10-Q

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 June 30, 2012

[  ]           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 þ No o.

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

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

Large accelerated filer o                                                                                     Accelerated filer o

Non-accelerated filer o                                                                                     Smaller reporting company þ

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

The number of shares of the issuer’s common stock, $0.001 par value, outstanding as of August 14, 2012 was 19,595,309.

AUXILIO, INC.

FORM 10-Q

TABLE OF CONTENTS

		Page
PART I - FINANCIAL INFORMATION		3
Item 1	Financial Statements:	3
	Condensed Consolidated Balance Sheets as of June 30, 2012 (unaudited) and December 31, 2011	3
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2012 and 2011 (unaudited)	4
	Condensed Consolidated Statement of Stockholders’ (Deficit) Equity for the Six Months Ended June 30, 2012 (unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011 (unaudited)	6
	Notes to Unaudited Condensed Consolidated Financial Statements	8
Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3	Quantitative and Qualitative Disclosure about Market Risk	21
Item 4	Controls and Procedures	22
PART II - OTHER INFORMATION		22
Item 1a	Risk Factors	22
Item 6	Exhibits	22
Signatures		23

2

PART I – FINANCIAL INFORMATION

ITEM 1.                      FINANCIAL STATEMENTS.

AUXILIO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	JUNE 30, 2012			DECEMBER 31, 2011
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	1,581,398		$	1,832,115
Accounts receivable, net		5,731,372			2,032,738
Supplies		829,124			651,874
Prepaid and other current assets		86,174			74,977
Total current assets		8,228,068			4,591,704
Property and equipment, net		204,197			191,810
Deposits		36,288			28,013
Loan acquisition costs		233,143			226,576
Goodwill		1,517,017			1,517,017
Total assets	$	10,218,713		$	6,555,120
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	5,973,124		$	2,757,670
Accrued compensation and benefits		1,123,649			1,031,748
Line of credit		873,849			-
Deferred revenue		883,561			381,767
Current portion of capital lease obligations		82,311			49,881
Total current liabilities		8,936,494			4,221,066
Long-term liabilities:
Convertible notes payable, net of discount of $293,750 and $364,250 at June 30, 2012 and December 31, 2011, respectively		1,546,250			1,485,750
Derivative warrant liability		146,000			126,000
Derivative additional investment rights liability		300,000			235,000
Capital lease obligations less current portion		67,407			80,735
Total long-term liabilities		2,059,657			1,927,485
Commitments and contingencies		-			-
Stockholders’ (deficit) equity:
Common stock, par value at $0.001, 33,333,333 shares authorized, 19,595,309 and 19,449,783 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively		19,597			19,451
Additional paid-in capital		21,356,622			20,894,653
Accumulated deficit		(22,153,657	)		(20,507,535	)
Total stockholders’ (deficit) equity		(777,438	)		406,569
Total liabilities and stockholders’ equity	$	10,218,713		$	6,555,120

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

3

AUXILIO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months						Six Months
	Ended June 30,						Ended June 30,
	2012			2011			2012			2011
Revenues	$	10,722,165		$	4,803,793		$	17,260,144		$	9,486,894
Cost of revenues		9,323,015			4,019,128			15,511,094			8,358,340
Gross profit		1,399,150			784,665			1,749,050			1,128,554
Operating expenses:
Sales and marketing		559,543			467,265			1,251,753			825,406
General and administrative expenses		954,502			884,013			1,842,738			1,728,653
Total operating expenses		1,514,045			1,351,278			3,094,491			2,554,059
Loss from operations		(114,895	)		(566,613	)		(1,345,441	)		(1,425,505	)
Other income (expense):
Interest expense		(116,939	)		(3,292	)		(214,381	)		(6,528	)
Interest income		16			209			300			616
Change in fair value of derivative liabilities		205,000			-			(85,000	)		-
Total other income (expense)		88,077			(3,083	)		(299,081	)		(5,912	)
Loss before provision for income taxes		(26,818	)		(569,696	)		(1,644,522	)		(1,431,417	)
Income tax expense		-			-			(1,600	)		(2,400	)
Net loss	$	(26,818	)	$	(569,696	)	$	(1,646,122	)	$	(1,433,817	)
Net loss per share:
Basic	$	(.00	)	$	(.03	)	$	(.08	)	$	(.07	)
Diluted	$	(.00	)	$	(.03	)	$	(.08	)	$	(.07	)
Number of weighted average shares:
Basic		19,568,513			19,336,651			19,509,148			19,336,651
Diluted		19,568,513			19,336,651			19,509,148			19,336,651

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

4

AUXILIO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

SIX MONTHS ENDED JUNE 30, 2012

(UNAUDITED)

	Common Stock				Additional Paid-in		Accumulated			Total Stockholders’
	Shares		Amount		Capital		Deficit			Equity
Balance at December 31, 2011		19,449,783	$	19,451	$	20,894,653	$	(20,507,535	)	$	406,569
Stock compensation expense for options and warrants granted to employees and directors		-		-		212,810		-			212,810
Common stock granted for consulting services		50,000		50		52,450		-52,500
Restricted stock granted for marketing services		85,526		86		151,079		-			151,165
Warrants issued as loan acquisition costs related to convertible note payable		-		-		35,640		-			35,640
Conversion of convertible note payable		10,000		10		9,990		-			10,000
Net loss		-		-		-		(1,646,122	)		(1,646,122	)
Balance at June 30, 2012		19,595,309	$	19,597	$	21,356,622	$	(22,153,657	)	$	(777,438	)

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

5

AUXILIO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Six months ended June 30,
	2012			2011
Cash flows from operating activities:
Net loss	$	(1,646,122	)	$	(1,433,817	)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation		54,095			67,071
Stock compensation expense for warrants and options issued to employees and directors		212,810			191,992
Fair value of common stock granted for consulting services		52,500			-
Fair value of restricted stock granted for marketing services		151,165			60,369
Change in fair value of derivative liabilities		85,000			-
Interest expense related to accretion of debt discount costs		70,500			-
Interest expense related to amortization of loan acquisition costs		53,938			-
Changes in operating assets and liabilities:
Accounts receivable		(3,698,634	)		148,080
Supplies		(177,250	)		20,906
Prepaid and other current assets		(11,197	)		154,477
Deposits		(8,275	)		-
Accounts payable and accrued expenses		3,215,454			24,316
Accrued compensation and benefits		91,901			(38,356	)
Deferred revenue		501,794			(3,478	)
Net cash used for operating activities		(1,052,321	)		(808,440	)
Cash flows from investing activities:
Purchases of property and equipment		(11,708	)		(10,185	)
Net cash used for investing activities		(11,708	)		(10,185	)
Cash flows from financing activities:
Net proceeds from line of credit agreement		873,849			-
Loan acquisition fees paid		(24,864	)		-
Proceeds from advances on convertible debt offering		-			375,000
Payments on capital leases		(35,673	)		(22,916	)
Net cash provided by financing activities		813,312			352,084
Net decrease in cash and cash equivalents		(250,717	)		(466,541	)
Cash and cash equivalents, beginning of period		1,832,115			2,249,907
Cash and cash equivalents, end of period	$	1,581,398		$	1,783,366

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

6

AUXILIO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (CONTINUED)

(UNAUDITED)

	Six months ended June 30,
	2012		2011
Supplemental disclosure of cash flow information:
Interest paid	$	90,726	$	6,528
Income taxes paid	$	3,590	$	1,117
Non-cash investing and financing activities:
Property and equipment acquired through capital leases	$	54,775	$	38,217
Warrants issued as loan acquisition costs related to convertible note payable	$	35,640	$	-
Conversion of convertible note payable	$	10,000	$	-

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

7

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SIX MONTHS ENDED JUNE 30, 2012 AND 2011

(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 year ended December 31, 2011, as filed with the Securities and Exchange Commission (“SEC”) on April 10, 2012.

