UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q

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

For the quarterly period ended March 31, 2016


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

For the transition period from _______ to _______

Commission file number 000-27507

AUXILIO, INC.
(Exact name of registrant as specified in its charter)
 
Nevada
88-0350448
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
26300 La Alameda, Suite 100
Mission Viejo, California  92691
(Address of principal executive offices, zip code)

(949) 614-0700
(Issuer’s telephone number)

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

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

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined by Section 12b-2 of the Exchange Act). Yes ☐ No .

The number of shares of the issuer’s common stock, $0.001 par value, outstanding as of May 12, 2016 was 24,557,224.

AUXILIO, INC.
FORM 10-Q
TABLE OF CONTENTS


 
PART I – FINANCIAL INFORMATION
 
 
Page
 
   
   
   
   
   
   
   
   
   
PART II – OTHER INFORMATION
 
   
   
   



PART I – FINANCIAL INFORMATION

ITEM 1.                 FINANCIAL STATEMENTS.

AUXILIO, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
   
    
MARCH 31, 2016
   
DECEMBER 31, 2015
 
    
(unaudited)
       
   
ASSETS
 
Current assets:
           
Cash and cash equivalents
 
$
5,348,844
   
$
6,436,732
 
Accounts receivable, net
   
7,191,704
     
7,397,957
 
Supplies
   
1,412,349
     
1,458,609
 
Prepaid and other current assets
   
469,429
     
625,806
 
Total current assets
   
14,422,326
     
15,919,104
 
                 
Property and equipment, net
   
554,123
     
495,324
 
Deposits
   
41,522
     
58,118
 
Intangible assets, net
   
2,595,833
     
2,731,250
 
Goodwill
   
3,665,656
     
3,665,656
 
Total assets
 
$
21,279,460
   
$
22,869,452
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
                 
Current liabilities:
               
Accounts payable and accrued expenses
 
$
7,979,455
   
$
8,306,860
 
Accrued compensation and benefits
   
1,957,556
     
2,856,165
 
Deferred revenue
   
787,806
     
913,677
 
Current portion of long-term liabilities
   
611,646
     
598,750
 
Total current liabilities
   
11,336,463
     
12,675,452
 
                 
Long-term liabilities:
               
Term loan, less current portion
   
1,125,000
     
1,250,000
 
Capital lease obligations, less current portion
   
107,132
     
125,496
 
Total long-term liabilities
   
1,232,132
     
1,375,496
 
                 
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 March 31, 2016 and December 31, 2015
   
24,453
     
24,453
 
Additional paid-in capital
   
27,727,578
     
27,682,061
 
Accumulated deficit
   
(19,041,166
)
   
(18,888,010
)
Total stockholders’ equity
   
8,710,865
     
8,818,504
 
Total liabilities and stockholders’ equity
 
$
21,279,460
   
$
22,869,452
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.


AUXILIO, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
(UNAUDITED)
 
             
     
Three Months Ended March 31,
 
   
2016
   
2015
 
Revenues
 
$
14,515,640
   
$
13,847,915
 
Cost of revenues
   
12,206,328
     
11,715,594
 
Gross profit
   
2,309,312
     
2,132,321
 
Operating expenses:
               
Sales and marketing
   
671,347
     
742,071
 
General and administrative expenses
   
1,763,021
     
1,386,343
 
Total operating expenses
   
2,434,368
     
2,128,414
 
(Loss) income from operations
   
(125,056
)
   
3,907
 
Other expense:
               
Interest expense
   
(25,700
)
   
(34,049
)
Total other expense
   
(25,700
)
   
(34,049
)
Loss before provision for income taxes
   
(150,756
)
   
(30,142
)
Income tax expense
   
2,400
     
2,400
 
Net loss
 
$
(153,156
)
 
$
(32,542
)
                 
Net loss per share:
         
Basic
 
$
(0.01
)
 
$
(0.00
)
Diluted
 
$
(0.01
)
 
$
(0.00
)
                 
Number of weighted average shares:
               
