or virtually for a defined amount of time, which results in hospital gaining the staff with expertise they need.
 
· We have a unique approach to providing fully-outsourced managed print service programs. Our program is completely outsourced and hospitals need only pay a single invoice. We operate the print management process as a department in the hospital with full-time staff on-site. In contrast, other print vendors and dealers in the majority of instances do not provide full-time staff on-site, which results in delays in providing service and supplies to the hospitals.
 
· We are not restricted to any single equipment vendor, which allows us to bring the best printer and copier hardware and software solutions to our customers. Our approach is to use the most appropriate technology to provide a superior solution without any prejudice as to equipment.
 
· We maintain a daily connection with the hospital, which allows us to provide a detailed strategy and plan on printer and copier equipment acquisitions saving the organization a great deal of time, effort and money in this process.
 
Customers
 
The majority of our customers are hospitals and their related off-site facilities. The loss of any key customer could have a material adverse effect upon our financial condition, business, prospects and results of operation. During the year ended December 31, 2015, our three largest customers represented approximately 50% of our revenues.
 
Intellectual Property
 
We maintain a database that contains our managed print services customers' image and document outputs for certain periods of time, for each piece of machinery maintained at the customer's location and trends for each of the foregoing. Our database allows us to anticipate our customers' future needs and to meet those needs. In addition, we maintain a database that contains information related to our current security customers and their assigned responders who use our Delphiis™ IT Risk Manager application suite.
 
We have a patent pending for our Delphiis™ IT Risk Manager and have not applied or been granted a patent with respect to any managed print service technology, or processes, as related to document and image management.
 
Employees
 
As of December 31, 2015, we had 291 full-time employees and three part-time employees, including 252 employees engaged in providing services, 14 employees engaged in sales and marketing, and 22 employees engaged in general and administrative activities. Our employees are not represented by any collective bargaining agreement, and we have never experienced a work stoppage. We believe our employee relations are good.
 
ITEM 1A. RISK FACTORS
 
Before deciding to purchase, hold or sell our Common Stock, you should carefully consider the risks described below in addition to the other information contained in this Annual Report and in our other filings with the SEC, including subsequent reports on Forms 10-Q and 8-K. The risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business. If any of these known or unknown risks or uncertainties actually occurs with material adverse effects on Auxilio, our business, financial condition, results of operations and/or liquidity could be seriously harmed. In that event, the market price of our Common Stock will likely decline, and you may lose all or part of your investment.
 
3

 
Risks Related to Our Industry
 
We face substantial competition from better established companies that may offer similar products and services at a lower cost to our customers, resulting in a reduction in the sale 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 we can to new or changing opportunities, technologies, standards or customer requirements. For all of the foregoing reasons, we may not be able to compete successfully against our current and future competitors.
 
We are dependent upon our vendors to continue to supply us equipment, parts, supplies, and services at comparable terms and price levels as the business grows.
 
Our access to equipment, parts, supplies, and services depends upon our relationships with, and our ability to purchase these items on competitive terms from our principal vendors. We rarely enter into long-term supply contracts with these vendors and we have no current plans to change this 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 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.
 
Risks Related to Our Business
 
A substantial portion of our business is dependent on 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 three largest customers represented approximately 50% of our revenues for the year ended December 31, 2015. We anticipate that these customers will represent approximately 50% of revenue for 2016; therefore the loss of one or more of these customers may contribute to our inability to operate as a going concern and may require us to obtain equity funding or debt financing to continue our operations. We cannot be certain that we will be able to obtain such financing on commercially reasonable terms, or at all.
 
Healthcare legislation and regulation.
 
The healthcare industry is highly regulated.  Legislation such as the Patient Protection and Affordable Care Act of 2010 has changed and will likely continue to change how healthcare services are provided and managed.  In addition, legislation related to electronic medical records may impact our business.  In 2009, the American Recovery and Reinvestment Act of 2009 included incentives and penalties related to electronic medical records.  For example, Medicare/Medicaid reimbursements will be less for providers who failed to use electronic medical records by 2015.
 
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The use of electronic medical records does not necessarily mean a hospital's printing demands will decrease, but we cannot be sure whether this will be the case.  Increased adoption and use of electronic medical records may negatively impact our business.
 
New legislation or regulation.
 
As to prospective legislation and regulation, we cannot determine what effect additional state or federal governmental legislation, regulations, or administrative orders would have on our business in the future.  New legislation or regulation may require the reformulation of our business to meet new standards, require us to cease operations, impose stricter qualification and/or registration standards, impose additional record keeping, or require expanded consumer protection measures.
 
We may be unable to recruit and maintain 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 life insurance policies on such persons. The loss of any 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.
 
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 adequately address the market's requirements.
 
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.
 
Achieving the desired benefits of the acquisition of Delphiis, Inc. and certain assets of Redspin, Inc. may be subject to a number of challenges and uncertainties which make it hard to predict the future success of each entity.
 
We acquired Delphiis, Inc. and certain assets of Redspin, Inc. with expected benefits including, among other things, operating efficiencies, procurement savings, innovation, sharing of best practices and increased market share that may allow for future growth.  Achieving the anticipated benefits may be subject to a number of significant challenges and uncertainties, including, without limitation, whether unique corporate cultures will work collaboratively in an efficient and effective manner, the coordination of separate organizations, the possibility of imprecise assumptions underlying expectations regarding potential synergies and the integration process, unforeseen expenses and delays, and competitive factors in the marketplace.  We could also encounter unforeseen transaction and integration-related costs or other circumstances such as unforeseen liabilities or other issues.  Many of these potential circumstances are outside of our control and any of them could result in increased costs, decreased revenue, decreased synergies and the diversion of management time and attention.  If we are unable to achieve our objectives within the anticipated time frame, or at all, the expected benefits may not be realized fully or at all, or may take longer to realize than expected, which could have an adverse effect on our business, financial condition and results of operations.
5

 
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, this may impact our ability to continue to grow our business operations.
 
We may need capital in the future to expand our business operations. 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 are unable 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.
 
Risks Related to the Market for Our Securities
 
Because the public market for shares of our Common Stock is limited, stockholders may be unable to resell their shares of Common Stock.
 
Currently, there is only a limited public market for our Common Stock on the OTCQB and our stockholders 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.
 
The price of our Common Stock may be volatile and could decline in value, resulting in loss to our stockholders.
 
The market for our Common Stock is volatile, having ranged in the last twelve months from a low of $0.91 to a high of $1.25 on the OTCQB. 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:
 
· 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 or purchases of shares 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.
 
6

 
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 December 31, 2015, we had 24,452,085 shares of our Common Stock outstanding.
 
If all warrants, options and restricted stock grants outstanding as of December 31, 2015 are exercised prior to their expiration, up to approximately 6.5 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.
 
Our stockholders approved, but our Board of Directors did not implement, a reverse stock split for our Common Stock at the 2015 Annual Meeting. If effected, this reverse stock split would have certain dilutive effects, among other effects, on our Common Stock.
 
At the 2015 annual meeting of stockholders, our stockholders approved a reverse stock split at a ratio of not less than one-for-one-and-one-half (1:1.5) and not more than one-for-three (1:3) (the "Reverse Stock Split").  The decision to implement the Reverse Stock Split is at the discretion of the Board of Directors.  If the Reverse Stock Split is implemented and the market price of our Common Stock declines, the percentage decline may be greater than would occur in the absence of the Reverse Stock Split. The market price of our Common Stock will also be based on performance and other factors, which are unrelated to the number of shares outstanding.
 
There can be no assurance that the Reverse Stock Split will result in any particular price for our Common Stock.  As a result, the trading liquidity of our Common Stock may not necessarily improve.
 
There can be no assurance that the market price per share of our Common Stock after the Reverse Stock Split will increase in proportion to the reduction in the number of shares of our Common Stock outstanding before the Reverse Stock Split.  Accordingly, the total market capitalization of our Common Stock after the Reverse Stock Split may be lower than the total market capitalization before the Reverse Stock Split. Moreover, in the future, the market price of our Common Stock following the Reverse Stock Split may not exceed or remain higher than the market price prior to the Reverse Stock Split.
 
Because the number of issued and outstanding shares of Common Stock would decrease as a result of the Reverse Stock Split, the number of authorized but unissued shares of Common Stock would increase on a relative basis. If we issue additional shares of Common Stock, the ownership interest of our current stockholders would be diluted, possibly substantially.
 
The proportion of unissued, authorized shares to issued shares could, under certain circumstances, have an anti-takeover effect. For example, the issuance of a large block of Common Stock could dilute the stock ownership of a person seeking to effect a change in the composition of our Board of Directors or contemplating a tender offer or other transaction for the combination of Auxilio with another company. The Reverse Stock Split, however, was not proposed in response to any effort of which we are aware to accumulate shares of our Common Stock or obtain control of the Company, nor is it part of a plan by management to recommend a series of similar amendments to the Board of Directors and stockholders.

The Reverse Stock Split may result in some stockholders owning "odd lots" of less than 100 shares of Common Stock. Odd lot shares may be more difficult to sell, and brokerage commissions and other costs of transactions in odd lots are generally somewhat higher than the costs of transactions in "round lots" of even multiples of 100 shares.

Some investors may interpret the Reverse Stock Split as a signal that Auxilio lacks confidence in its ability to increase its stock price naturally.
 
7


There can be no assurances that our Common Stock will obtain qualification for listing on a national exchange on grounds other than the minimum share price requirement.

Our Board of Directors intends to implement the Reverse Stock Split only if it believes that a decrease in the number of shares is likely to improve the trading price of our Common Stock and if the implementation of the Reverse Stock Split is determined by the Board of Directors to be in the best interests of Auxilio and its stockholders.

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 stockholders.
 
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 stockholders.
 
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 any deterioration of the global credit markets, financial services industry and U.S. economy may negatively affect our business and our ability to obtain capital, if needed.
 
A deterioration in the global credit markets, the financial services industry and the U.S. economy could result in a period of substantial turmoil. The impact of these events on our business and the severity of an economic crisis is uncertain. It is possible that a crisis in the global credit markets, the financial services industry or the U.S. economy could adversely affect our business, vendors and prospects as well as our liquidity and financial condition. This could impact 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 in the past, 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 minimize growth to a point that would be detrimental to our business development activities. These courses of action may be detrimental to 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.
 
8

 
The forward looking statements contained in this Annual Report may prove incorrect.
 
This Annual Report contains certain forward-looking statements. These forward-looking statements are based largely on our current expectations and are subject to a number of risks and uncertainties. Actual results could differ materially from these forward-looking statements. In addition to the other risks described elsewhere in this "Risk Factors" discussion, important factors to consider in evaluating such forward-looking statements include: (i) changes to external competitive market factors or in our internal budgeting process which might impact trends in our results of operations; (ii) anticipated working capital or other cash requirements; (iii) changes in our business strategy or an inability to execute our strategy due to unanticipated changes in our industry; and (iv) various competitive factors that may prevent us from competing successfully in the marketplace. In light of these risks and uncertainties, many of which are described in greater detail elsewhere in this "Risk Factors" discussion, there can be no assurance that the events predicted in forward-looking statements contained in this Annual Report will, in fact, transpire.  Any negative change in the factors listed above could adversely affect the financial condition and operating results of the Company and its products and services.
 