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.

For the six months ended June 30, 2012, our cash reserves combined with the cash generated from revenues was sufficient to cover our operating expenses.  However, no assurances can be given that we can continue to generate sufficient revenues.  We believe that the availability of funds from equity offerings and a recently added accounts receivable line of credit, the growth of our customer base and cost containment efforts will enable us to generate positive operating cash flows and to continue our operations.

Although we have been able to raise additional working capital through convertible note agreements and private placement offerings of our common stock, we may not be able to continue this practice in the future nor may we be able to obtain additional working capital through other debt or equity financings on terms that are acceptable to us.  In the event that sufficient capital cannot be obtained, we may be forced to significantly reduce operating expenses to a point that would be detrimental to our business operations and business development activities.  These courses of action may be detrimental to our business prospects and result in material changes 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.

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

From time to time, new accounting pronouncements are issued by the FASB that we adopt as of the specified effective date.  Unless otherwise discussed in these financial statements and notes or in our financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2011, we believe the impact of any other recently issued standards that are not yet effective are either not applicable to us at this time or will not have a material impact on our consolidated financial statements upon adoption.

8

3.           OPTIONS AND WARRANTS

Below is a summary of Auxilio stock option and warrant activity during the six month period ended June 30, 2012:

Options	Shares			Weighted Average Exercise Price		Weighted Average Remaining Term in Years		Aggregate Intrinsic Value
Outstanding at December 31, 2011		5,367,053		$	1.03
Granted		481,000			1.10
Exercised		-			-
Cancelled		(44,348	)		2.41
Outstanding at June 30, 2012		5,803,705		$	1.03		6.06	$	492,265
Exercisable at June 30, 2012		4,092,705		$	1.05		4.95	$	388,136

Warrants	Shares		Weighted Average Exercise Price		Weighted Average Remaining Term in Years		Aggregate Intrinsic Value
Outstanding at December 31, 2011		3,982,508	$	1.40
Granted		72,098		1.39
Exercised		-		-
Cancelled		-		-
Outstanding at June 30, 2012		4,054,606	$	1.40		2.37	$	223,222
Exercisable at June 30, 2012		2,179,606	$	1.37		2.37	$	200,900

During the six months ended June 30, 2012, we granted a total of 481,000 options to our employees and directors to purchase shares of our common stock at an exercise price range of $0.76 to $1.39 per share.  The exercise price equals the fair value of our stock on the grant date.  The options have graded vesting annually over three years starting January 2012.  The fair value of the options was determined using the Black-Scholes option-pricing model.  The assumptions used to calculate the fair market value are as follows:  (i) risk-free interest rate of 0.07% to 0.17%; (ii) estimated volatility of 67.42% to 82.48%; (iii) dividend yield of 0.0%; and (iv) expected life of the options of three years.  In November 2008 we entered into a five year joint marketing agreement with Sodexo Operations, LLC, (“Sodexo”) to provide our document services to Sodexo’s healthcare customer base in the United States.  Sodexo will invest in sales and marketing resources and assist us with marketing our document services to Sodexo’s US healthcare customer base of more than 1,600 hospitals.  Under the terms of the agreement we expect to provide Sodexo with warrants to purchase up to two million shares of our common stock at a price of $1.50 per share.  The first 150,000 warrants vested in June 2009.  An additional 175,000 vested in July 2010 upon the signing of a new customer contract.  The balance of the warrants will vest in increments of between 75,000 and 500,000 shares dependent on the size and number of the new customer contracts that we enter into as a direct result of this agreement.  The expense associated with these performance based warrants will be recognized when the warrants are earned.

For the three and six months ended June 30, 2012 and 2011, stock-based compensation expense recognized in the statement of operations as follows:

9

	Three Months Ended June 30,				Six months Ended June 30,
	2012		2011		2012		2011
Cost of revenues	$	27,862	$	38,028	$	53,164	$	74,151
Sales and marketing		35,759		4,969		45,113		9,861
General and administrative expense		57,473		63,217		114,533		107,980
Total stock based compensation expense	$	121,094	$	106,214	$	212,810	$	191,992

4.           RESTRICTED STOCK

On May 11, 2011, we amended the joint marketing agreement with Sodexo.  Under the revised agreement, Sodexo will provide additional sales and marketing resources and will expand the marketing effort directed towards existing or potential Sodexo hospital clients.  The term of the agreement is extended to December 31, 2014.  Upon signing the amended agreement, we granted 200,000 shares of restricted stock to Sodexo.  These shares vest as follows:  66,667 immediately, 66,667 on May 11, 2013 and 66,666 on May 11, 2014.  The immediately vested shares resulted in a charge to marketing expense of $54,667.  The cost of the remaining shares will be recognized over the vesting periods using the current market price of the stock at each periodic reporting date.  On April 18, 2012, we granted 23,437 shares as a result of a new sale.  These shares vest as follows:  7,812 on April 11, 2013, 7,812 on April 11, 2014 and 7,813 on April 11, 2015.  For the six months ended June 30, 2012, the cost recognized for these shares totaled $48,533.  Sodexo will be granted additional restricted stock for new sales resulting from their efforts.  Under the amended joint marketing agreement Sodexo will also receive a quarterly commission based on actual revenues derived from these new accounts over the life of the contract along with an annual marketing fee based on  total revenues received by us, excluding for certain existing accounts.  For the six months ended June 30, 2012, commissions and marketing fees due to Sodexo totaled $97,087.

In January 2011, we entered into an independent contractor services agreement with a sales channel partner to provide us marketing services.  In March 2012, this sales channel partner became fully vested in a grant of 85,526 restricted stock units provided for in the agreement.  The cost recognized for the 85,526 restricted stock units was $102,631.

5.           NET (LOSS) PER SHARE

Basic net loss per share is calculated using the weighted average number of shares of our common stock issued and outstanding during a certain period, and is calculated by dividing the 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.  Secured convertible notes, options and warrants are not included in the computation of diluted net loss per share because inclusion would be anti-dilutive.

10

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Numerator:
Net loss	$	(26,818	)	$	(569,696	)	$	(1,646,122	)	$	(1,433,817	)
Denominator:
Denominator for basic calculation weighted average shares		19,568,513			19,336,651			19,509,148			19,336,651
Dilutive common stock equivalents:
Secured convertible notes		-			-			-			-
Options and warrants		-			-			-			-
Denominator for diluted calculation weighted average shares		19,568,513			19,336,651			19,509,148			19,336,651
Net loss per share:
Basic net loss per share	$	.00		$	(.03	)	$	(.08	)	$	(.07	)
Diluted net loss per share	$	(.00	)	$	(.03	)	$	(.08	)	$	(.07	)

6.           ACCOUNTS RECEIVABLE

A summary as of June 30, 2012 is as follows:

Trade receivable	$	6,000,500
Customer advances		(269,128	)
Allowance for doubtful accounts		-
Total accounts receivable	$	5,731,372

7.           LINE OF CREDIT

On May 4, 2012, we entered into a Loan and Security Agreement (the “Loan and Security Agreement”) with AvidBank Corporate Finance, a Division of Avidbank (“AvidBank”).  The Loan and Security Agreement provides us with a revolving line-of-credit up to $2.0 million at an interest rate of prime plus 3.75%; provided, however that at no time shall the rate be less than seven percent (7.0%) per annum.  The amount available to us at any given time is the lesser of (a) $2.0 million, or (b) the amount available under our borrowing base (80% of our eligible accounts, minus (1) accrued client lease payables, and minus (2) accrued equipment pool liability).  While there are outstanding credit extensions, we must maintain a minimum balance of unrestricted cash and cash equivalents at AvidBank of at least $400,000, measured on a monthly basis, and our maximum quarterly consolidated adjusted EBITDA loss must not exceed:  $1,000,000 for the quarter ended March 31, 2012, $250,000 for the quarter ending June 30, 2012, $500,000 for the quarter ending September 30, 2012, and $100,000 for the quarter ending December 31, 2012.  We covenanted not to, among other things, (a) dispose of assets (other than in the ordinary course), (b) change our business, (c) change our CEO or CFO, (d) merge or consolidate with any other person, (e) acquire all or substantially all of the capital stock or property of another person, or (f) become liable for any indebtedness (other than permitted indebtedness, as set forth in the Loan and Security Agreement).  The foregoing description is qualified in its entirety by reference to the Loan and Security Agreement, which is found in our 8-K filing on May 8, 2012 as Exhibit 10.1 and is incorporated herein by reference.