Basic
   
24,452,085
     
23,681,559
 
Diluted
   
24,452,085
     
23,681,559
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

AUXILIO, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
 
THREE MONTHS ENDED MARCH 31, 2016
 
(UNAUDITED)
 
   
                     
         
Additional
     
Total
 
  
Common Stock
 
Paid-in
 
Accumulated
 
Stockholders’
 
  
Shares
 
Amount
 
Capital
 
Deficit
 
Equity
 
Balance at December 31, 2015
   
24,452,085
   
$
24,453
   
$
27,682,061
   
$
(18,888,010
)
 
$
8,818,504
 
Stock compensation expense for options and warrants granted to employees and directors
   
     
     
45,517
     
     
45,517
 
Net loss
   
     
     
     
(153,156
)
   
(153,156
)
Balance at March 31, 2016
   
24,452,085
   
$
24,453
   
$
27,727,578
   
$
(19,041,166
)
 
$
8,710,865
 
 

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

AUXILIO, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(UNAUDITED)
 
       
     
Three Months Ended March 31,
 
   
2016
   
2015
 
Cash flows from operating activities:
           
Net loss
 
$
(153,156
)
 
$
(32,542
)
Adjustments to reconcile net loss to net cash (used for) provided by
               
 operating activities:
               
Depreciation
   
48,982
     
35,772
 
Amortization of intangible assets
   
135,417
     
52,500
 
Stock compensation expense for warrants and options issued to employees and directors
   
45,517
     
53,922
 
Stock compensation expense for restricted stock issued to key employee
   
     
25,378
 
Interest expense related to accretion of debt discount costs
   
     
26,488
 
Changes in operating assets and liabilities:
               
Accounts receivable
   
206,253
     
(496,040
)
Supplies
   
46,260
     
(29,298
)
Prepaid and other current assets
   
156,377
     
(195,401
)
Deposits
   
16,596
     
 
Accounts payable and accrued expenses
   
(327,405
)
   
1,260,260
 
Accrued compensation and benefits
   
(898,609
)
   
(147,200
)
Deferred revenue
   
(125,871
)
   
(114,259
)
Net cash (used for) provided by operating activities
   
(849,639
)
   
439,580
 
Cash flows from investing activities:
               
Purchases of property and equipment
   
(85,611
)
   
 
Net cash used for investing activities
   
(85,611
)
   
 
Cash flows from financing activities:
               
Payments on capital leases
   
(27,638
)
   
(24,416
)
Payments on term loan
   
(125,000
)
   
 
Payments on notes payable to related parties
   
     
(52,944
)
Net cash used for financing activities
   
(152,638
)
   
(77,360
)
Net (decrease) increase in cash and cash equivalents
   
(1,087,888
)
   
362,220
 
Cash and cash equivalents, beginning of period
   
6,436,732
     
4,743,395
 
Cash and cash equivalents, end of period
 
$
5,348,844
   
$
5,105,615
 



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


AUXILIO, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
 
(UNAUDITED)
 
         
  
Three Months Ended March 31,
 
 
2016
 
2015
 
Supplemental disclosure of cash flow information:
       
         
Interest paid
 
$
25,700
   
$
7,561
 
                 
Income taxes paid
 
$
71,703
   
$
100,050
 
 
Non-cash investing and financing activities:            
             
Property and equipment acquired through capital leases
 
$
22,170
   
$
93,745
 
                 
Conversion of note payable to related party into restricted common stock
 
$
   
$
257,835
 
                 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2016 AND 2015
(UNAUDITED)

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of Auxilio, Inc. and its subsidiaries (the “Company”, “we”, “us” or “Auxilio”) have been prepared in accordance with generally accepted accounting principles of the United States of America (“GAAP”) for interim financial statements pursuant to the rules and regulations of the Securities and Exchange Commission.  Accordingly, these financial statements do not include all of the information and notes required by GAAP for complete financial statements.  These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, as filed with the Securities and Exchange Commission (“SEC”) on March 30, 2016.