ITEM 1B. UNRESOLVED STAFF COMMENTS.
 
None.
 
ITEM 2. PROPERTIES.
 
We lease approximately 17,000 square feet of office space at 27271 Las Ramblas, Suite 200, Mission Viejo, California  92691. This lease terminates in April of 2021. We also lease approximately 3,000 square feet of office space at 4690 Carpinteria Ave, Suite B, Carpinteria, CA 93013. This lease is currently on a month-to-month rental. We expect that the current leased premises will be satisfactory until the future growth of our business operations necessitates an increase in office space.
 
ITEM 3. LEGAL PROCEEDINGS.
 
We are not a party to any material legal proceedings, nor has any material proceeding been terminated during the fiscal year ended December 31, 2015.
 
ITEM 4. MINE SAFETY DISCLOSURES.
 
 Not applicable.
9

PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
 
Market Information
 
Our Common Stock is traded on the OTCQB under the symbol "AUXO." As such, the market for our Common Stock may be less liquid, receive less coverage by security analysts and news media, and generate lower prices than might otherwise be obtained if it were listed on a national exchange.
 
The following table presents quarterly information on the high and low sales prices of our Common Stock for the fiscal year ending December 31, 2016 (through March 28, 2016), and the fiscal years ended December 31, 2015 and 2014, furnished by the OTCQB.
 
   
High
   
Low
 
Fiscal Year Ending December 31, 2016
           
First Quarter (through March 28, 2016)
 
$
1.17
   
$
0.76
 
                 
Fiscal Year Ended December 31, 2015
               
First Quarter
 
$
1.25
   
$
0.96
 
Second Quarter
 
$
1.24
   
$
1.01
 
Third Quarter
 
$
1.15
   
$
0.95
 
Fourth Quarter
 
$
1.17
   
$
0.91
 
                 
Fiscal Year Ended December 31, 2014
               
First Quarter
 
$
1.72
   
$
1.18
 
Second Quarter
 
$
1.72
   
$
1.21
 
Third Quarter
 
$
1.33
   
$
0.96
 
Fourth Quarter
 
$
1.17
   
$
0.81
 

The high and low sales prices for our Common Stock on March 28, 2016, as quoted on the OTCQB, were $0.87 and $0.85, respectively.
 
Holders
 
On March 28, 2016, we had approximately 103 stockholders of record.
 
Dividends
 
We have never paid cash dividends on our Common Stock and do not anticipate paying such dividends in the foreseeable future. The future payment of dividends, if any, will be determined by our Board of Directors (the "Board") in light of conditions then existing, including our financial condition and requirements, future prospects, restrictions in financing agreements, business conditions and other factors deemed relevant by the Board.
 
Repurchases
 
During the fiscal year ended December 31, 2015, we did not repurchase any of our securities.
 
Securities Authorized for Issuance under Equity Compensation Plans
 
The following table provides certain information as of December 31, 2015 with respect to our existing equity compensation plans under which shares of our Common Stock are authorized for issuance.
 
10

 
Plan
 
Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights
   
Weighted Average Exercise Price of Outstanding Options, Warrants and Rights
   
Number of Securities Remaining Available for Future Issuances Under Plans (excluding securities reflected in column (a))
 
   
(a)
   
(b)
   
(c)
 
Equity compensation plans approved by security holders (1)
   
4,554,555
   
$
1.00
     
1,002,411
 
Equity compensation plans not approved by security holders (2)
   
1,975,231
   
$
1.13
     
-
 
Total
   
6,529,786
             
1,002,411
 


(1) These plans consist of the 2001 Stock Option Plan, the 2003 Stock Option Plan, the 2004 Stock Option Plan, the 2007 Stock Option Plan and the 2011 Stock Incentive Plan.
(2) From time to time and at the discretion of the Board, we may issue warrants to our key individuals or officers as performance-based compensation. We have also issued warrants to debt holders in connection with a convertible debt agreement and to Cambria Capital, LLC in consideration for financing arrangements.

 
ITEM 6. SELECTED FINANCIAL DATA.
 
As a smaller reporting company, we are not required to include this information in our Annual Report on Form 10-K.
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
The following discussion presents information about our consolidated results of operations, financial condition, liquidity and capital resources and should be read in conjunction with our consolidated financial statements and the notes thereto beginning on page F-1 of this Annual Report.
 
Overview
 
We provide fully-outsourced managed print services and data security services to the healthcare industry that help reduce expenses, increase efficiency and mitigate risks across a hospital or health system. We work exclusively in healthcare and intimately understand the needs we solve on a daily basis.
 
Our managed print services group helps hospitals and health systems reduce expenses and create manageable, dependable document image management programs by managing their back-office processes.  The process is initiated through a detailed proprietary managed print services assessment.  The assessment is a strategic, operational and financial analysis that is performed at the customer's premises using a combination of proprietary processes and innovative web-based technology for data collection and report generation.  After the assessment and upon engagement, we charge the customer on a per print basis.  This charge covers the entire print management process and includes the placement of a highly trained resident team on-site to manage the entire process.  
 
Our data security group is built on four pillars that addresses the most common security needs in healthcare: Security Process and Program Development, Regulatory and Penetration Assessments, Incident and Breach Response and Delphiis™ IT Risk Manager SaaS Solution. Our team has the expertise needed to help hospitals and health systems build the foundation needed to ensure the confidentiality, integrity and security of patient health information (PHI). Our technology revolutionizes the way in which hospitals and health systems perform their annual HIPAA analysis, regulatory and on-going risk assessments by making it fast, effective and affordable.
 
11

 
 Application of Critical Accounting Policies
 
The SEC defines critical accounting policies as those that are, in management's view, most important to the portrayal of our financial condition and results of operations and most demanding of our judgment. The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which were prepared in accordance with accounting principles generally accepted in the U.S., which is referred to as "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 related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate these estimates, including those related to stock-based compensation, customer programs and incentives, bad debts, supply inventories, intangible assets, income taxes, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
 
We consider the following accounting policies to be those 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) equipment revenue; (3) software subscription services revenue, which is 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) cyber security professional services such as penetration testing, cyber security risk assessments and security program strategy development.
 
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 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 Multi-Function Device ("MFD") 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 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.
 
The Company's contracts with customers may include provisions that relate to guaranteed savings amounts and shared savings. Such provisions are considered by management during the Company's initial proprietary client assessment and are charged and accrued when deemed by management to be probable. The Company's historical settlement of such amounts has been within management's estimates.
 
12

 
· 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.
 
· Cyber Security Professional Services Revenue
 
The majority of the Company's cyber security 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.
 
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 income and cash flows during the implementation phase.
 
Impairment review of goodwill and intangible assets
 
The Company performs an impairment test of goodwill and intangible assets at least annually or on an interim basis if any triggering events occur that would merit another test.  The goodwill impairment test first involves assessing qualitative factors to determine if there is a possible impairment and if it is necessary to perform the first step of the two-step impairment test that compares the fair value based on market capitalization of the Company with its book value of net assets, including goodwill and intangibles. 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, stock-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 stock-based compensation expense.
 
13

 
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.
 
The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP, with no need for management's judgment in its application. There are also areas in which management's judgment in selecting any available alternative would not produce a materially different result. Please see our audited financial statements and notes thereto which begin on page F-1 of this Annual Report on Form 10-K, which contain accounting policies and other disclosures required by GAAP and please refer to the disclosures in Note 1 of our financial statements for a summary of our significant accounting policies.
 
Results of Operations
 
Year Ended December 31, 2015 Compared to the Year Ended December 31, 2014
 
Net Revenue
 
Revenues consist of managed print services revenue, equipment revenue, software subscription services revenue and cyber security professional services. Net revenue increased by $17,221,777 to $61,253,853 for the year ended December 31, 2015, as compared to the same period in 2014.  Of this increase, approximately $8,200,000 is a result of the addition of new recurring service revenue contracts in 2015. We added approximately $4,400,000 in cyber security professional services and software subscriptions from our newly acquired businesses, Delphiis, Inc. and Redspin. Partially offsetting these increases was a net reduction of approximately $400,000 from existing customers, where there was a reduction in unit price and sales volume, and non-renewing contracts, offset by the expansion of services. We still anticipate overall revenue growth as a result of the expansion of our customer base.  Equipment sales for 2015 were approximately $7,800,000 as compared to approximately $3,600,000 in 2014. Equipment sales in 2015 were primarily from copier fleet refresh activities at five customers compared to three in 2014. These fleet refreshes are typically done every five years at any one customer facility and vary widely in total revenue value.
 
Cost of Revenues
 
Cost of revenues consists of document imaging equipment, parts, supplies and salaries expense for field services personnel. Cost of revenues was $50,664,713 for the year ended December 31, 2015, as compared to $35,799,726 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 in 2015. We incurred approximately $6,600,000 in additional staffing, approximately $700,000 of additional travel costs and approximately $3,400,000 in additional service and supply costs, primarily as a result of our new customers in both managed print services and security services.  Equipment costs increased by approximately $4,000,000 in 2015, primarily as a result of the increase in equipment revenues from the copier fleet refresh activities.
 
14

 
Gross margin decreased to 17% of revenue in 2015 as compared to 19% in 2014. This decrease is primarily a result of the significant increase in new recurring revenue customers in 2015. 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, thus reducing costs over the term of the contract. We anticipate this trend to continue but anticipate an overall increase in cost of revenues sold as a result of the expansion of our customer base.
 
Sales and Marketing
 
Sales and marketing expenses include salaries, commissions and expenses of sales and marketing personnel, travel and entertainment, and other selling and marketing costs. Sales and marketing expenses were $2,809,377 for the year ended December 31, 2015, as compared to $2,125,085 for the same period in 2014. Staffing costs, including commissions, increased approximately $700,000 in 2015 because we increased sales staff headcount with approximately half of the cost increase coming from our new security offerings.
 
General and Administrative
 
General and administrative expenses, which include personnel costs for finance, administration, information systems, and general management, as well as facilities expenses, professional fees, and other administrative costs, increased by $2,370,208 to $6,802,582 for the year ended December 31, 2015. We brought on the president of security as part of the Redspin asset acquisition and we moved the executive vice president for Delphiis to an administrative role. We added one accounts payable staff position as well as an IT support staff. This staff increase resulted in approximately $800,000 more payroll in 2015. In 2015 we also incurred executive severance costs for security of approximately $400,000. Depreciation and amortization increased approximately $400,000 in 2015 due to the charge for the amortization of identified intangibles associated with both the recent Redspin and Delphiis acquisitions. Also in connection with the Redspin transaction and increased investor relations activities, we incurred approximately $200,000 more in travel costs in 2015. Stock compensation increased by approximately $100,000 primarily due to performance based warrants which were deemed to have been earned for executives. Professional fees increased by approximately $200,000 primarily due to due diligence efforts for the Redspin acquisition. We incurred approximately $200,000 more in equipment and software costs primarily as a result of operating the new security business. Our overall rent expense increased by approximately $100,000 due to an additional space in Carpinteria and the move of our corporate offices into larger space in Mission Viejo. In 2015 we brought in-house a number of our human resources activities including the hiring of a director for this group. We do not anticipate an increase of this magnitude next year as a result of some of the integration activities that occurred during 2015 related to our security acquisitions providing some synergy savings.
 