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.  Each holder of convertible promissory notes issued in a private offering in July 2011 agreed to subordinate its right of payment and security interest in and to our assets to AvidBank throughout the term of the Loan and Security Agreement pursuant to a subordination agreement.  In addition, we issued AvidBank a 5-year warrant to purchase up to 72,098 shares of our common stock at an exercise price of $1.387 per share, as additional consideration for the Loan and Security Agreement.  The foregoing descriptions are qualified in their entirety by reference to related agreements.  These agreements are found in our 8-K filing on May 9, 2012 as Exhibits 10.2, 10.3 and 10.4, respectively, and are incorporated herein by reference.

11

Interest charges associated with the line of credit, including amortization of the discounts and loan acquisition costs totaled $19,264 for the three and six months ended June 30, 2012.

8.           CONVERTIBLE NOTES PAYABLE

Effective July 29, 2011, we closed on a private offering of secured convertible notes and warrants (“Units”) for gross proceeds of $1,850,000.  Each of the Units consists 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 $1.50 per share.  The Notes mature July 29, 2014 and are secured by our tangible and intangible assets.  The Notes accrue interest at a rate of eight percent (8%) per annum, compounded annually, and the interest on the outstanding balance of the Notes is payable no later than thirty (30) days following the close of each calendar quarter.  The Notes are 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, including John Pace, Michael Joyce, Mark St. Clare and Michael Vanderhoof, participated in the offering.

We may call the Notes for prepayment (“Call Option”) if (a) our Common Stock closes at or above $2.00 per share for 20 consecutive days; and (b) our Common Stock has had daily trading volume at or above 100,000 shares for the same 20 consecutive days.  Investors shall have 60 days from the date on which we call the Notes to convert the Notes(thereafter we may prepay any outstanding Notes).

At any time prior to the maturity date, the holders of the Notes may elect to convert all or part of the unpaid principal amount of the Notes and any unpaid interest accrued thereon, into shares of our Common Stock.  The conversion price will be $1.00 per share of Common Stock, subject to adjustment upon the occurrence of certain capital events.  If (a) there is any transaction, or a series of transactions, that results, directly or indirectly, in the transfer of 100% of Auxilio including, without limitation, any sale of stock, sale of assets, sale of membership interests, merger or consolidation, reorganization, recapitalization or restructuring, tender or exchange offer, negotiated purchase or  leveraged buyout, and (b) the per share price of our Common Stock in such transaction equals or exceeds $1.00, then the Notes will be automatically converted into our Common Stock.

The Note agreement provides the note holders with certain dilution protections.  If (a) by July 29, 2012, we complete an additional round of debt financing with new investors (“New Debt”) and (b) the New Debt contains more favorable interest rate, payment frequency, amortization, conversion price, warrant coverage and registration rights terms to the New Debt holders than the Notes, then the holder of Notes shall have the option to exchange the Notes for an equal principal amount of new notes with the same terms as the New Debt (the “Exchange Feature”).  The Exchange Feature does not provide for fixed terms for the associated Warrants or can allow for an adjustment to the conversion rate of the Notes.

We allocated the proceeds from the sale of the Notes and Warrants in connection with ASC Topic 470-25.  Due to the existence of the Exchange Feature, the Warrants were determined to not be indexed to its own underlying stock and therefore did not qualify for equity classification.  Therefore the proceeds allocated to the Warrants were determined to be a derivative liability and were measured at fair value.

The conversion rights and the Call Option held by us, or the “Additional Investment Rights”, are embedded derivatives of the host debt contract.  The potential variability of the conversion rate and the terms of the Call Option, due to the existence of the Exchange Feature, also caused the Additional Investment Rights to not qualify for equity classification.  Under the accounting guidance for multiple embedded derivatives, we combined these rights into one embedded derivative and allocated proceeds from the offering to the bundled derivative.  Accordingly, the bundled Additional Investment Rights are accounted for as a derivative liability to be measured at fair value.  We allocated $1,427,000 to the convertible Notes payable, $166,000 to the derivative Warrant liability and $257,000 to the derivative Additional Investments Rights liability.  The debt discount of $423,000 will be amortized as interest expense over the term of the convertible notes payable.  The valuation methodologies for the fair values of the Derivative Warrant Liability and the Derivative Additional Investment Rights Liability are described in Note 9 below.

12

In April, 2012 a note holder elected to convert $10,000 of his note into 10,000 shares of common stock.

Interest charges associated with the convertible notes payable, including amortization of the discounts and loan acquisition costs totaled $188,211for the six months ended June 30, 2012.

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

9.           DERIVATIVE LIABILITIES

Our derivative liability instruments were measured at fair value using the Black-Scholes model.  We evaluated the use of other valuation models and determined that given the fact pattern these methods were not anticipated to be materially different from the amounts calculated using the Black-Scholes model.  This determination was based on management’s belief that the likelihood of another round of financing prior to the expiration of the Exchange Feature is remote, and another round of financing with terms more favorable to new investors is even more remote.  If another round of financing were to occur, we believe that our need for an additional round of financing would most likely be driven by significant growth in our business.  This growth would likely result in more favorable terms to us, thus rendering the instruments subject to the Exchange Feature with nominal value.  As a result, we believe that the Black-Scholes model was an appropriate method for valuing the warrants and additional investment rights subject to the Exchange Feature.

Derivative Warrant Liability

We have warrants outstanding that were issued in connection with the convertible notes payable financing that have potentially variable terms that could have allowed for the reduction in the exercise price of the warrants in the event that, prior to July 29, 2012, we completed an additional round of debt financing with new investors that called for better economic terms.  However, no such debt financing occurred.  We accounted for these warrants in accordance with FASB ASC Topic 815.

We recognize all of our warrants subject to the Exchange Feature as a derivative liability in our consolidated balance sheet.  The derivative liability is revalued at each reporting period and changes in fair value are recognized currently in the consolidated statements of operations.  The initial recognition and subsequent changes in fair value of the derivative liability have no effect on our cash flows.

The revaluation of these warrants at the end of the reporting period resulted in the recognition of a $20,000 charge within our consolidated statements of operations for the six months ended June 30, 2012, under the caption “Change in fair value of derivative liabilities”.  The fair value of these warrants at June 30, 2012 was $146,000, which is reported on the consolidated balance sheet under the caption “Derivative Warrant Liability”.

Fair Value Assumptions Used in Accounting for Derivative Warrant Liability

We have determined our derivative warrant liability to be a Level 3 fair value measurement.  The fair value as of December, 2011and June 30, 2012 required the data inputs listed in the table below:

13

	December 31, 2011		June 30, 2012
Exercise price	$1.50		$1.50
Term (years)	4.33		3.83
Risk-free interest rate	0.83	%	0.72	%
Estimated volatility	79	%	77	%
Dividend rate	-0-		-0-
Stock price	$0.76		$0.90

Derivative Additional Investment Rights Liability

We have Additional Investment Rights outstanding with terms that could allow for more beneficial consideration to the note holders in the event that, prior to July 29, 2012, we complete an additional round of debt financing with new investors that calls for better economic terms.  We accounted for these Additional Investment Rights in accordance with FASB ASC Topic 815.