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

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

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

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

2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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 was effective for us in the first quarter of 2016.
 
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.
 

 
3. OPTIONS AND WARRANTS

Below is a summary of Auxilio stock option and warrant activity during the three month period ended March 31, 2016:

Options
 
Shares
   
Weighted Average Exercise Price
 
Weighted Average Remaining Term in Years
 
Aggregate
Intrinsic Value
 
Outstanding at December 31, 2015
   
4,554,555
   
$
1.00
         
Granted
   
250,500
     
0.97
         
Exercised
   
     
         
Cancelled
   
(513,000
)
   
1.26
         
Outstanding at March 31, 2016
   
4,292,055
   
$
0.97
     
4.50
   
$
273,045
 
Exercisable at March 31, 2016
   
3,672,246
   
$
0.95
     
4.50
   
$
273,045
 

Warrants
 
Shares
   
Weighted Average Exercise Price
 
Weighted Average Remaining Term in Years
 
Aggregate
Intrinsic Value
 
Outstanding at December 31, 2015
   
1,975,231
   
$
1.13
         
Granted
   
     
         
Exercised
   
     
         
Cancelled
   
(300,000
)
   
0.94
         
Outstanding at March 31, 2016
   
1,675,231
   
$
1.16
     
4.59
   
$
314,084
 
Exercisable at March 31, 2016
   
1,441,899
   
$
1.18
     
3.10
   
$
209,084
 

For the three months ended March 31, 2016 and 2015, stock-based compensation expense recognized in the statement of operations was as follows:

   
2016
   
2015
 
Cost of revenues
 
$
9,403
   
$
33,294
 
Sales and marketing
   
8,333
     
9,264
 
General and administrative expenses
   
27,781
     
36,742
 
   Total stock based compensation expense
 
$
45,517
   
$
79,300
 

In April 2016 the Company issued an option for 300,000 shares of common stock to an executive officer.
 
4. NET LOSS PER SHARE

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

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

    
Three Months Ended March 31,
 
   
2016
   
2015
 
Numerator:
           
Net loss
 
$
(153,156
)
 
$
(32,542
)
                 
Denominator:
               
Denominator for basic calculation weighted average shares
   
24,452,085
     
23,681,559
 
                 
Net  loss per share:
               
Basic net loss per share
 
$
(0.01
)
 
$
(0.00
)
Diluted net loss per share
 
$
(0.01
)
 
$
(0.00
)
 


 
5. INTANGIBLE ASSETS

Intangible assets consist of the following:

Intangible assets are amortized over expected useful lives ranging from 1.5 to 10 years and consist of the following:
 
   
March 31, 2016
   
December 31, 2015
 
   
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Gross
Carrying
Amount
   
Accumulated
Amortization
 
Delphiis, Inc.
                       
Acquired technology
 
$
900,000
   
$
(157,500
)
 
$
900,000
   
$
(135,000
)
Customer relationships
   
400,000
     
(140,000
)
   
400,000
     
(120,000
)
Trademarks
   
50,000
     
(50,000
)
   
50,000
     
(50,000
)
Non-compete agreements
   
20,000
     
(11,667
)
   
20,000
     
(10,000
)
 Total intangible assets, Delphiis, Inc.
 
$
1,370,000
   
$
(359,167
)
 
$
1,370,000
   
$
(315,000
)
                                 
Redspin
                               
Acquired technology
 
$
1,050,000
   
$
(105,000
)
 
$
1,050,000
   
$
(78,750
)
Customer relationships
   
600,000
     
(200,000
)
   
600,000
     
(150,000
)
Trademarks
   
200,000
     
(40,000
)
   
200,000
     
(30,000
)
Non-compete agreements
   
100,000
     
(20,000
)
   
100,000
     
(15,000
)
 Total intangible assets, Redspin
 
$
1,950,000
   
$
(365,000
)
 
$
1,950,000
   
$
(273,750
)
                                 
Total intangible assets
 
$
3,320,000
   
$
(724,167
)
 
$
3,320,000
   
$
(588,750
)
 
6. ACCOUNTS RECEIVABLE

A summary of accounts receivable is as follows:
 
   
March 31, 2016
   
December 31, 2015
 
Trade receivables
 
$
7,032,513
   
$
7,458,022
 
Unapplied advances and unbilled revenue, net
   
159,191
     
(60,065
)
Allowance for doubtful accounts
   
     
 
Total accounts receivable
 
$
7,191,704
   
$
7,397,957
 

7. 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 March 31, 2016, 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). As of March 31, 2016 and December 31, 2015, no amounts were outstanding under the line of credit.
 