Other Income (Expense)
 
We recognized a gain of $623,000 in 2015 as part of the Redspin asset acquisition. This amount represents contingent consideration initially recorded as part of the acquisition which management now believes will not be paid to the seller due to certain earn-out goals that are not expected to be achieved.
 
Interest expense for the year ended December 31, 2015 was $127,576, compared to $259,112 for the same period in 2014. The reduction is primarily due to the lower interest rate for our current bank term loan as compared to the interest rate on our convertible debt in 2014.
 
Income Tax Expense
 
Income tax expense for the year ended December 31, 2015 was $152,436 and was $78,860 for the year ended December 31, 2014. The increase is primarily due to our recent expansion into states where we have no NOL's to offset taxable earnings.
 
15

 
Liquidity and Capital Resources
 
At December 31, 2015, our cash and cash equivalents were $6,436,732 and our working capital was $3,243,652. By comparison, our working capital was $2,790,005 as of December 31, 2014. Our principal cash requirements were for operating expenses, including equipment, supplies, employee costs, and capital expenditures and funding of the operations. Our primary sources of cash were from service and equipment sale revenues.
 
During the year ended December 31, 2015, cash provided by operating activities was $2,445,586 as compared to cash provided by operating activities of $1,480,510 for the same period in 2014.  Our cash generated from operating activities in 2015 improved over 2014 primarily due to more successful trade receivable collection efforts.
 
We expect to continue to establish recurring revenue contracts to new customers throughout 2016, though at a slower rate than in 2015. We expect to have higher cost of revenues at the start of the engagements with most new customers. In June 2015, we borrowed $2,000,000 under a four year, $4,000,000 term loan agreement with a financial institution where we also have in place the availability of a $2,000,000 line of credit. 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 operate without disruption.
 
Off-Balance Sheet Arrangements
 
Our off-balance sheet arrangements consist primarily of conventional operating leases and purchase and other commitments arising in the normal course of business, as further discussed below under the section "Contractual Obligations, Contingent Liabilities and Commitments." As of December 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, Contingent Liabilities and Commitments
 
As of December 31, 2015, expected future cash payments, including interest portion, related to contractual obligations, contingent liabilities, and commitments were as follows:
 
   
Payments Due by Period
 
   
Total
   
Within 1 year
   
Year 2-3
   
Year 4-5
   
More than 5 years
 
Term loan
 
$
1,923,907
   
$
577,813
   
$
1,088,125
   
$
257,969
   
$
-
 
Capital leases
   
248,663
     
123,135
     
125,528
     
-
     
-
 
Operating leases
   
2,106,889
     
297,684
     
795,835
     
880,444
     
132,926
 
Total
 
$
4,279,459
   
$
998,632
   
$
2,009,488
   
$
1,138,413
   
$
132,926
 


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
Not applicable.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
The financial statements required by this item are included in Part IV, Item 15 of this Annual Report.
 
16

 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
 
None.
 
ITEM 9A. 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 of the end of the period covered by this Annual Report, pursuant to Rules 13a-15(b) and 15d-15(b) under the Exchange Act. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures, as of the end of the period covered by this Annual Report, were effective.
 
Management's Report on Internal Control over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Management conducted an assessment of the effectiveness, as of December 31, 2015, of our internal control over financial reporting, based on the framework established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on their assessment under the COSO framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2015.
 
This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our independent registered public accounting firm pursuant to final rules of the Securities and Exchange Commission that permit us to provide only management's report in this Annual Report on Form 10-K.
 
Changes in Internal Control over Financial Reporting
 
There has been no change in our internal control over financial reporting during the most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
ITEM 9B. OTHER INFORMATION.
 
Employment Agreement with Joseph J. Flynn

On January 28, 2016, we entered into an employment agreement with Mr. Flynn (the "2016 Flynn Agreement"). The 2016 Flynn Agreement had an effective date of January 1, 2016.  The 2016 Flynn Agreement provides that Mr. Flynn will continue his employment as our President and CEO. The 2016 Flynn Agreement has a term of two years, provides for an annual base salary of $300,000, and will automatically renew for subsequent twelve (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 twelve (12) 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 $180,000 per year, the achievement of which is based on Company performance metrics.  We may terminate Mr. Flynn's employment under the Flynn Agreement without cause at any time on thirty (30) 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 2016 Flynn Agreement is qualified in its entirety by reference to the full contexts of the employment agreement, which is found as Exhibit 10.31 to this Annual Report on Form 10-K.
 
17


Employment Agreement with Paul T. Anthony

On January 28, 2016, we entered into an employment agreement with Mr. Anthony (the "2016 Anthony Agreement").  The 2016 Anthony Agreement had an effective date of January 1, 2016.   The 2016 Anthony Agreement provides that Mr. Anthony will continue to serve as our Executive Vice President ("EVP") and CFO. The 2016 Anthony Agreement has a term of two years, and provides for an annual base salary of $245,000. The 2016 Anthony Agreement will automatically renew for subsequent twelve (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 twelve (12) 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 $132,000 per year, the achievement of which is based on Company performance metrics.  We may terminate Mr. Anthony's employment under the 2016 Anthony Agreement without cause at any time on thirty (30) 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 2016 Anthony Agreement is qualified in its entirety by reference to the full contexts of the employment agreement, which is found as Exhibit 10.32 to this Annual Report on Form 10-K.

 
PART III
 
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
 
The information with respect to our executive officers and directors appearing in our Definitive Proxy Statement to be filed with the SEC in connection with the 2016 Annual Meeting of Stockholders ("Proxy Statement") is hereby incorporated by reference.
 
ITEM 11. EXECUTIVE COMPENSATION.
 
The information with respect to compensation of our executive officers appearing in our Proxy Statement is hereby incorporated by reference.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
 
The information with respect to the security ownership of certain beneficial owners and management appearing in our Proxy Statement is hereby incorporated by reference.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.
 
The information with respect to certain relationships and related transactions with management appearing in our Proxy Statement is hereby incorporated by reference.
 
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
 
The information with respect to the principal accounting fees and services appearing in the Proxy Statement is hereby incorporated by reference.
 
18

PART IV
 
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
 
(a)
 
     (1) Financial Statements
 
The following consolidated financial statements and related notes thereto, and the report of our independent registered public accounting firm are filed as part of this Annual Report:
 
 
Page
Report of Independent Registered Public Accounting Firm
F-1
Consolidated Balance Sheets as of December 31, 2015 and 2014
F-2
Consolidated Statements of Income for the years ended December 31, 2015 and 2014
F-3
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2015 and 2014
F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2015 and 2014
F-5
Notes to Consolidated Financial Statements
F-7
 
     (2) Financial Statement Schedules
 
All other financial statement schedules were omitted because they are not applicable, not required or the information required is shown in the financial statements or the notes thereto.
 
     (3) Exhibits
 
The exhibits listed on the accompanying index to exhibits immediately following the financial statements are filed as part of, or hereby incorporated by reference into, this Annual Report.
 
19


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders
Auxilio, Inc.
 
We have audited the accompanying consolidated balance sheets of Auxilio, Inc. (the "Company") as of December 31, 2015 and 2014, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Auxilio, Inc. as of December 31, 2015 and 2014, and the consolidated results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.
 
 
/s/ HASKELL & WHITE LLP
 
Irvine, California
March 30, 2016
F-1

AUXILIO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
   
As of December 31,
 
   
2015
   
2014
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
 
$
6,436,732
   
$
4,743,395
 
Accounts receivable, net
   
7,397,957
     
6,808,183
 
Prepaid and other current assets
   
625,806
     
214,105
 
Supplies
   
1,458,609
     
1,066,132
 
Total current assets
   
15,919,104
     
12,831,815
 
                 
Property and equipment, net
   
495,324
     
215,747
 
Deposits
   
58,118
     
34,413
 
Intangible assets, net
   
2,731,250
     
1,265,000
 
Goodwill
   
3,665,656
     
2,473,656
 
Total assets
 
$
22,869,452
   
$
16,820,631
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
Current liabilities:
               
Accounts payable and accrued expenses
 
$
8,306,860
   
$
7,417,361
 
Accrued compensation and benefits
   
2,856,165
     
1,447,132
 
Line of credit
   
-
     
200,000
 
Deferred revenue
   
913,677
     
921,771
 
Current portion of long-term liabilities
   
598,750
     
55,546
 
Total current liabilities
   
12,675,452
     
10,041,810
 
                 
                 
Long-term liabilities:
               
Term loan, less current portion
   
1,250,000
     
-
 
Notes payable to related parties, net of discount of $30,189 at December 31, 2014
   
-
     
333,534
 
Capital lease obligations, less current portion
   
125,496
     
49,822
 
Total long-term liabilities
   
1,375,496
     
383,356
 
                 
Commitments and contingencies
               
                 
Stockholders' equity:
               
Common stock, par value at $0.001, 33,333,333 shares authorized, 24,452,085 shares issued and outstanding at December 31, 2015 and 23,623,619 shares issued and outstanding at December 31, 2014
   
24,453
     
23,625
 
Additional paid-in capital
   
27,682,061
     
26,576,506
 
Accumulated deficit
   
(18,888,010
)
   
(20,204,666
)
Total stockholders' equity
   
8,818,504
     
6,395,465
 
Total liabilities and stockholders' equity
 
$
22,869,452
   
$
16,820,631
 
 
The accompanying notes are an integral part of these consolidated financial statements.
F-2

AUXILIO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
 
   
Year Ended December 31,
 
   
2015
   
2014
 
Net revenues
 
$
61,253,853
   
$
44,032,076
 
Cost of revenues
   
50,664,713
     
35,799,726
 
Gross profit
   
10,589,140
     
8,232,350
 
 
Operating expenses:
               
Sales and marketing
   
2,809,377
     
2,125,085
 
General and administrative expenses
   
6,802,582
     
4,432,374
 
Total operating expenses
   
9,611,959
     
6,557,459
 
Income from operations
   
977,181
     
1,674,891
 
 
Other income (expense):
               
Interest expense
   
(127,576
)
   
(259,112
)
Reduction in contingent consideration in connection with acquisition of Redspin
   
623,000
     
-
 
Loss on disposition of property and equipment
   
(3,513
)
   
-
 
Total other income (expense)
   
491,911
     
(259,112
)
                 
Income before provision for income taxes
   
1,469,092
     
1,415,779
 
Income tax expense
   
152,436
     
78,860
 
Net income
 
$
1,316,656
   
$
1,336,919
 
                 
Net income per share:
               
Basic
 
$
0.05
   
$
0.06
 
Diluted
 
$
0.05
   
$
0.06
 
                 
Number of weighted average shares outstanding:
               
Basic
   
24,150,572
     
22,062,789
 
Diluted
   
24,978,936
     
23,437,628
 
 
The accompanying notes are an integral part of these consolidated financial statements.
F-3

AUXILIO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2015 AND 2014
 
 
Common Stock
               
   
Shares
   
Amount
   
Additional Paid-in Capital
   
Accumulated Deficit
   
Total Stockholders' Equity (Deficit)
 
Balance at January 1, 2014
   
20,643,966
   
$
20,645
   
$
23,491,490
   
$
(21,541,585
)
 
$
1,970,550
 
Stock compensation expense for options and warrants granted to employees and consultants
   
-
     
-
     
280,061
     
-
     
280,061
 
Stock compensation expense for restricted stock granted to key employee
   
-
     
-
     
30,634
     
-
     
30,634
 
Options and warrants exercised
   
349,247
     
349
     
64,951
     
-
     
65,300
 
Conversion of convertible note payable
   
1,700,000
     
1,700
     
1,698,300
     
-
     
1,700,000
 
Acquisition of Delphiis, Inc.
   