We recognize all of our Additional Investment Rights subject to the Exchange Feature as derivative liabilities in our consolidated balance sheet.  The derivative liability is revalued at each reporting period and changes in fair value are recognized in the consolidated statements of operations.  The initial recognition and subsequent changes in fair value of the derivative Additional Investment Rights liability have no effect on our cash flows.

The revaluation of the Additional Investment Rights at each reporting period resulted in the recognition of a $65,000 charge within our consolidated statements of operations for the six months ended June 30, 2012, under the caption “Change in fair value of derivative liabilities”.  The fair value of the Additional Investments Rights at June 30, 2012 was $300,000, which is reported on the consolidated balance sheet under the caption “Derivative Additional Investment Rights Liability”.

Fair Value Assumptions Used in Accounting for Derivative Additional Investment Rights Liability

We have determined that our derivative additional investment rights liability to be a Level 3 fair value measurement.  The fair value as of December 31, 2011and June 30, 2012 required the data inputs listed in the table below:

	December 31, 2011		June 30, 2012
Conversion price (range)	$1.00-$2.00		$1.00-$2.00
Term (years)	2.58		2.08
Risk-free interest rate	0.36	%	0.41	%
Estimated volatility	79	%	77	%
Dividend rate	-0-		-0-
Stock price	$0.76		$0.90

9.           EMPLOYMENT AGREEMENTS

Effective January 1, 2012, we entered into a new employment agreement with Mr. Joseph J. Flynn. (the “New Flynn Agreement”).  The New Flynn Employment Agreement provides that Mr. Flynn will be employed as our President and CEO.  The New Flynn Employment Agreement has a term of two years, provides for an annual base salary of $269,087, and will automatically renew for subsequent twelve month terms unless either party provides advance written notice to the other that such party does not wish to renew the agreement for a subsequent twelve months.  Mr. Flynn also receives the customary employee benefits available to our employees.  Mr. Flynn is also entitled to receive a bonus of up to $110,000 per year, the achievement of which is based on Company performance metrics.  We may terminate Mr. Flynn’s employment under this agreement without cause at any time on thirty days advance written notice, at which time Mr. Flynn would receive severance pay for six months and be fully vested in all options and warrants granted to date.

14

Effective January 1, 2012, we entered into a new employment agreement with Mr. Paul T. Anthony to serve as our Executive Vice President (“EVP”) and CFO.  The employment agreement has a term of two years, and provides for an annual base salary of $219,037.  The agreement will automatically renew for subsequent twelve month terms unless either party provides advance written notice to the other that such party does not wish to renew the agreement for a subsequent twelve months.  Mr. Anthony also receives the customary employee benefits available to our employees.  Mr. Anthony is also entitled to receive a bonus of up to $70,000 per year, the achievement of which is based on Company performance metrics.  We may terminate Mr. Anthony’s employment under this agreement without cause at any time on thirty days advance written notice, at which time Mr. Anthony would receive severance pay for six months and be fully vested in all options and warrants granted to date.

10.           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 three largest customers accounted for approximately 56% of our revenues for the six months ended June 30, 2012.  Net accounts receivable for these customers totaled approximately $3,500,000 as of June 30, 2012.  Our two largest customers accounted for approximately 43% of our revenues for the six months ended June 30, 2011.

11.           SEGMENT REPORTING

We have adopted ASC 280, “Segment Reporting”.  Because we operate in one business segment based on our integration and management strategies, segment disclosure has not been presented.

12.           GOODWILL

We performed an impairment test of goodwill as of December 31,2011 determining that our estimated fair value based on our market capitalization was greater than our carrying amount including goodwill.  We did not perform step 2 since the fair value was greater than the carrying amount.

Although we have experienced a net loss for the six months ended June 30, 2012, these losses were a direct result of operating expenses related to improved sales efforts that recently resulted in our closing six new recurring revenue contracts.  As a result Management did not feel it was necessary to perform an interim impairment test.

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

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

15

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

Readers should carefully review the risk factors described below under the heading “Risk Factors”  and in other documents we file from time to time with the SEC, including our Form 10-K for the fiscal year ended December 31, 2011.  Our filings with the SEC, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those filings, pursuant to Sections 13(a) and 15(d) of the Exchange Act, are available free of charge at www.auxilioinc.com, when such reports are available at the SEC web site.

OVERVIEW

Prior to March 2004, Auxilio, Inc., then operating under the name PeopleView, Inc., developed, marketed and supported web based assessment and reporting tools and provided consulting services that enabled companies to manage their Human Capital Management needs in real-time.  In March 2004, we decided to change our business strategy and sold the PeopleView business to Workstream, Inc. (“Workstream”).  Following completion of the sale of PeopleView, Inc. to Workstream, we focused our business strategy on providing outsourced image management services to healthcare facilities.

To facilitate this strategy, we acquired Alan Mayo & Associates, dba The Mayo Group (“The Mayo Group” or “TMG”) in April 2004.  TMG is a provider of integration strategies and outsourced services for document image management in healthcare facilities.  It was this acquisition that formed the basis of our current operations.

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

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

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

APPLICATION OF CRITICAL ACCOUNTING POLICIES

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

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

16

· Revenue recognition and deferred revenue

Revenue is recognized pursuant to ASC Topic 605, “Revenue Recognition” (“ASC 605”).  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 the placement of equipment that is to be placed at a customer’s location at a future date, revenue is deferred until the placement of such equipment.  Monthly service and supply revenue is earned monthly during the term of the contract, as services and supplies are provided.

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 FASB ASC Topic 605-25, Multiple-Deliverable Revenue Arrangements, which provides criteria for separating consideration in multiple-deliverable arrangements by establishing a selling price hierarchy for determining the selling price of a deliverable.  The selling price used for each deliverable is based on vendor-specific objective evidence (“VSOE”) if available, third-party evidence if VSOE is not available, or estimated selling price if neither VSOE nor third-party evidence is available.  We are required to determine the best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a standalone basis.  We generally do not separately sell MFD equipment or service on a standalone basis.  Therefore, we do not have VSOE for the selling price of these units.  As we purchase the equipment, we have third-party evidence of the cost of this element.  We estimate the proceeds from the arrangement to allocate to the service unit based on historical cost experiences.  Based on the relative costs of each unit to the overall cost of the arrangement, we utilize the same relative percentage to allocate the total arrangement proceeds.

· Accounts receivable valuation and related reserves

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

· New customer implementation costs

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

· Impairment of intangible assets

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.

· 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

17

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.

· Derivative Liabilities

Our derivative warrants and additional investment rights liabilities are measured at fair value using the Black-Scholes valuation model which takes into account, as of the measurement date, factors including the current exercise price, the term of the instrument, the current price of the underlying stock and its expected volatility, expected dividends on the stock and the risk-free interest rate for the term of the item.  These derivative liabilities are revalued at each reporting period and changes in fair value are recognized currently in the consolidated statements of operations under the caption “Change in fair value of derivative liabilities.”

You should refer to our Annual Report on Form 10-K filed on April 10, 2012 for a discussion of our critical accounting policies.