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 March 31, 2016, outstanding borrowings under the term loan are $1,625,000, of which $500,000 is due within one year. The interest rate is 4.75% as of March 31, 2016.
 
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 March 31, 2016 and December 31, 2015.
 
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 $0 and $2,124 respectively, for the three months ended March 31, 2016 and 2015, respectively. Interest charges associated with the Avidbank term loan, including loan origination costs, totaled $20,499 for the three months ended March 31, 2016.
 
8. 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 Form 10-K filed on March 30, 2016.
 
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.
 
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 Form 10-K filed on March 30, 2016.
 
9. CONCENTRATIONS
 
Cash Concentrations

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

Major Customers

Our two largest customers accounted for approximately 46% of our revenues for the three months ended March 31, 2016 compared to approximately 34% of our revenues for the three months ended March 31, 2015.  These customers had net accounts receivable totaling approximately $2,400,000 and $2,600,000 as of March 31, 2016 and December 31, 2015, respectively.

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

11 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 $0 as Management believes that the earnings targets will not be met. 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. Estimated useful lives of the identifiable intangible assets acquired ranges from three to ten years. We also 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.
 
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 three months ended March 31, 2016 and 2015, as if the acquisition had occurred at the beginning of each of the periods presented. The pro forma information is based on the historical financial statements of the Company and that of the acquired business. Amounts are not necessarily indicative of the results that may have been attained had the combinations been in effect at the beginning of the periods presented or that may be achieved in the future.
 
   
Three Months Ended March 31,
 
   
2016
   
2015
 
Pro forma net revenue
 
$
14,515,640
   
$
14,546,591
 
Pro forma net loss
 
$
(153,156
)
 
$
(233,421
)
Pro forma basic net loss per share
 
$
(0.01
)
 
$
(0.01
)
Pro forma diluted net loss per share
 
$
(0.01
)
 
$
(0.01
)


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

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

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

Readers should carefully review the risk factors described in other documents we file from time to time with the SEC, including our Form 10-K for the fiscal year ended December 31, 2015.  Our filings with the SEC, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those filings, pursuant to Sections 13(a) and 15(d) of the Exchange Act, are available free of charge at www.auxilioinc.com, when such reports are available via the EDGAR system maintained by the SEC at www.sec.gov.

OVERVIEW

We provide total outsourced document and image management services and related financial and business processes for major healthcare facilities. Our proprietary technologies and unique processes assist hospitals, health plans and health systems with strategic direction and services that reduce document image expenses, increase operational efficiencies and improve the productivity of their staff. Our analysts, consultants and resident hospital teams work with senior hospital financial management and department heads to determine the best possible long term strategy for managing the millions of document images produced by their facilities on an annual basis. Our document image management programs help our clients achieve measurable savings and a fully outsourced document image management process.

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

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

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

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

APPLICATION OF CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities.  We evaluate these estimates on an on-going basis, including those estimates related to customer programs and incentives, product returns, bad debts, inventories, investments, intangible assets, income taxes, contingencies and litigation.  We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances.  The results of these estimates form the basis for our judgments about the carrying values of assets and liabilities which are not readily apparent from other sources.  As a result, actual results may differ from these estimates under different assumptions or conditions.
 

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

·
Revenue recognition and deferred revenue

The Company, operating under a consolidated strategy and management structure, 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 revenue 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.

Software Subscriptions and Managed Services Revenue

Software subscriptions and managed services revenue 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 Service 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 operations and cash flows during the implementation phase.