930,406
     
931
     
1,011,070
     
-
     
1,012,001
 
Net income
   
-
     
-
     
-
     
1,336,919
     
1,336,919
 
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
   
-
     
-
     
277,668
     
-
     
277,668
 
Stock compensation expense for restricted stock granted to key employee
   
100,000
     
100
     
101,780
     
-
     
101,880
 
Stock options exercised
   
18,347
     
18
     
(18
)
   
-
     
-
 
Conversion of related party note payable to common stock
   
257,835
     
258
     
257,577
     
-
     
257,835
 
Common stock issued in connection with the acquisition of Redspin
   
452,284
     
452
     
468,548
     
-
     
469,000
 
Net income
   
-
     
-
     
-
     
1,316,656
     
1,316,656
 
Balance at December 31, 2015
   
24,452,085
   
$
24,453
   
$
27,682,061
   
$
(18,888,010
)
 
$
8,818,504
 

The accompanying notes are an integral part of these consolidated financial statements.
F-4

AUXILIO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
Year Ended December 31,
 
   
2015
   
2014
 
Cash flows provided by operating activities:
           
Net income
 
$
1,316,656
   
$
1,336,919
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation
   
155,183
     
107,621
 
Amortization of intangible assets
   
483,750
     
105,000
 
Bad debt
   
22,000
     
-
 
Stock compensation expense for options and warrants granted to employees and directors
   
277,668
     
280,061
 
Stock compensation expense for restricted stock issued to key employee
   
101,880
     
30,634
 
Interest expense related to accretion of debt discount costs
   
30,189
     
91,784
 
Interest expense related to amortization of loan acquisition costs
   
-
     
51,162
 
Loss on disposition of property and equipment
   
3,513
     
-
 
Changes in operating assets and liabilities:
               
Accounts receivable
   
(431,365
)
   
(2,579,359
)
Prepaid and other current assets
   
(395,870
)
   
118,654
 
Supplies
   
(392,477
)
   
(98,778
)
Deposits
   
(20,527
)
   
-
 
Accounts payable and accrued expenses
   
43,302
     
2,266,006
 
Accrued compensation and benefits
   
1,291,024
     
(128,690
)
Deferred revenue
   
(39,340
)
   
(100,504
)
Net cash provided by operating activities
   
2,445,586
     
1,480,510
 
Cash flows (used for) investing activities:
               
Purchases of property and equipment
   
(214,478
)
   
(94,165
)
Purchase of Redspin
   
(1,876,966
)
   
-
 
Purchase of Delphiis, Inc. net of cash acquired
   
-
     
(995,257
)
Net cash (used for) investing activities
   
(2,091,444
)
   
(1,089,422
)
Cash flows provided by (used for) financing activities:
               
Net repayments on line of credit agreement
   
(200,000
)
   
(200,000
)
Proceeds from term loan
   
2,000,000
     
-
 
Payments on term loan
   
(250,000
)
   
-
 
Payments on notes payable to related parties
   
(105,888
)
   
(100,000
)
Payments on capital leases
   
(104,917
)
   
(81,617
)
Proceeds from exercise of options and warrants
   
-
     
65,300
 
Net cash provided by (used for) financing activities
   
1,339,195
     
(316,317
)
Net increase in cash and cash equivalents
   
1,693,337
     
74,771
 
Cash and cash equivalents, beginning of year
   
4,743,395
     
4,668,624
 
Cash and cash equivalents, end of year
 
$
6,436,732
   
$
4,743,395
 
 
The accompanying notes are an integral part of these consolidated financial statements.
F-5

AUXILIO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
 
   
Year Ended December 31,
 
   
2015
   
2014
 
Supplemental disclosure of cash flow information:
           
Interest paid
 
$
97,386
   
$
116,100
 
Income tax paid
 
$
158,521
   
$
102,733
 
                 
Non-cash investing and financing activities:
               
Property and equipment acquired through capital leases
 
$
223,795
   
$
68,494
 
Conversion of convertible note payable
 
$
-
   
$
1,700,000
 
Conversion of note payable to related party
 
$
257,835
   
$
-
 
Common stock issued in connection with the acquisition of Redspin
 
$
469,000
   
$
-
 
Common stock issued for acquisition of Delphiis, Inc.
 
$
-
   
$
1,012,000
 
 
The accompanying notes are an integral part of these consolidated financial statements.
F-6

AUXILIO, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
 
(1)   Basis of Presentation and Summary of Significant Accounting Policies
 
Business Activity
 
We are engaged in the business of providing fully-outsourced managed print services and IT security consulting data security services primarily to the healthcare industry, and also to financial institutions, gaming and other industries.  Our business is operated throughout the United States.
 
Basis of Presentation
 
The accompanying consolidated financial statements were prepared in conformity with GAAP, and include the accounts of Auxilio and our wholly-owned subsidiaries. All intercompany balances and transactions were eliminated.
 
Use of Estimates
 
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 and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
Revenue Recognition and Deferred Revenue
 
The Company derives its revenue from four sources: (1) managed print services revenue; (2) equipment revenue; (3) software subscriptions and managed services revenue, which is 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) cyber security professional services such as penetration testing, cyber security risk assessments and security program strategy development.
 
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 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 Multi-Function Device ("MFD") 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 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.
 
The Company's contracts with customers may include provisions that relate to guaranteed savings amounts and shared savings. Such provisions are considered by management during the Company's initial proprietary client assessment and are charged and accrued when deemed by management to be probable. The Company's historical settlement of such amounts has been within management's estimates.
F-7

 
· 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.
 
· Cyber Security Professional Services Revenues
 
The majority of the Company's cyber security 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.
 
Cash and Cash Equivalents
 
For purposes of the statement of cash flows and balance sheet classification, cash equivalents include all highly liquid debt instruments with original maturities of three months or less which are not securing any corporate obligations.
 
Accounts Receivable
 
We provide an allowance for doubtful accounts equal to the estimated uncollectible amounts. Our estimate is based on historical collection experience and a review of the current status of trade accounts receivable. It is reasonably possible that our estimate of the allowance for doubtful accounts will change. Management believes that no accounts receivable were uncollectible at December 31, 2015 or 2014.
 
Supplies
 
Supplies consist of parts and supplies for the automated office equipment, including copiers, facsimile machines and printers. Supplies are valued at the lower of cost or market value on a first-in, first-out basis.
 
Property and Equipment
 
Property and equipment are carried at cost less accumulated depreciation. Depreciation of the property and equipment is provided using the straight-line method over the assets' estimated economic lives, which range from two to seven years. Expenditures for maintenance and repairs are charged to expense as incurred.
 
F-8

 
New customer implementation costs
 
We ordinarily incur additional costs to implement our managed print 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 income and cash flows during the implementation phase.
 
Goodwill and Intangible Assets
 
The Company accounts for its business combinations in accordance with the Financial Accounting Standards Board ("FASB") Accounting Standard Codification ("ASC") 805-10 through ASC 805-50, "Business Combinations" which requires that the purchase method of accounting be applied to all business combinations and addresses the criteria for initial recognition of intangible assets and goodwill. In accordance with FASB ASC 350-10 through ASC 350-30, goodwill and other intangible assets with indefinite lives are not amortized but are tested for impairment annually, or more frequently if circumstances indicate the possibility of impairment. If the carrying value of goodwill or an indefinite lived intangible asset exceeds its fair value, an impairment loss shall be recognized. Based on management's tests and reviews, no impairment of its goodwill, intangible assets or other long-lived assets existed at December 31, 2015 or 2014. However, future events or changes in current circumstances could affect the recoverability of the carrying value of goodwill and long-lived assets. Should an asset be deemed impaired, an impairment loss would be recognized to the extent the carrying value of the asset exceeded its estimated fair value.
 
To test for impairment, first we perform a qualitative assessment. If we determine, based on qualitative factors, that the fair value of goodwill is more likely than not greater than the carrying amount, a quantitative calculation would not be needed. Our methodology for a quantitative assessment of testing for goodwill impairment consists of one, and possibly two steps. In step one of the goodwill impairment test, management compares the carrying amount (including goodwill) of the entity-wide reporting unit and the fair value based on market capitalization. Our market capitalization is based on the closing price of our Common Stock as quoted on the OTCQB multiplied by our outstanding shares of Common Stock.
 
Long-Lived Assets
 
In accordance with ASC Topic 350, long-lived assets, such as definite lived intangible assets, to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If there are indications of impairment, we use future undiscounted cash flows of the related asset or asset grouping over the remaining life in measuring whether the assets are recoverable. In the event such cash flows are not expected to be sufficient to recover the recorded asset values, the assets are written down to their estimated fair value. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value of asset less the cost to sell. As of December 31, 2015 and 2014, management determined there was no impairment of these assets.
 
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.
 
F-9

 
Fair Value of Financial Instruments
 
ASC Topic 820, "Fair Value Measurements," defines fair value, provides a framework for measuring fair value and expands the disclosures required for fair value measurements. The standard applies to other accounting pronouncements, but does not require any new fair value measurements.
 
The fair value hierarchy consists of three broad levels, which are described below:
 
Level 1 - Quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
 
Level 2 - Observable inputs, other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
 
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
 
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, line of credit and capital lease obligations approximate fair value due to the short-term nature of these financial instruments. The carrying amount of our host debt contract of our convertible debt approximates its fair value as we believe the credit market has not materially changed since the original borrowing date.
 
As described in Notes 15 and 16, certain fair value measurements were made in connection with the acquisitions of Delphiis, Inc. and Redspin.
 