RESULTS OF OPERATIONS

For the Three Months Ended June 30, 2012 Compared to the Three Months Ended June 30, 2011

Revenue

Revenue increased by $5,918,372 to $10,722,165 for the three months ended June 30, 2012, as compared to the same period in 2011.  Of this increase, approximately $2,700,000 is a result of the addition of five new recurring revenue contracts between July 2011 and June 2012.  Meanwhile we have maintained all of our current customers, though we have negotiated lower rates for some of them.  Equipment sales for the three months ended June 30, 2012 were approximately $3,100,000 as compared to approximately $80,000 for the same period in 2011. Of this increase, approximately $3,000,000 was from large copier fleet refresh activities at three customers, of which approximately $1,200,000 was from an arrangement whereby we are contractually limited to billing for the equipment at our cost.  We limit our revenue recognition of delivered equipment to the extent of funds received for such equipment, and thus only recognize revenue for equipment to the extent of cost for this contract.

Cost of Revenue

Cost of revenue consists of document imaging equipment, parts, supplies and salaries and expenses of field services personnel.  Cost of revenue was $9,323,015 for the three months ended June 30, 2012, as compared to $4,019,128 for the same period in 2011.  The increase in the cost of revenue for the second quarter of 2012 is attributed primarily to the addition of five new recurring revenue contracts between July 2011 and June 2012.  We incurred approximately $730,000 in additional staffing and approximately $140,000 in additional one-time travel related costs in connection with the implementation of new customers.  Service and supply costs increased by approximately $1,130,000 primarily as a result of our new customers.  Equipment costs, which include equipment provided under the recurring service contracts and equipment sold, increased by approximately $3,150,000 in 2012, primarily as a result of the increase in equipment sales from the copier fleet refresh activities.

18

We expect higher cost of revenues at the start of our engagement with most new customers.  In addition to the costs associated with implementing our services, we absorb our new customer’s legacy contracts with third-party vendors.  As we implement our programs we strive to improve upon these legacy contracts and thus reduce costs over the term of the contract.  We anticipate this trend to continue but anticipate overall increase in cost revenues sold as a result of the expansion of our customer base.  However, given the varying expiration dates of these vendor contracts and the fact that the amount of savings is specific to each arrangement, we cannot predict our anticipated profit margins as these legacy contracts come up for renewal.  We anticipate this trend to continue but anticipate overall increase in cost revenues sold as a result of the expansion of our customer base.

Sales and Marketing

Sales and marketing expenses include salaries, commissions and expenses for sales and marketing personnel, travel and entertainment, and other selling and marketing costs.  Sales and marketing expenses were $559,543 for the three months ended June 30, 2012, as compared to $467,265 for the same period in 2011.  Staffing costs, including commissions, increased approximately $120,000 in the second quarter of 2012 due to a more aggressive sales and marketing efforts to obtain new clients.

General and Administrative

General and administrative expenses include personnel costs for finance, administration, information systems, and general management, as well as facilities expenses, professional fees, legal expenses and other administrative costs.  General and administrative expenses increased by $70,489 to $954,502 for the three months ended June 30, 2012, as compared to $884,013 for the three months ended June 30, 2011.  General and administrative expenses increased primarily as a result of increases in staffing headcount to reflect the increased size of our business.

Other Income (Expense)

Interest expense for the three months ended June 30, 2012 was $116,939, compared to $3,292 for the same period in 2011.  The increase is a result of the convertible debt borrowing consummated in July 2011 and the line of credit borrowings consummated in May 2012.

Interest income is primarily derived from short-term interest-bearing securities and money market accounts.  Interest income for the three months ended June 30, 2012 was $16, as compared to $209for the same period in 2011, due to a decrease in the amount of invested cash.

The change in the fair value of derivative liabilities totaled to a benefit of $205,000 for the three months ended June 30, 2012.  This benefit is primarily a result of the change in our stock price between March 31, 2012 and June 30, 2012.  There was no such benefit for the three months ended March 31, 2011 because there was no derivative liability at that time.

For the Six Months Ended June 30, 2012 Compared to the Six Months Ended June 30, 2011

Revenue

Revenue increased by $7,773,250 to $17,260,144 for the six months ended June 30, 2012, as compared to the same period in 2011. Of this increase, approximately $4,000,000 is a result of the addition of five new recurring revenue contracts between July 2011 and June 2012. Meanwhile we have maintained all of our current customers, though we have negotiated lower rates for some of them. Equipment sales for the six months ended June 30, 2012 were approximately $3,700,000 as compared to approximately $200,000 for the same period in 2011. Of this increase, approximately $3,400,000 was from large copier fleet refresh activities at three customers, of which approximately $1,600,000 was from an arrangement whereby we are contractually limited to billing for the equipment at our cost. We limit our revenue recognition of delivered equipment to the extent of funds received for such equipment, and thus only recognize revenue for equipment to the extent of cost for this contract.

19

Cost of Revenue

Cost of revenue consists of document imaging equipment, parts, supplies and salaries and expenses of field services personnel.  Cost of revenue was $15,511,094 for the six months ended June 30, 2012, as compared to $8,358,340 for the same period in 2011.  The increase in the cost of revenue for the first six months of 2012 is attributed primarily to the addition of four new recurring revenue contracts between July 2011 and April 2012.  We incurred approximately $1,300,000 in additional staffing and approximately $290,000 in additional one-time travel related costs in connection with the implementation of new customers.  Service and supply costs increased by approximately $1,800,000 primarily as a result of our new customers.  Equipment costs, which includes equipment provided under the recurring service contracts and equipment sold, increased by approximately $3,800,000 in 2012, primarily as a result of the increase in equipment sales from the copier fleet refresh activities.

We expect higher cost of revenues at the start of our engagement with most new customers.  In addition to the costs associated with implementing our services, we absorb our new customer’s legacy contracts with third-party vendors.  As we implement our programs we strive to improve upon these legacy contracts and thus reduce costs over the term of the contract.  We anticipate this trend to continue but anticipate overall increase in cost revenues sold as a result of the expansion of our customer base.  However, given the varying expiration dates of these vendor contracts and the fact that the amount of savings is specific to each arrangement, we cannot predict our anticipated profit margins as these legacy contracts come up for renewal.  We anticipate this trend to continue but anticipate overall increase in cost revenues sold as a result of the expansion of our customer base.

Sales and Marketing

Sales and marketing expenses include salaries, commissions and expenses for sales and marketing personnel, travel and entertainment, and other selling and marketing costs.  Sales and marketing expenses were $1,251,753 for the six months ended June 30, 2012, as compared to $825,406 for the same period in 2011.  Staffing costs, including commissions, increased approximately $250,000 in the first six months of 2012 due to a more aggressive sales and marketing efforts to obtain new clients.  We also paid third party channel partners approximately $150,000 in restricted stock units earned as sales commissions.

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 $114,085 to $1,842,738 for the six months ended June 30, 2012, as compared to $1,728,653 for the six months ended June 30, 2011.  General and administrative expenses increased primarily as a result of increases in staffing headcount to reflect the increased size of our business.

Other Income (Expense)

Interest expense for the six months ended June 30, 2012 was $214,381, compared to $6,528 for the same period in 2011.  The increase is a result of the convertible debt borrowing consummated in July 2011 and the line of credit borrowings consummated in May 2012.

Interest income is primarily derived from short-term interest-bearing securities and money market accounts.  Interest income for the six months ended June 30, 2012 was $300, as compared to $616 for the same period in 2011, due to a decrease in the amount of invested cash.

The change in the fair value of derivative liabilities totaled to a charge of $85,000 for the six months ended June 30, 2012.  This cost is primarily a result of the change in our stock price between December 31, 2011 and June 30, 2012.  There was no such charge for the six months ended June 30, 2011 because there was no derivative liability at that time.