·
Impairment of goodwill and intangible assets

The Company performs an impairment test of goodwill at least annually or on an interim basis if any triggering events occur that would merit another test. The impairment test compares our estimate of our fair value based on its market capitalization to the Company’s carrying amount including goodwill. We have not had to perform step 2 of the impairment test because the fair value has exceeded the carrying amount. For other intangible assets with definite lives, we compare future undiscounted cash flow forecasts prepared by management to the carrying value of the related intangible asset group to determine if there is impairment.

·
Stock-based compensation

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

·
Income taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial reporting requirements and those imposed under federal and state tax laws.  Deferred taxes are provided for timing differences in the recognition of revenue and expenses for income tax and financial reporting purposes and are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.  Deferred income tax expense represents the change during the period in the deferred tax assets and liabilities.  The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics.  Realization of the deferred tax asset is dependent on generating sufficient taxable income in future years.  Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Reference is made to our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed on March 30, 2016 for additional discussion of our critical accounting policies.



RESULTS OF OPERATIONS

For the Three Months Ended March 31, 2016 Compared to the Three Months Ended March 31, 2015

Revenue

Revenue increased by $667,725 to $14,515,640 for the three months ended March 31, 2016, as compared to the same period in 2015.  Of this increase, approximately $2,800,000 is a result of the addition of new recurring service revenue contracts. This is partially offset by a combined decrease in consulting revenues and software subscriptions of approximately $400,000 from our recently acquired companies, Delphiis, Inc. and Redspin. Rate and volume fluctuations account for another approximately $400,000 decrease in 2016. Also equipment sales for 2016 were approximately $500,000 as compared to approximately $1,800,000 in 2015. Equipment revenues are primarily from copier fleet refresh activities at customers. These fleet refreshes are sporadic since they are typically done every five years at any one customer facility.

Cost of Revenue

Cost of revenue consists of document imaging equipment, parts, supplies and salaries and expenses of direct labor and indirect support staff.  Cost of revenue was $12,206,328 for the three months ended March 31, 2016, as compared to $11,715,594 for the same period in 2015. The increase in the cost of revenues in 2016 is attributed primarily to the addition of new recurring service revenue contracts. We incurred approximately $1,000,000 in additional staffing, including contract labor, approximately $100,000 of additional travel costs and approximately $600,000 in additional service and supply costs, primarily as a result of our new customers.  Equipment costs decreased by approximately $1,200,000 in 2016, primarily as a result of the decrease in equipment revenues from the copier fleet refresh activities.


Gross margin increased to 16% of revenue for the three months ended March 31, 2016 as compared to 15% for the same period in 2015. During both periods we implemented services at new large customers. Our recent growth will result in additional implementations costs over the next 6 months. We expect higher cost of revenues at the start of our engagement with most new customers. In addition to the costs associated with implementing our services, we absorb our new customers’ legacy contracts with third-party vendors. As we implement our programs, we strive to improve upon these legacy contracts and thus reduce costs over the term of the contract. Given the varying expiration dates of these vendor contracts and the amount of savings being specific to each arrangement, we cannot predict our anticipated profit margins until these legacy contracts approach renewal. 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 for sales and marketing personnel, travel and entertainment, and other selling and marketing costs. Sales and marketing expenses were $671,347 for the three months ended March 31, 2016, as compared to $742,071 for the same period in 2015. The decrease is primarily attributable to lower year to date spending in marketing efforts when compared to the prior year.

General and Administrative

General and administrative expenses include personnel costs for finance, administration, information systems, and general management, as well as facilities expenses, professional fees, legal expenses and other administrative costs. General and administrative expenses increased by $376,678 to $1,763,021 for the three months ended March 31, 2016, as compared to $1,386,343 for the three months ended March 31, 2015.  The increase in general and administrative expenses is attributed to approximately $200,000 in staffing cost due to the addition of three employees to a newly formed human resources department, an additional IT headcount, and an approximately $30,000 increase from an executive consulting contract stemming from the acquisition of Redspin. Also there was an increase of approximately $100,000 in amortization of intangible assets from the acquisitions of Delphiis, Inc. and Redspin and an increase in building rent of approximately $60,000 as a result of moving to a larger office space in December 2015 along with the addition of office space from the Redspin acquisition.