Stock-Based Compensation
 
We account for stock options granted to employees and directors using the accounting guidance in ASC 718 "Stock Compensation" ("ASC 718").  In accordance with ASC 718, we estimate the fair value of service based options and performance based options on the date of grant, using the Black-Scholes pricing model.  We recognize compensation expense for stock option awards over the requisite or implied service period of the grant.  With respect to performance-based awards, compensation expense is recognized when the performance target is deemed probable.
 
We account for stock options granted to consultants using the accounting guidance included in ASC 505-50 "Equity-Based Payments to Non-Employees."  In accordance with ASC 505-50, we estimate the fair value of service-based stock options and performance-based options at each reporting period using the Black-Scholes pricing model.  The measurement date of the fair value of the equity instrument issued is the earlier of the date on which the counterparty's performance is complete or the date on which it is probable that performance will occur.
 
For the years ended December 31, 2015 and 2014, stock-based compensation expense recognized in the consolidated statements of income is as follows:
 
   
Year Ended December 31,
 
   
2015
   
2014
 
Cost of revenues
 
$
137,279
   
$
173,089
 
Sales and marketing
   
34,203
     
19,371
 
General and administrative expenses
   
208,066
     
118,235
 
Total stock based compensation expense
 
$
379,548
   
$
310,695
 

 
F-10

The weighted average estimated fair value of stock options granted during 2015 and 2014 was $0.42 and $0.55 per share, respectively. These amounts were determined using the Black-Scholes option-pricing model, which values options based on the stock price at the grant date, the expected life of the option, the estimated volatility of the stock, the expected dividend payments, and the risk-free interest rate over the expected life of the option. The assumptions used in the Black-Scholes model were as follows for stock options granted in 2015 and 2014:
 
   
2015
   
2014
 
Risk-free interest rate
 
0.08% to 0.12%
   
0.07% to 0.09%
 
Expected volatility of our Common Stock
 
46.74% to 54.98%
   
57.08% to 64.72%
 
Dividend yield
   
0%
 
   
0%
 
Expected life of options
 
3 years
   
3 years
 

The Black-Scholes 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.
 
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 was 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. As of December 31, 2015, we have not granted any restricted stock units under the 2011 Stock Incentive Plan.
 
Basic and Diluted Net Income Per Share
 
In accordance with ASC Topic 260, "Earnings Per Share," basic net income 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 income by the weighted average number of shares of our Common Stock issued and outstanding during such period. Diluted net income 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.
 
As of December 31, 2015, potentially dilutive securities consisted of options and warrants to purchase 6,529,786 shares of our Common Stock at prices ranging from $0.30 to $2.15 per share. Of these potentially dilutive securities, only 828,364 of the shares to purchase Common Stock from the options and warrants are included from the computation of diluted earnings per share because the effect of including the remaining instruments would be anti-dilutive.
 
As of December 31, 2014, potentially dilutive securities consisted of options and warrants to purchase 7,095,394 shares of our Common Stock at prices ranging from $0.30 to $2.15 per share. Of these potentially dilutive securities, only 1,374,839 of the shares to purchase Common Stock from the options and warrants are included in the computation of diluted earnings per share because the effect of including the remaining instruments would be anti-dilutive.
 
F-11

 
The following table sets forth the computation of basic and diluted net income per share:
 
   
Year Ended December 31,
 
   
2015
   
2014
 
Numerator:
           
Net income
 
$
1,316,656
   
$
1,336,919
 
Effects of dilutive securities:
               
Convertible notes payable
   
-
     
75,189
 
Income after effects of conversion of note payable
 
$
1,316,656
   
$
1,412,108
 
                 
Denominator:
               
Denominator for basic calculation weighted averages
   
24,150,572
     
22,062,789
 
                 
Dilutive Common Stock equivalents:
               
Convertible debt
   
-
     
-
 
Options and warrants
   
828,364
     
1,374,839
 
Denominator for diluted calculation weighted average
   
24,978,936
     
23,437,628
 
                 
Net income per share:
               
Basic net income per share
 
$
.05
   
$
.06
 
Diluted net income per share
 
$
.05
   
$
.06
 

Segment Reporting
 
Based on our integration and management strategies, we operate in a single business segment. For the years ended December 31, 2015 and 2014, all revenues were derived from domestic operations.
 
New Accounting Pronouncements
 
In April 2015 and August 2015, the FASB issued guidance which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability consistent with the presentation of debt discounts, however debt issuance costs related to revolving credit agreements may be presented in the balance sheet as an asset. This guidance is effective for us in the first quarter of 2016 and is not expected to have a material impact on our consolidated financial statements.
 
In November 2015, the FASB issued guidance related to the presentation of deferred income taxes. The guidance requires that deferred tax assets and liabilities are classified as non-current in a consolidated balance sheet. This guidance is effective for us in the first quarter of 2017 and is not expected to materially impact our financial position or net earnings.
 
In May 2014, the FASB issued guidance which provides a single, comprehensive accounting model for revenue arising from contracts with customers. This guidance supersedes most of the existing revenue recognition guidance, including industry-specific guidance. Under this model, revenue is recognized at an amount that a company expects to be entitled to upon transferring control of goods or services to a customer, as opposed to when risks and rewards transfer to a customer. The new guidance also requires additional disclosures about the nature, timing and uncertainty of revenue and cash flow arising from customer contracts, including significant judgments and changes in judgments. Considering the one-year delay in the required adoption date for the guidance as issued in July 2015, the new guidance is effective for us beginning in 2018 and may be applied retrospectively to all prior periods presented or through a cumulative adjustment to the opening retained earnings balance in the year of adoption. We are in the process of evaluating the impact of the new guidance on our consolidated financial statements.
 
In February 2016, the FASB issued a new accounting standard on leasing. The new standard will require companies to record most leased assets and liabilities on the balance sheet, and also proposes a dual model for recognizing expense. This guidance will be effective in the first quarter of 2019 with early adoption permitted. We are evaluating the impact that adopting this guidance will have on our consolidated financial statements.
 
(2) Accounts Receivable
 
A summary of accounts receivable follows:
 
   
As of December 31,
 
   
2015
   
2014
 
Trade receivables
 
$
7,458,022
   
$
8,105,330
 
Unapplied advances and unbilled revenue, net
   
(60,065
)
   
(1,297,147
)
Allowance for doubtful accounts
   
-
     
-
 
   
$
7,397,957
   
$
6,808,183
 

F-12

(3) Property and Equipment
 
A summary of property and equipment follows:
 
   
As of December 31,
 
   
2015
   
2014
 
Furniture and fixtures
 
$
102,316
   
$
68,184
 
Computers and office equipment
   
623,810
     
650,352
 
Fleet equipment
   
373,572
     
260,866
 
Leasehold improvements
   
103,993
     
3,838
 
     
1,203,691
     
983,240
 
Less accumulated depreciation and amortization
   
(708,367
)
   
(767,493
)
   
$
495,324
   
$
215,747
 

Depreciation and amortization expense for property, equipment, and improvements amounted to $155,183 and $107,621 for the years ended December 31, 2015 and 2014, respectively.
 
(4) Intangible Assets
 
Intangible assets are amortized over expected useful lives ranging from 1.5 to 10 years and consist of the following:
 
   
As of December 31,
 
   
2015
   
2014
 
   
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Gross
Carrying
Amount
   
Accumulated
Amortization
 
Delphiis, Inc.
                       
Acquired technology
 
$
900,000
   
$
(135,000
)
 
$
900,000
   
$
(45,000
)
Customer relationships
   
400,000
     
(120,000
)
   
400,000
     
(40,000
)
Trademarks
   
50,000
     
(50,000
)
   
50,000
     
(16,667
)
Non-compete agreements
   
20,000
     
(10,000
)
   
20,000
     
(3,333
)
 Total intangible assets, Delphiis, Inc.
 
$
1,370,000
   
$
(315,000
)
 
$
1,370,000
   
$
(105,000
)
                                 
Redspin
                               
Acquired technology
 
$
1,050,000
   
$
(78,750
)
 
$
-
   
$
-
 
Customer relationships
   
600,000
     
(150,000
)
   
-
     
-
 
Trademarks
   
200,000
     
(30,000
)
   
-
     
-
 
Non-compete agreements
   
100,000
     
(15,000
)
   
-
     
-
 
 Total intangible assets, Redspin
 
$
1,950,000
   
$
(273,750
)
 
$
     
$
-
 
                                 
Total intangible assets
 
$
3,320,000
   
$
(588,750
)
 
$
1,370,000
   
$
(105,000
)

Please see Notes 15 and 16 below for further discussion of the origin of these intangible assets.

(5) Line of Credit and Term Loan
 
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. 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 was extended through April 25, 2015, at an interest rate of prime plus 1.0% per annum. This line of credit was further extended through June 25, 2015 under the third amendment to the Loan and Security Agreement. On June 19, 2015, we again amended the Loan and Security Agreement with Avidbank (the "Fourth Avidbank Amendment"). Under the Fourth Avidbank Amendment, the term of the revolving line-of-credit of up to $2.0 million was extended through June 19, 2017, at an interest rate of prime plus 0.75% per annum.  As of December 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).
 
F-13

 
The Fourth Avidbank Amendment also provided for a term loan facility which allows for advances up to $4,000,000 through June 19, 2016. Our initial draw was for $2,000,000 in 2015. Term loan repayments shall be in 48 equal installments of principal, plus accrued interest at an interest rate of prime plus 1.25% per annum.
 
As of December 31, 2015 outstanding borrowings under the term loan was $1,750,000 and the interest rate was 4.75%.
 
While there are outstanding credit extensions, we are to maintain a liquidity ratio of cash plus accounts receivable divided by all obligations owing to the bank of at least 1.75 to 1.00, measured monthly, and a debt coverage ratio, whereby adjusted EBITDA for the most recent twelve months shall be no less than 1.50 to 1.00 of the sum of the annual principal payments to come due in respect of the term loan advances plus the annualized interest expense of the quarter ending on the measurement date. We were in compliance with all of the Avidbank agreement covenants as of December 31, 2015 and December 31, 2014.
 
The foregoing description is qualified in its entirety by reference to the Fourth Amendment to the Loan and Security Agreement between Avidbank Corporate Finance and Auxilio, Inc., which is found as Exhibit 10.1 of our form 10-Q filed on August 14, 2015.
 
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 $1.39 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 loan origination costs, totaled $16,347 and $22,776, respectively, for the years ended December 31, 2015 and 2014, respectively. Interest charges associated with the Avidbank term loan, including loan origination costs, totaled $59,385 for the year ended December 31, 2015.
 
(6) 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. 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 and the other note holder was paid $52,944. The remaining $52,944 principal was repaid in September 2015 when, pursuant to the terms of the note, we accelerated payment on the outstanding amount due at such time as Delphiis, Inc. achieved $4,000,000 of bookings measured from July 1, 2014.
 