20

Income Tax Expense

Income tax expense for each of the six months ended June 30, 2012 and June 30, 2011, was $1,600 and $2,400 respectively, which represents the minimum tax liability due for required state income taxes.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2012, our cash and cash equivalents were $1,581,398 and our working capital deficit was $708,426.  Our principal cash requirements are for operating expenses, including equipment, supplies, employee costs, and capital expenditures and funding of the operations.  Our primary sources of cash are service and equipment sale revenues, borrowings from our line of credit, and the exercise of options and warrants.

During the six months ended June 30, 2012, our cash used for operating activities amounted to $1,052,321, as compared to $808,440 used for operating activities for the same period in 2011.  The cash used for operating activities for both periods was primarily due to the costs incurred to implement our new recurring revenue contracts.

We expect to close additional recurring revenue contracts to new customers throughout 2012. Because we expect higher cost of revenues at the start of our engagement with most new customers, we have entered into an accounts receivable line of credit with a commercial bank.  We may seek additional financing, which may include debt and/or equity financing or funding through third party agreements.  There can be no assurance that any additional financing will be available on acceptable terms, if at all.  Any equity financing may result in dilution to existing stockholders and any debt financing may include restrictive covenants.  Management believes that cash generated from debt and/or equity financing arrangements along with funds from operations will be sufficient to sustain our business operations over the next twelve months.

OFF-BALANCE SHEET ARRANGEMENTS

Our off-balance sheet arrangements consist primarily of conventional operating leases, purchase commitments and other commitments arising in the normal course of business, as further discussed below under “Contractual Obligations and Contingent Liabilities and Commitments.” As of June 30, 2012, 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 June 30, 2012, 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
Convertible notes	$	2,183,467	$	73,600	$	2,109,867	$	-	$	-
Capital leases		161,572		92,623		68,949		-		-
Operating leases		530,225		158,658		329,599		41,968		-
Total	$	2,875,264	$	324,881	$	2,508,415	$	41,968	$	-

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.

21

ITEM 4.                      CONTROLS AND PROCEDURES.

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

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

PART –II - OTHER INFORMATION

ITEM 1A.                      RISK FACTORS.

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, 2011, filed with the SEC on April 10, 2012.

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.INS	XBRL Instance Document*
101.SCH	XBRL Taxonomy Extension Schema Document*
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB	XBRL Taxonomy Extension Label Linkbase Document*
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document*

†           Filed herewith.

+           Furnished herewith.

* 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.

22

SIGNATURES

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

	AUXILIO, INC.
Date: August 14, 2012	By:	/s/ Joseph J. Flynn
		Joseph J. Flynn
		Chief Executive Officer
		(Principal Executive Officer)

Date: August 14, 2012	By:	/s/ Paul T. Anthony
		Paul T. Anthony
		Chief Financial Officer
		(Principal Accounting Officer)

23

EX-31.1

EXHIBIT 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

I, Joseph J. Flynn, certify that:

1.      I have reviewed this Quarterly Report on Form 10-Q of Auxilio, Inc. (the “Registrant”);

2.      Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.      Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.      The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)      Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)      Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)      Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)      Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.      The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)      All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)      Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated:  August 14, 2012

/s/ Joseph J. Flynn                                                      

Joseph J. Flynn ,

President and Chief Executive Officer

(Principal Executive Officer)

EX-31.2

EXHIBIT 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

I, Paul T. Anthony, certify that:

1.      I have reviewed this Quarterly Report on Form 10-Q of Auxilio, Inc. (the “Registrant”);

2.      Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.      Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.      The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)      Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)      Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)      Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)      Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.      The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)      All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)      Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated:  August 14, 2012

/s/ Paul T. Anthony                                           

Paul Anthony ,

Chief Financial Officer

(Principal Financial Officer)

EX-32.1

EXHIBIT 32.1

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13A-14(B) AND RULE 15D-14(B) OF THE SECURITIES EXCHANGE ACT OF 1934 AND 18 U.S.C. SECTION 1350

In connection with the Quarterly Report of Auxilio, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2012as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Joseph J. Flynn, Chief Executive Officer and Paul T. Anthony, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of our knowledge:

(1)           The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)           The information contained in the Report fairly presents, in all material respects, the financial condition of the Company as of the dates presented and the results of operations of the Company for the periods presented.

Date:  August 14, 2012

By:           /s/ Joseph J. Flynn                                                      

Joseph Flynn,

President and Chief Executive Officer

By:           /s/ Paul T. Anthony                                                      

Paul Anthony,

Chief Financial Officer

A signed original of this written statement required by section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

This certification accompanies the Quarterly Report pursuant to Rule 13a-14(b) or Rule 15d-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934.

XML

Derivative Liabilities: Fair Value Assumptions, Derivative Additional Investment Rights Liability (Details) (Derivative Additional Investment Rights Liability, Fair Value, Inputs, Level 3, USD $)	3 Months Ended	12 Months Ended
	Jun. 30, 2012	Dec. 31, 2011
Fair Value Assumptions, Expected Term	2 years 29 days	2 years 7 months
Fair Value Assumptions, Risk Free Interest Rate	0.41%	0.36%
Fair Value Assumptions, Expected Volatility Rate	77.00%	79.00%
Fair Value Assumptions, Expected Dividend Rate	0.00%	0.00%
Share Price	$ 0.90	$ 0.76
Minimum
Fair Value Assumptions, Conversion Price	$ 1.00	$ 1.00
Maximum
Fair Value Assumptions, Conversion Price	$ 2.00	$ 2.00

XML

Net Loss Per Share: Schedule of Earnings Per Share Calculation, Basic and Diluted (Details) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Net loss	$ (26,818)	$ (569,696)	$ (1,646,122)	$ (1,433,817)
Basic weighted average shares outstanding	19,568,513	19,336,651	19,509,148	19,336,651
Diluted weighted average shares outstanding	19,568,513	19,336,651	19,509,148	19,336,651
Basic	$ 0.00	$ (0.03)	$ (0.08)	$ (0.07)
Diluted	$ 0.00	$ (0.03)	$ (0.08)	$ (0.07)

XML

Accounts Receivable: Schedule of Accounts Receivable (Tables)

3 Months Ended

Jun. 30, 2012

Schedule of Accounts Receivable:

Schedule of Accounts Receivable

Trade receivable	$  6,000,500
Customer advances	(269,128)
Allowance for doubtful accounts	-
Total accounts receivable	$  5,731,372

XML

Derivative Liabilities (Details) (USD $)	3 Months Ended	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2012	Dec. 31, 2011
Change in fair value of derivative liabilities	$ 205,000	$ (85,000)
Derivative warrant liability	146,000	146,000	126,000
Derivative Financial Instruments, Liabilities
Change in fair value of derivative liabilities	20,000
Derivative warrant liability	$ 146,000	$ 146,000

XML

Recently Issued Accounting Pronouncements

3 Months Ended

Jun. 30, 2012

Recently Issued Accounting Pronouncements:

Recently Issued Accounting Pronouncements

2.             RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

From time to time, new accounting pronouncements are issued by the FASB that we adopt as of the specified effective date.  Unless otherwise discussed in these financial statements and notes or in our financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2011, we believe the impact of any other recently issued standards that are not yet effective are either not applicable to us at this time or will not have a material impact on our consolidated financial statements upon adoption.