Other Income (Expense)

Interest expense for the three months ended March 31, 2016 was $25,700, compared to $34,049 for the same period in 2015. The reduction is due to the reduction in the combined borrowings on the bank line of credit and term loans for the respective periods.
 
 

Income Tax Expense

Income tax expense for the three months ended March 31, 2016 and March 31, 2015, was $2,400, which represents the respective provisions for state income taxes.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2016, our cash and cash equivalents were $5,348,844 and our working capital was $3,085,863.  Our principal cash requirements are for operating expenses, including equipment, supplies, employee costs, and capital expenditures and funding of the operations. Our primary sources of cash are revenues from operations and our bank line of credit.

During the three months ended March 31, 2016, our cash used for operating activities amounted to $849,639, as compared to $439,580 provided by operating activities for the same period in 2015.  The decrease in cash provided by operating activities in 2016 is primarily due a decrease in accounts payable as we made payment on validated expenses for new client vendors, and a decrease in accrued compensation and benefits after we paid out year-end bonuses.

We expect to continue to establish recurring revenue contracts to new customers throughout 2016. 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. The term loan was used primarily to finance the acquisition of Redspin. 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, purchase commitments and other commitments arising in the normal course of business, as further discussed below under “Contractual Obligations and Contingent Liabilities and Commitments.” As of March 31, 2016, we did not have any other relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
 
CONTRACTUAL OBLIGATIONS AND CONTINGENT LIABILITIES AND COMMITMENTS

As of March 31, 2016, expected future cash payments related to contractual obligations and commercial commitments were as follows:

   
Payments Due by Period
 
   
Total
   
Less than
1 year
   
1-3 years
   
3-5 years
   
More than 5 years
 
Term loan
 
$
1,795,625
   
$
577,813
   
$
1,088,125
   
$
129,688
   
$
 
Capital leases
   
241,833
     
95,631
     
137,663
     
8,539
     
 
Operating leases
   
2,073,814
     
366,813
     
802,059
     
887,048
     
17,894
 
Total
 
$
4,111,272
   
$
1,040,257
   
$
2,027,847
   
$
1,025,275
   
$
17,894
 

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4.   CONTROLS AND PROCEDURES.

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

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

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

PART –II – OTHER INFORMATION

ITEM 1A.   RISK FACTORS.

As of the date of this filing, there have been no material changes to the Risk Factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, filed with the SEC on March 30, 2016 (the “2015 Form 10-K”).  The Risk Factors set forth in the 2015 Form 10-K should be read carefully in connection with evaluating our business and in connection with the forward-looking statements contained in this Quarterly Report on Form 10-Q.  Any of the risks described in the 2015 Form 10-K could materially adversely affect our business, financial condition or future results and the actual outcome of matters as to which forward-looking statements are made.  These are not the only risks we face.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

ITEM 6.   EXHIBITS.

No.
Item
31.1
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2
Certification  of the Chief Financial Officer  pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1
Certification of the CEO and CFO pursuant to Rule 13a-14(b) and Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 *.
101**
Interactive Data File

* In accordance with Item 601(b)(32)(ii) of Regulation S-K, this exhibit shall not be deemed “filed” for the purposes of Section 18 of the Securities and Exchange Act of 1934 or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

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

SIGNATURES


In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
  AUXILIO, INC.
   
   
Date:  May 13, 2016
By: /s/  Joseph J. Flynn
 
Joseph J. Flynn
 
Chief Executive Officer
 
(Principal Executive Officer)
   
   
   
   
Date:  May 13, 2016
/s/  Paul T. Anthony
 
Paul T. Anthony
Chief Financial Officer
 
(Principal Accounting Officer)
 
 
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