Pursuant to a Note Conversion Agreement, dated February 19, 2015 (the "Conversion Agreement"), the holder of the $257,835 note agreed to convert the principal amount of his note into 257,835 shares of our common stock. In February 2015 he received 128,917 shares of common stock, and in October 2015 he received the remaining 128,918 shares when, under the terms of the Conversion Agreement, we accelerated the issuance at such time as Delphiis, Inc. achieved $4,000,000 of bookings measured from July 1, 2014. The foregoing summary of the note conversion is qualified in its entirety by reference to the full context of the Conversion Agreement which is found as Exhibit 99.1 to our 8-K filing on February 27, 2015.
 
F-14

 
Interest expense on the notes, including amortization of the discount, was $33,258 and $17,093 for the years ended December 31, 2015 and 2014, respectively.
 
(7) 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 Note 5.  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 paid Cambria Capital, LLC a placement fee of $149,850 in sales commissions, reimbursement for costs associated with the placement of the Units and issued 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 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 $208,601 for the year ended December 31, 2014.
 
(8) Warrants
 
Below is a summary of warrant activity during the years ended December 31, 2014 and 2015:
 
   
Number of Shares
   
Weighted Average Exercise Price
   
Weighted Average Remaining Term in Years
   
Aggregate Intrinsic Value
 
Outstanding at January 1, 2014
   
2,983,565
   
$
1.15
             
Granted in 2014
   
-
   
$
-
             
Exercised in 2014
   
(122,500
)
 
$
1.01
             
Cancelled in 2014
   
(652,500
)
 
$
1.31
             
Outstanding at December 31, 2014
   
2,208,565
   
$
1.11
     
3.35
   
$
235,750
 
Granted in 2015
   
-
   
$
-
                 
Exercised in 2015
   
-
   
$
-
                 
Cancelled in 2015
   
(233,334
)
 
$
1.01
                 
Outstanding at December 31, 2015
   
1,975,231
   
$
1.13
     
3.46
   
$
265,750
 
                                 
Warrants exercisable at December 31, 2015
   
1,508,565
   
$
1.16
     
2.35
   
$
200,417
 

 
F-15

The following tables summarize information about warrants outstanding and exercisable at December 31, 2015:
 
Range of
Exercise Prices
   
Number of Shares Outstanding
   
Weighted Average Remaining in Contractual Life
in Years
   
Outstanding Warrants Weighted Average Exercise Price
   
Number of Warrants Exercisable
   
Exercisable Warrants Weighted Average Exercise Price
 
$
0.30 to $0.75
     
141,667
     
0.36
   
$
0.60
     
141,667
   
$
0.60
 
$
0.91 to $1.84
     
1,833,564
     
3.70
   
$
1.17
     
1,366,898
   
$
1.22
 
$
0.30 to $1.84
     
1,975,231
     
3.46
   
$
1.13
     
1,508,565
   
$
1.16
 

On January 16, 2013, we granted warrants to four executive employees to purchase a total of 1,500,000 shares of common stock with a strike price set at $1.01. The exercise price equals the fair value of our stock on the grant date.  Of these warrants, 150,000 vested immediately and 1,350,000 vest contingent upon the Company achieving certain performance targets for fiscal years 2013 through 2016 as follows:
 
Year Ended
December 31,
 
Number of Shares
 
2013
   
450,000
 
2014
   
366,667
 
2015
   
366,667
 
2016
   
166,666
 

 
The fair value of the warrants that vest is 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 0.14%, (ii) estimated volatility of 62.94%; (iii) dividend yield of 0.0%; and (iv) expected life of the warrants of five years. The performance targets in 2013 were deemed achieved by the Board of Directors. We have recorded stock compensation for the 150,000 initially vested shares and the 450,000 contingent shares totaling $315,176 for the year ended December 31, 2013.
 
In March 2014, one of the executives separated from the Company which resulted in the full vesting of all 200,000 shares of his remaining warrant grants. We have recorded stock compensation for the shares totaling $105,059 for the year ended December 31, 2014. Also in 2014, three of the executives' employment agreements provided for a modification of the vesting of this warrant grant. The revised vesting schedule is as follows:
 
Year Ended
December 31,
 
Number of Shares
 
2014
   
233,334
 
2015
   
233,334
 
2016
   
233,332
 

 
Our Board of Directors determined that the performance measures for 2014 were not met. As such the warrants for 2014 did not vest to the three executives. This tranche of warrants was cancelled. Our Board of Directors determined that the performance measures for 2015 were met. As such the warrants for 2015 vested to the three remaining executives. We have recorded stock compensation for the shares totaling $122,569 for the year ended December 31, 2015.
 
(9) Stock Option and Stock Incentive Plans
 
In October 2001, we approved the 2001 Stock Option Plan under which all employees may be granted options to purchase shares of our Common Stock. The maximum number of shares of the Common Stock available for issuance under the 2001 Plan was 5,400,000 shares. Under the 2001 Stock Option Plan (the "2001 Plan"), the option exercise price was equal to the fair market value of the Common Stock on the date of grant. Options expired no later than 10 years from the grant date and generally vested within five years.
 
F-16

 
The Board approved the 2003 Stock Option Plan (the "2003 Plan") and it became effective immediately upon stockholder approval at the Annual Meeting on May 15, 2003. The maximum number of shares of Common Stock available for issuance under the 2003 Plan was 4,400,000 shares. On May 15, 2003, 899,500 shares were available to grant under the 2003 Plan, and 567,167 had been granted under our former 2000 Stock Option Plan (the "2000 Plan") and the 2001 Plan. Although we no longer granted options under the 2000 Plan or the 2001 Plan, all outstanding stock options continue to be subject to the terms and conditions of the stock option agreement and the underlying plans, except to the extent the Board or the Compensation Committee elected to extend one or more features of the 2003 Plan to the outstanding stock options that were granted pursuant to the 2000 Plan or the 2001 Plan. Under the 2003 Plan, the option exercise price was equal to the fair market value of the Common Stock at the date of grant. Stock options expired no later than 10 years from the grant date and generally vested within five years.
 
In May of 2004, the Board and stockholders approved the 2004 Stock Incentive Plan (the "2004 Plan"). The maximum number of shares of the Common Stock available for issuance under the 2004 Plan was 6,400,000 shares. As of the date of stockholder approval, May 12, 2004, options to purchase 714,750 shares had been granted pursuant to the 2000 Plan, 2001 Plan and 2003 Plan. Under the terms and conditions of the 2004 Plan, the option exercise price is equal to the fair market value of the Common Stock at the date of grant. Options expired no later than 10 years from the grant date and generally vested within five years.
 
The Board approved the 2007 Stock Option Plan, as amended (the "2007 Plan"), and it became effective on May 16, 2007 upon receipt of stockholder approval. On May 16, 2007, options to purchase 2,890,147 shares of Common Stock had been granted pursuant to the 2000 Plan, 2001 Plan, 2003 Plan and 2004 Plan. Under the 2007 Plan, the administrator could grant options to purchase 4,470,000 shares of Common Stock. The options granted pursuant to the 2004 Plan continue to be governed by the terms and conditions of the 2004 Plan, except to the extent the administrator elected to extend one or more features of the 2007 Plan to the outstanding stock options granted pursuant to the 2004 Plan. Under the 2007 Plan, the option exercise price was equal to the fair market value of the Common Stock at the date of grant. Options expired no later than 10 years from the grant date and generally vested within three years.
 
On March 17, 2011, the Board approved the 2011 Stock Incentive Plan (the "2011 Plan"), and it became effective on May 12, 2011. The 2011 Plan authorizes the issuance of no more than 5,970,000 shares of our Common Stock and it provides for the granting of stock options, stock appreciation rights and restricted stock to our employees, members of the Board and service providers. As of December 31, 2015, there were 1,002,411 shares available for issuance under the 2011 Plan.
 
Additional information with respect to these Plans' stock option activity is as follows:
 
   
Number of Shares
   
Weighted Average Exercise Price
   
Weighted Average Remaining Term in Years
   
Aggregate Intrinsic Value
 
Outstanding at January 1, 2014
   
5,256,349
   
$
1.03
             
Granted in 2014
   
402,500
   
$
1.29
             
Exercised in 2014
   
(226,747
)
 
$
0.92
             
Cancelled in 2014
   
(545,273
)
 
$
1.04
             
Outstanding at December 31, 2014
   
4,886,829
   
$
1.05
     
4.79
   
$
912,287
 
Granted in 2015
   
270,250
   
$
1.15
                 
Exercised in 2015
   
(18,347
)
 
$
0.47
                 
Cancelled in 2015
   
(584,177
)
 
$
1.52
                 
Outstanding at December 31, 2015
   
4,554,555
   
$
1.00
     
4.22
   
$
966,509
 
                                 
Options exercisable at December 31, 2015
   
4,099,829
   
$
0.98
     
4.22
   
$
943,089
 

F-17

The following table summarizes information about stock options outstanding and exercisable at December 31, 2015:
 
Range of
Exercise Prices
   
Number of Shares Outstanding
   
Weighted Average Remaining in Contractual Life
in Years
   
Outstanding Options Weighted Average Exercise Price
   
Number of Options Exercisable
   
Exercisable Options Weighted Average Exercise Price
 
$0.30 to $0.75
     
913,000
     
2.14
   
$
0.59
     
914,500
   
$
0.59
 
$0.76 to $0.90
     
811,501
     
4.51
   
$
0.80
     
811,723
   
$
0.80
 
$0.91 to $1.84
     
2,800,054
     
4.83
   
$
1.18
     
2,343,606
   
$
1.19
 
$1.85 to $2.15
     
30,000
     
2.67
   
$
2.15
     
30,000
   
$
2.15
 
$0.30 to $2.15
     
4,554,555
     
4.22
   
$
1.00
     
4,099,829
   
$
0.98
 

Unamortized compensation expense associated with unvested options approximates $164,965 as of December 31, 2015. The weighted average period over which these costs are expected to be recognized is approximately 1.5 years.
 
(10) Restricted Stock
 
In July 2014, in connection with our acquisition of the common stock of Delphiis, Inc., we issued to a key employee 400,000 shares of restricted stock 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
 

In August 2015, the key employee's employment agreement was revised such that the first 100,000 shares became fully vested and the remaining shares were cancelled on January 1, 2016. The stock-based compensation expense recognized for these shares totaled $101,881 for the year ended December 31, 2015.
 