XML

Options and Warrants: Schedule of Stockholders' Warrants Activity (Details) (USD $)	6 Months Ended
	Jun. 30, 2012	Dec. 31, 2011
Warrants, Outstanding	4,054,606	3,982,508
Warrants, Weighted Average Exercise Price	$ 1.40	$ 1.40
Warrants, Issued	72,098
Warrants, Granted, Weighted Average Exercise Price	$ 1.39
Warrants, Outstanding, Weighted Average Remaining Contractual Life	2.37
Warrants, Outstanding, Intrinsic Value	$ 223,222
Warrants, Exercisable	2,179,606
Warrants, Exercisable, Weighted Average Exercise Price	$ 1.37
Warrants, Exercisable, Weighted Average Remaining Contractual Life	2.37
Warrants, Exercisable, Intrinsic Value	$ 200,900

XML

Options and Warrants: Schedule of Share-based Compensation, Stock Options, Activity (Details) (USD $)	3 Months Ended	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2012	Dec. 31, 2011
Options, Outstanding	5,803,705	5,803,705	5,367,053
Options, Outstanding, Weighted Average Exercise Price	$ 1.03	$ 1.03	$ 1.03
Options, Grants in Period		481,000
Options, Granted, Weighted Average Exercise Price		$ 1.10
Options, Expirations in Period		(44,348)
Options, Expired, Weighted Average Exercise Price		$ 2.41
Options, Outstanding, Weighted Average Remaining Contractual Term	6 years 21 days
Options, Outstanding, Intrinsic Value	$ 492,265	$ 492,265
Options, Exercisable	4,092,705	4,092,705
Options, Exercisable, Weighted Average Exercise Price	$ 1.05	$ 1.05
Options, Exercisable, Weighted Average Remaining Contractual Term	4 years 12 months 12 days
Options, Exercisable, Intrinsic Value	$ 388,136	$ 388,136

XML

Options and Warrants (Details) (USD $)	6 Months Ended	3 Months Ended			3 Months Ended
	Jun. 30, 2012	Jun. 30, 2012 Sodexo Operations LLC	Jul. 01, 2010 Sodexo Operations LLC	Jun. 01, 2009 Sodexo Operations LLC	Jun. 30, 2012 Sodexo Operations LLC Minimum	Jun. 30, 2012 Sodexo Operations LLC Maximum
Options, Grants in Period	481,000
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range, Lower Range Limit	$ 0.76
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range, Upper Range Limit	$ 1.39
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period	3 years
Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions, Method Used	Black-Scholes option-pricing model
Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions, Risk Free Interest Rate, Minimum	0.07%
Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions, Risk Free Interest Rate, Maximum	0.17%
Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions, Expected Volatility Rate, Minimum	67.42%
Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions, Expected Volatility Rate, Maximum	82.48%
Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions, Expected Dividend Rate	0.00%
Warrants, Vestable		2,000,000
Warrants, Exercise Price		$ 1.50
Warrants, Vested			175,000	150,000
Warrants, Vesting Increments					75,000	500,000

XML

Options and Warrants: Schedule of Employee Service Share-based Compensation, Allocation of Recognized Period Costs (Details) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Allocated Share-based Compensation Expense, Net of Tax	$ 121,094	$ 106,214	$ 212,810	$ 191,992
Cost of Sales
Allocated Share-based Compensation Expense	27,862	38,028	53,164	74,151
Selling and Marketing Expense
Allocated Share-based Compensation Expense	35,759	4,969	45,113	9,861
General and Administrative Expense
Allocated Share-based Compensation Expense	$ 57,473	$ 63,217	$ 114,533	$ 107,980

XML

Basis of Presentation

3 Months Ended

Jun. 30, 2012

Basis of Presentation:

Basis of Presentation

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 year ended December 31, 2011, as filed with the Securities and Exchange Commission (“SEC”) on April 10, 2012.

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.

For the six months ended June 30, 2012, our cash reserves combined with the cash generated from revenues was sufficient to cover our operating expenses.  However, no assurances can be given that we can continue to generate sufficient revenues.  We believe that the availability of funds from equity offerings and a recently added accounts receivable line of credit, the growth of our customer base and cost containment efforts will enable us to generate positive operating cash flows and to continue our operations.

Although we have been able to raise additional working capital through convertible note agreements and private placement offerings of our common stock, we may not be able to continue this practice in the future nor may we be able to obtain additional working capital through other debt or equity financings on terms that are acceptable to us.  In the event that sufficient capital cannot be obtained, we may be forced to significantly reduce operating expenses to a point that would be detrimental to our business operations and business development activities.  These courses of action may be detrimental to our business prospects and result in material changes 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.

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.

XML

Restricted Stock (Details) (USD $)	3 Months Ended				3 Months Ended
	Jun. 30, 2012 Restricted Stock	Jun. 30, 2012 Restricted Stock Sodexo Operations LLC	May 11, 2014 Restricted Stock Sodexo Operations LLC	May 11, 2013 Restricted Stock Sodexo Operations LLC	Jun. 30, 2012 Restricted Stock 2 Sodexo Operations LLC	Apr. 11, 2015 Restricted Stock 2 Sodexo Operations LLC	Apr. 11, 2014 Restricted Stock 2 Sodexo Operations LLC	Apr. 11, 2013 Restricted Stock 2 Sodexo Operations LLC
Shares, Granted		200,000			23,437
Shares, Vested		66,667
Shares, Future Vesting, By Date			66,666	66,667		7,813	7,812	7,812
Marketing Expense		$ 54,667			$ 48,533
Commissions and Marketing Fees Due	97,087
Restricted Stock Units	85,526
Restricted Stock, Cost	$ 102,631

XML

Employment Agreements (Details) (USD $)	3 Months Ended
	Jun. 30, 2012
Chief Executive Officer
Employment Agreement Term Years	2
Annual base salary	$ 269,087
Officer Performance Bonus	110,000
Chief Financial Officer
Employment Agreement Term Years	2
Annual base salary	219,037
Officer Performance Bonus	$ 70,000

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)	Jun. 30, 2012	Dec. 31, 2011
Current assets:
Cash and cash equivalents	$ 1,581,398	$ 1,832,115
Accounts receivable, net	5,731,372	2,032,738
Supplies	829,124	651,874
Prepaid and other current assets	86,174	74,977
Total current assets	8,228,068	4,591,704
Property and equipment, net	204,197	191,810
Deposits	36,288	28,013
Loan acquisition costs	233,143	226,576
Goodwill	1,517,017	1,517,017
Total assets	10,218,713	6,555,120
Current liabilities:
Accounts payable and accrued expenses	5,973,124	2,757,670
Accrued compensation and benefits	1,123,649	1,031,748
Line of credit	873,849
Deferred revenue	883,561	381,767
Current portion of capital lease obligations	82,311	49,881
Total current liabilities	8,936,494	4,221,066
Long-term liabilities:
Convertible notes payable, net of discount of $293,750 and $364,250 at June 30, 2012 and December 31, 2011, respectively	1,546,250	1,485,750
Derivative warrant liability	146,000	126,000
Derivative additional investment rights liability	300,000	235,000
Capital lease obligations less current portion	67,407	80,735
Total long-term liabilities	2,059,657	1,927,485
Stockholders' (deficit) equity:
Common stock, par value at $0.001, 33,333,333 shares authorized, 19,595,309and 19,449,783 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively	19,597	19,451
Additional paid-in capital	21,356,622	20,894,653
Accumulated deficit	(22,153,657)	(20,507,535)
Total stockholders' (deficit) equity	(777,438)	406,569
Total liabilities and stockholders' equity	$ 10,218,713	$ 6,555,120