(11) Income Taxes
 
For the years ended December 31, 2015 and 2014, the components of income tax expense are as follows:
 
   
Year Ended December 31,
 
   
2015
   
2014
 
Current provision:
           
Federal
 
$
70,436
   
$
20,712
 
State
   
82,000
     
58,148
 
     
152,436
     
78,860
 
Deferred:
               
Federal
   
-
     
-
 
State
   
-
     
-
 
     
-
     
-
 
Income tax expense
 
$
152,436
   
$
78,860
 
 

 
F-18


Income tax provision amounted to $152,436 and $78,860 for the years ended December 31, 2015 and 2014, respectively (an effective rate of 10.4% for 2015 and 5.6% for 2014).  A reconciliation of the provision for income taxes with amounts determined by applying the statutory U.S. federal income tax rate to income before income taxes is as follows:
 
   
Year Ended December 31,
 
   
2015
   
2014
 
Computed tax at federal statutory rate of 34%
 
$
448,479
   
$
465,951
 
State taxes, net of federal benefit
   
54,121
     
37,088
 
Non-deductible items
   
43,654
     
148,820
 
Other
   
75,828
     
24,310
 
Change in valuation allowance
   
(469,646
)
   
(597,309
)
   
$
152,436
   
$
78,860
 
 
Realization of deferred tax assets is dependent on future earnings, if any, the timing and amount of which is uncertain.  Accordingly, a valuation allowance, in an amount equal to the net deferred tax asset as of December 31, 2015 and 2014 has been established to reflect these uncertainties.  As of December 31, 2015 and 2014, the net deferred tax asset before valuation allowances is approximately $4,543,000 and $5,346,000 respectively, for federal income tax purposes, and $1,044,000 and $1,067,000, respectively for state income tax purposes. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.  Significant components of our deferred tax assets and liabilities are as follows:
 
   
Year Ended December 31,
 
   
2015
   
2014
 
Deferred tax assets:
           
Accrued salaries/vacation
 
$
253,600
   
$
221,900
 
Accrued equipment pool
   
127,900
     
105,100
 
State taxes
   
18,700
     
17,900
 
Stock options
   
864,500
     
844,700
 
Credits
   
153,000
     
131,800
 
Net operating loss carryforwards
   
5,064,000
     
5,398,100
 
Total deferred tax assets
   
6,481,700
     
6,719,500
 
                 
Deferred tax liabilities:
               
Depreciation
   
9,100
     
34,500
 
Amortization of intangibles
   
343,500
     
4,700
 
Other
   
541,600
     
267,400
 
Total deferred tax liabilities
   
894,200
     
306,600
 
                 
Net deferred assets before valuation allowance
   
5,587,500
     
6,412,900
 
Valuation allowance
   
(5,587,500
)
   
(6,412,900
)
Net deferred tax assets
 
$
-
   
$
-
 

At December 31, 2015, we have available unused net operating loss carryforwards of approximately $12,538,000 for federal and $11,050,000 for state that may be applied against future taxable income and that, if unused, expire beginning in 2023 through 2033.
 
Utilization of the net operating loss carryforwards may be subject to a substantial annual limitation due to ownership change limitations provided by the Internal Revenue Code under section 382.  The annual limitation may result in the expiration of net operating loss carryforwards before utilization. Our Federal and state net operating loss carryforwards will begin to expire in 2023 and 2016, respectively.
 
F-19

 
We evaluate our tax positions each reporting period to determine the uncertainty of such positions based upon one of the following conditions: (1) the tax position is not ''more likely than not'' to be sustained, (2) the tax position is ''more likely than not'' to be sustained, but for a lesser amount, or (3) the tax position is ''more likely than not'' to be sustained, but not in the financial period in which the tax position was originally taken. We have evaluated our tax positions for all jurisdictions and all years for which the statute of limitations remains open. We have determined that no additional liability for unrecognized tax benefits and interest was necessary.
 
(12) Retirement Plan
 
We sponsor a 401(k) plan (the "Plan") for the benefit of employees who are at least 21 years of age. Our management determines, at its discretion, the annual and matching contribution. In 2015 we contributed a matching contribution totaling $94,042. We elected not to contribute to the Plan for the year ended December 31, 2014.
 
(13) Commitments
 
Leases
 
We lease our Mission Viejo, California facility under a non-cancellable operating lease effective December 2015 that expires in April 2021. Our Carpinteria, California office lease is currently on a month-to-month basis. Rent expense for the years ended December 31, 2015 and 2014 totaled $272,064 and $204,257 respectively. Future minimum lease payments under non-cancelable operating leases during subsequent years are as follows:
 
December 31,
 
Payments
 
2016
 
$
297,684
 
2017
   
374,751
 
2018
   
421,084
 
2019
   
433,716
 
2020
   
446,728
 
Thereafter
   
132,926
 
Total
 
$
2,106,889
 

F-20

Employment Agreements
 
Effective January 1, 2014, we entered into an employment agreement with 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.  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. The calendar year 2015 performance metrics were met.  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, 2016, we entered into an employment agreement with Mr. Flynn (the "2016 Flynn Agreement"). The 2016 Flynn Agreement provides that Mr. Flynn will continue his employment as our President and CEO. The 2016 Flynn Agreement has a term of two years, provides for an annual base salary of $300,000, and will automatically renew for subsequent twelve (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 twelve (12) 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 $180,000 per year, the achievement of which is based on Company performance metrics.  We may terminate Mr. Flynn's employment under the Flynn Agreement without cause at any time on thirty (30) 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 2016 Flynn Agreement is qualified in its entirety by reference to the full context of the employment agreement, which is found as Exhibit 10.31 to this Annual Report on Form 10-K.
 
Effective January 1, 2014, we entered into an 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. 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. The calendar year 2015 performance metrics were met.  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.
 
F-21

 
Effective January 1, 2016, we entered into a new employment agreement with Mr. Anthony (the "2016 Anthony Agreement"). The 2016 Anthony Agreement provides that Mr. Anthony will continue to serve as our Executive Vice President ("EVP") and CFO. The 2016 Anthony Agreement has a term of two years, and provides for an annual base salary of $245,000. The 2016 Anthony Agreement will automatically renew for subsequent twelve (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 twelve (12) 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 $132,000 per year, the achievement of which is based on Company performance metrics.  We may terminate Mr. Anthony's employment under the 2016 Anthony Agreement without cause at any time on thirty (30) 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 2016 Anthony Agreement is qualified in its entirety by reference to the full context of the employment agreement, which is found as Exhibit 10.32 to this Annual Report on Form 10-K.
 
(14) Concentrations
 
Cash Concentrations
 
At times, cash and cash equivalent 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
 
For the year ended December 31, 2015, there were three customers that each generated at least 10% of our revenues and these customers represented a total of 50% of revenues. As of December 31, 2015, net accounts receivable due from these customers totaled approximately $3,100,000.
 
For the year ended December 31, 2014, there were three customers that each generated at least 10% of our revenues and these customers represented a total of 42% of revenues. As of December 31, 2014, net accounts receivable due from these customers totaled approximately $2,800,000.
 
 (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.

F-22

-  
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.  As set forth in Note 6 above, $257,835 of such debt was converted to equity and the remaining amounts were paid out to the noteholders.
 
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. The estimated useful life of the identifiable intangible assets acquired ranges from 1.5 to 10 years. We recognized goodwill of $956,639. 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 year ended December 31, 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.  Under this escrow agreement, if no indemnification claims have been made prior to July 7, 2015, the Escrow Agent is to release the escrowed funds to the Stockholders. On July 28, 2015, the remaining $100,000 was distributed to the Stockholders by the Escrow Agent.

Employment Agreement
 
In connection with the Agreement, we entered into an employment agreement with 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.
 
F-23


On August 16, 2015, we entered into a revised employment agreement with Mr. Gentile. The initial term of the agreement was changed to terminate as of January 1, 2016. The first 100,000 restricted shares of common stock were deemed to be vested and were issued to him in August 2015 with the remaining unvested shares cancelled on January 1, 2016 (Note 10). The revised agreement required a severance payment of $120,000 which was paid in January 2016.This amount was recorded as expense for the year ended December 31, 2015.

(16) Asset Purchase Agreement – Redspin
 
On March 31, 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 and certain liabilities of Redspin (the "Acquired Assets").  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 the Acquired Assets 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 for the Acquired Assets, the Company paid Redspin $2,076,966 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 Company also agreed to pay a cash Earn-out Payment, as defined in the Purchase Agreement, upon the achievement of certain earnings targets in the first year following the date of the Purchase Agreement. Management estimated the fair value of the contingent consideration to be approximately $623,000. As of December 31, 2015, Management believes that the earnings targets will not be met. Accordingly, this portion of the acquisition is recorded as other income on the consolidated statement of income for the year ended December 31, 2015. If no indemnification claims have been made prior to June 30, 2016, the Company's secretary will release the holdback funds to Redspin.
 
The Purchase Agreement also provides for the Company to pay employee bonus shares of common stock upon the achievement of the same certain earnings targets and provided they remain with the Company for one year subsequent to the acquisition date. Management previously had considered the $124,000 of fair value of these employee bonus shares to be a component of the acquisition cost.  After completing the analysis of the earn-out provisions, Management has determined that the employee bonus shares would be post-combination compensation. Management believes that the minimum earnings targets will not be achieved. Accordingly no related stock compensation expense has been recorded for the year ended December 31, 2015.
 
The allocation of the purchase price of the assets acquired and liabilities assumed based on their fair values was as follows: 
 
Acquired technology
 
$
1,050,000
 
Customer relationships
   
600,000
 
Trademarks
   
200,000
 
Non-compete agreements
   
100,000
 
Goodwill
   
1,192,000
 
Accounts receivable
   
180,409
 
Other assets received
   
19,009
 
Accounts payable and accrued expenses
   
(23,196
)
Accrued compensation
   
(118,009
)
Deferred revenue
   
(31,247
)
Total
 
$
3,168,966
 
 
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 three to ten years. We recognized goodwill of $1,192,000. 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 Redspin products and services to Auxilio's customers.
 
F-24

 
The Company incurred approximately $70,000 in legal, accounting and other professional fees related to this acquisition, all of which were expensed during the year ended December 31, 2015.

Employment Agreement
 
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 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 $11,000 per month.

Pro Forma Information
 
The following supplemental unaudited pro forma information presents the combined operating results of the Company and the acquired business during the years ended December 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.

 
   
Year Ended December 31
 
   
2015
   
2014
 
Pro forma net revenue
 
$
61,952,529
   
$
46,662,798
 
Pro forma net income
 
$
1,115,777
   
$
917,342
 
Pro forma basic net income per share
 
$
0.05
   
$
0.04
 
Pro forma diluted net income per share
 
$
0.04
   
$
0.04
 
 
F-25


 
PART IV
 
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
 
No.
Item
2.1
Agreement and Plan of Reorganization dated as of November 20, 2001, by and between Auxilio and e-Perception, Inc., incorporated by reference to Exhibit 1.1 to our Form 8-K filed on January 24, 2002.
2.2
Agreement and Plan of Merger, dated April 1, 2004, by and between Auxilio, PPVW Acquisition Corporation, and Alan Mayo & Associates, Inc., incorporated by reference to Exhibit 2.1 to our Form 8-K filed on April 16, 2004.
3.1
Articles of Incorporation of Auxilio, Inc. as amended, incorporated by reference to Exhibit 3.1 to our Form 10-KSB filed on April 19, 2005.
3.2
Amended and Restated Bylaws of Auxilio, incorporated by reference to Exhibit 2 to our Form 10-SB filed on October 1, 1999.
3.3
First Amendment to Amended and Restated Bylaws of Auxilio, Inc. dated August 6, 2015, incorporated by reference to Exhibit 10.1 to our 10-Q filed on August 14, 2015.
4.1
Subscription Agreement, dated January 9, 2002, by and among Auxilio and each of the stockholders of e-Perception, Inc., incorporated by reference to Exhibit 1.1 to our Form 8-K filed on January 24, 2002.
4.2
Form of Subscription Agreement entered into between April 6, 2009 and April 15, 2009 with Michael Vanderhoof and Edward B. Case, incorporated by reference to Exhibit 4.1 of our Form 8-K filed on May 14, 2009.
10.1
Auxilio's 2001 Stock Option Plan, incorporated by reference to Exhibit 4.1 to our Form S-8 filed on March 3, 2011.*
10.1.1
Form of Stock Option Agreement under Auxilio's 2001 Stock Option Plan, incorporated by reference to Exhibit 4.6 to our Form S-8 filed on March 3, 2011.*
10.2
Auxilio's 2003 Stock Option Plan, incorporated by reference to Exhibit 4.2 to our Form S-8 filed on March 3, 2011.*
10.2.1
Form of Stock Option Agreement under Auxilio's 2003 Stock Option Plan, incorporated by reference to Exhibit 4.7 to our Form S-8 filed on March 3, 2011.*
10.3
Auxilio's 2004 Stock Option Plan, incorporated by reference to Exhibit 4.3 to our Form S-8 filed on March 3, 2011.*
10.3.1
Form of Stock Option Agreement under Auxilio's 2004 Stock Option Plan, incorporated by reference to Exhibit 4.8 to our Form S-8 filed on March 3, 2011.*
10.4
Auxilio's 2007 Stock Option Plan, incorporated by reference to Exhibit 4.4 to our Form S-8 filed on March 3, 2011.*
10.5
Amendment to Auxilio 2007 Stock Option Plan, incorporated by reference to Exhibit 4.5 to our Form S-8 filed on March 3, 2011.*
10.5.1
Form of 2007 Stock Option Agreement, incorporated by reference to Exhibit 4.9 to our Form S-8 filed on March 3, 2011.*
10.6
Auxilio's 2011 Stock Incentive Plan, incorporated by reference to Exhibit 4.1 to our Form S-8 filed on August 24, 2011.*
10.6.1
Form of Auxilio's 2011 Stock Option Agreement under the 2011 Stock Incentive Plan, incorporated by reference to Exhibit 4.3 to our Form S-8 filed on August 24, 2011.*
10.6.2
Form of Restricted Stock Agreement under the Auxilio 2011 Stock Incentive Plan, incorporated by reference to Exhibit 4.4 to our Form S-8 filed on August 24, 2011.*
10.7
Asset Purchase Agreement between Workstream USA, Inc., Workstream, Inc. and PeopleView, Inc. dated March 8,.2004, incorporated by reference to Exhibit 2.1 to our Form 8-K filed on April 2, 2004.
10.8
Addendum dated as of May 27, 2004 to Asset Purchase Agreement dated March 17th, 2004 between Workstream Inc. Workstream USA, Inc. and PeopleView, Inc., incorporated by reference to Exhibit 2.1 to our Form 8-K/A filed on August 3, 2004.
10.9
Office Lease between MVPlaza, Inc. and Auxilio, Inc., dated as of June 24, 2015, incorporated by reference to Exhibit 10.1 to our Form 10-Q filed on November 13, 2015.
 

 
No.
Item
10.10
Executive Employment Agreement, effective  January 1, 2014, by and between Auxilio and Joseph Flynn, incorporated by reference to Exhibit 10.2 to our 10-Q filing on May 14, 2014.
10.11
Executive Employment Agreement, effective January 1, 2014, by and between Auxilio and Paul T. Anthony, incorporated by reference to Exhibit 10.2 to our 10-Q filing on May 14, 2014.
10.12
Form of 8% Convertible Promissory Note, dated July 29, 2011, incorporated by reference to Exhibit 10.1 to our Form 8-K filed on August 3, 2011.
10.13
Form of Warrant to Purchase Common Stock, dated July 29, 2011, incorporated by reference to Exhibit 10.2 to our Form 8-K filed on August 3, 2011.
10.14
Placement Agent Warrant to Purchase Common Stock, dated July 29, 2011, incorporated by reference to Exhibit 10.3 to our Form 8-K filed on August 3, 2011.
10.15
Form of Security Agreement, dated July 29, 2011, incorporated by reference to Exhibit 10.4 to our Form 8-K filed on August 3, 2011.
10.16
Form of Registration Rights Agreement, dated July 29, 2011, incorporated by reference to Exhibit 10.5 to our Form 8-K filed on August 3, 2011.
10.17
Form of Investment Unit Purchase Agreement, dated July 29, 2011, incorporated by reference to Exhibit 10.6 to our Form 8-K filed on August 3, 2011.
10.18
Loan and Security Agreement by and among Auxilio, Inc., Auxilio Solutions, Inc. and AvidBank Corporate Finance, a division of AvidBank, dated effective April 19, 2012, incorporated by reference to Exhibit 10.1 to our Form 8-K filed on May 9, 2012.
10.19
Intellectual Property Security Agreement by and among Auxilio, Inc., Auxilio Solutions, Inc. and AvidBank Corporate Finance, a division of AvidBank, dated effective April 19, 2012, incorporated by reference to Exhibit 10.2 to our Form 8-K filed on May 9, 2012.
10.20
Form of Subordination by and among AvidBank Corporate Finance, a division of AvidBank and certain individual creditors dated effective April 19, 2012, incorporated by reference to Exhibit 10.3 to our Form 8-K filed on May 9, 2012.
10.21
Warrant to Purchase Stock issued by Auxilio, Inc. to AvidBank Holdings, Inc. dated effective April 24, 2012, incorporated by reference to Exhibit 10.4 to our Form 8-K filed on May 9, 2012.
10.22
Warrant to Purchase Common Stock issued by Auxilio, Inc. to Joseph Flynn dated January 16, 2013, incorporated by reference to Exhibit 10.1 to our Form 8-K filed on January 22, 2013.
10.23
Warrant to Purchase Common Stock issued by Auxilio, Inc. to Paul Anthony dated January 16, 2013, incorporated by reference to Exhibit 10.1 to our Form 8-K filed on January 22, 2013..
10.24
Warrant to Purchase Common Stock issued by Auxilio, Inc. to Simon Vermooten dated January 16, 2013, incorporated by reference to Exhibit 10.1 to our Form 8-K filed on January 22, 2013..
10.25
Stock Purchase Agreement between Auxilio, Inc., Delphiis, Inc., certain stockholders of Delphiis, Inc., and Mike Gentile as Seller's Representative dated effective July 1, 2014, incorporated by reference to Exhibit 99.11 to our Form 8-K filed on July 8, 2014.
10.26
Second Amendment to Loan and Security Agreement dated as of April 25, 2014, incorporated by reference to Exhibit 10.1 to our 10-Q filed on May 14, 2014.
10.27
Note Conversion Agreement between Auxilio, Inc. and Mike Gentile dated effective as of January 12, 2015, incorporated by reference to Exhibit 99.1 to our Form 8-K filed on February 27, 2015.
10.28
Asset Purchase Agreement between Auxilio, Inc. and Redspin, Inc. dated as of March 31, 2015, incorporated by reference to Exhibit 99.1 to our Form 8-K filed on April 6, 2015.
10.29
Third Amendment to the Loan and Security Agreement between Avidbank Corporate Finance and Auxilio, Inc., dated as of April 24, 2015, incorporated by reference to Exhibit 10.1 to our Form 10-Q filed on May 15, 2015.
10.30
Fourth Amendment to the Loan and Security Agreement between Avidbank and Auxilio, Inc. dated June 19, 2015, incorporated by reference to Exhibit 10.1 to our 10-Q filed on August 14, 2015.
10.31
Executive Employment Agreement, effective January 1, 2016, by and between Auxilio and Joseph J. Flynn.
10.32
Executive Employment Agreement, effective January 1, 2016, by and between Auxilio and Paul T. Anthony.
14
Code of Ethics, incorporated by reference to Exhibit 14.1 to our Form 10-KSB filed on April 14, 2004.
 

 
No.
Item
16.1
Letter regarding change in certifying accountants, dated February 14, 2002, incorporated by reference to Exhibit 16 to our Form 8-K filed on February 15, 2002.
16.2
Letter regarding change in certifying accountants dated December 22, 2005, incorporated by reference to Exhibit 16.1 to our Form 8-K/A filed on January 24, 2006.
21.1
Subsidiaries.
23.1
Consent of Haskell & White LLP, Independent Registered Public Accounting Firm.
24
Power of Attorney (included on the Signature Page).
31.1
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a).
31.2
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a).
32.1
Certification of CEO and CFO pursuant to 18 U.S.C. §1350 as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002.
 

* Each of these Exhibits constitutes a management contract, compensatory plan or arrangement.
 

SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) with the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
  AUXILIO, INC.
   
   
 
By:/s/ Joseph J. Flynn 
 
Joseph J. Flynn
 
Chief Executive Officer and
 
Principal Executive Officer
   
 
March 30, 2016
   
 
By:/s/ Paul T. Anthony 
 
Paul T. Anthony
 
Chief Financial Officer and
 
Principal Financial Officer
   
 
March 30, 2016


POWER OF ATTORNEY AND SIGNATURES
 
We, the undersigned directors and officers of Auxilio, Inc., do hereby constitute and appoint each of Joseph J. Flynn and Paul T. Anthony as our true and lawful attorneys-in-fact and agents with power of substitution, to do any and all acts and things in our name and behalf in our capacities as directors and officers and to execute any and all instruments for us and in our names in the capacities indicated below, which said attorneys-in-fact and agents, or either of them, may deem necessary or advisable to enable said corporation to comply with the Securities and Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Annual Report on Form 10-K, including specifically but without limitation, power and authority to sign for us or any of us in our names in the capacities indicated below, any and all amendments (including post-effective amendments) hereto; and we do hereby ratify and confirm all that said attorney-in-fact and agent, shall do or cause to be done by virtue hereof.
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
 
Signature
 
Title
Date
       
/s/ Joseph J. Flynn
 
Chief Executive Officer
March 30, 2016
Joseph J. Flynn
 
(Principal Executive Officer and Director)
 
       
/s/ Paul T. Anthony
 
Chief Financial Officer
March 30, 2016
Paul T. Anthony
 
(Principal Financial Officer and Accounting Officer)
 
       
/s/ Edward Case
   
March 30, 2016
Edward Case
 
Director
 
       
/s/ Brooks Corbin
   
March 30, 2016
Brooks Corbin
 
Director
 
       
/s/ John D. Pace
   
March 30, 2016
John D. Pace
 
Director (Non-executive Chairman of the Board)
 
       
/s/ Michael Vanderhoof
   
March 30, 2016
Michael Vanderhoof
 
Director