XML

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED) (USD $)	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Cash flows from operating activities:
Net loss	$ (1,646,122)	$ (1,433,817)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation	54,095	67,071
Stock compensation expense for warrants and options issued to employees and directors	212,810	191,992
Fair value of common stock granted for consulting services	52,500
Fair value of restricted stock granted for marketing services	151,165	60,369
Change in fair value of derivative liabilities	(85,000)
Interest expense related to accretion of debt discount costs	70,500
Interest expense related to amortization of loan acquisition costs	53,938
Changes in operating assets and liabilities:
Accounts receivable	(3,698,634)	148,080
Supplies	(177,250)	20,906
Prepaid and other current assets	(11,197)	154,477
Deposits	(8,275)
Accounts payable and accrued expenses	3,215,454	24,316
Accrued compensation and benefits	91,901	(38,356)
Deferred revenue	501,794	(3,478)
Net cash used for operating activities	(1,052,321)	(808,440)
Cash flows from investing activities:
Purchases of property and equipment	(11,708)	(10,185)
Net cash used for investing activities	(11,708)	(10,185)
Cash flows from financing activities:
Net proceeds from line of credit agreement	873,849
Loan acquisition fees paid	(24,864)
Proceeds from advances on convertible debt offering		375,000
Payments on capital leases	(35,673)	(22,916)
Net cash provided by financing activities	813,312	352,084
Net decrease in cash and cash equivalents	(250,717)	(466,541)
Cash and cash equivalents, beginning of period	1,832,115	2,249,907
Cash and cash equivalents, end of period	$ 1,581,398	$ 1,783,366

XML

Line of Credit (Details) (USD $)	3 Months Ended	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2012
Line of Credit Facility, Initiation Date	May 04, 2012
Line of Credit Facility, Maximum Borrowing Capacity	$ 2,000,000	$ 2,000,000
Line of Credit Facility, Interest Rate Description	prime plus 3.75%; provided, however that at no time shall the rate be less than seven percent (7.0%) per annum
Line of Credit Facility, Borrowing Capacity, Description	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).
Line of Credit Facility, Covenant Terms	While there are outstanding credit extensions, we must maintain a minimum balance of unrestricted cash and cash equivalents at AvidBank of at least $400,000, measured on a monthly basis, and our maximum quarterly consolidated adjusted EBITDA loss must not exceed: $1,000,000 for the quarter ended March 31, 2012, $250,000 for the quarter ending June 30, 2012, $500,000 for the quarter ending September 30, 2012, and $100,000 for the quarter ending December 31, 2012. We covenanted not to, among other things, (a) dispose of assets (other than in the ordinary course), (b) change our business, (c) change our CEO or CFO, (d) merge or consolidate with any other person, (e) acquire all or substantially all of the capital stock or property of another person, or (f) become liable for any indebtedness (other than permitted indebtedness, as set forth in the Loan and Security Agreement).
Line of Credit
Warrant Exercise Term, Years	5
Class of Warrant or Right, Number of Securities Called by Warrants or Rights	72,098	72,098
Class of Warrant or Right, Exercise Price of Warrants or Rights	1.387	1.387
Interest Expense, Debt, Excluding Amortization	$ 19,264	$ 19,264

XML

Options and Warrants: Schedule of Stockholders' Warrants Activity (Tables)

3 Months Ended

Jun. 30, 2012

Schedule of Stockholders' Warrants Activity:

Schedule of Stockholders' Warrants Activity

Warrants	Shares	Weighted Average Exercise Price	Weighted Average Remaining Term in Years	Aggregate Intrinsic Value
Outstanding at December 31, 2011	3,982,508	$    1.40
Granted	72,098	1.39
Exercised	-	-
Cancelled	-	-
Outstanding at June 30, 2012	4,054,606	$    1.40	2.37	$ 223,222
Exercisable at June 30, 2012	2,179,606	$    1.37	2.37	$ 200,900

XML

Convertible Notes Payable (Details) (USD $)	3 Months Ended	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2012	Jun. 30, 2011	Dec. 31, 2011
Private Offering of Secured Convertible Notes And Warrants Closed Date	Jul. 29, 2011
Proceeds From Convertible Notes and Warrants			$ 375,000
Derivative additional investment rights liability	300,000	300,000		235,000
Convertible notes payable, discount	293,750	293,750		364,250
Conversion of convertible note payable		10,000
Debt Instrument, Convertible, Interest Expense		188,211
Derivative Financial Instruments, Liabilities
Convertible Notes Payable	1,427,000	1,427,000
Derivative Warrant Liability	166,000	166,000
Derivative additional investment rights liability	257,000	257,000
Convertible notes payable, discount	423,000	423,000
Convertible Debt Securities
Proceeds From Convertible Notes and Warrants	1,850,000
Debt Instrument, Description	Each of the Units consists 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 $1.50 per share.
Debt Instrument, Maturity Date	Jul. 29, 2014
Debt Instrument, Interest Rate, Stated Percentage	8.00%	8.00%
Debt Instrument, Interest Rate Terms	the interest on the outstanding balance of the Notes is payable no later than thirty (30) days following the close of each calendar quarter
Debt Instrument, Convertible, Number of Equity Instruments	1,850,000
Investment Warrants Expiration Date	Apr. 29, 2016
Debt Instrument, Call Feature	We may call the Notes for prepayment (“Call Option”) if (a) our Common Stock closes at or above $2.00 per share for 20 consecutive days; and (b) our Common Stock has had daily trading volume at or above 100,000 shares for the same 20 consecutive days. Investors shall have 60 days from the date on which we call the Notes to convert the Notes(thereafter we may prepay any outstanding Notes).
Debt Instrument, Convertible, Conversion Price	$ 1	$ 1
Debt Instrument, Convertible, Terms of Conversion Feature	If (a) there is any transaction, or a series of transactions, that results, directly or indirectly, in the transfer of 100% of Auxilio including, without limitation, any sale of stock, sale of assets, sale of membership interests, merger or consolidation, reorganization, recapitalization or restructuring, tender or exchange offer, negotiated purchase or leveraged buyout, and (b) the per share price of our Common Stock in such transaction equals or exceeds $1.00, then the Notes will be automatically converted into our Common Stock.
Commissions and Marketing Fees Due	149,850
Class of Warrant or Right, Exercise Price of Warrants or Rights	1.50	1.50
Convertible Debt Securities | Note Holder
Conversion of convertible note payable	$ 10,000
Debt Conversion, Converted Instrument, Shares Issued	10,000

XML

Net Loss Per Share: Schedule of Earnings Per Share Calculation, Basic and Diluted (Tables)

3 Months Ended

Jun. 30, 2012

Schedule of Earnings Per Share Calculation, Basic and Diluted:

Schedule of Earnings Per Share Calculation, Basic and Diluted

	Three Months Ended June 30,		Six Months Ended June 30,
	2012	2011	2012	2011
Numerator:
Net loss	$   (26,818)	$  (569,696)	$ (1,646,122)	$ (1,433,817)
Denominator:
Denominator for basic calculation weighted average shares	19,568,513	19,336,651	19,509,148	19,336,651
Dilutive common stock equivalents:
Secured convertible notes	-	-	-	-
Options and warrants	-	-	-	-
Denominator for diluted calculation weighted average shares	19,568,513	19,336,651	19,509,148	19,336,651
Net Loss per share:
Basic net loss per share	$           .00	$            (.03)	$            (.08)	$            (.07)
Diluted net loss per share	$          (.00)	$            (.03)	$            (.08)	$            (.07)

XML

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (SUPPLEMENTAL) (USD $)	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Interest paid	$ 90,726	$ 6,528
Income taxes paid	3,590	1,117
Property and equipment acquired through capital leases	54,775	38,217
Warrants issued as loan acquisition costs related to convertible note payable	35,640
Conversion of convertible note payable	$ 10,000

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (PARENTHETICAL) (USD $)	Jun. 30, 2012	Dec. 31, 2011
Common Stock, par or stated value	$ 0.001	$ 0.001
Common Stock, shares authorized	33,333,333	33,333,333
Common Stock, shares issued	19,595,308	19,449,783
Common Stock, shares outstanding	19,595,308	19,449,783
Convertible notes payable, discount	$ 293,750	$ 364,250

XML

Employment Agreements

3 Months Ended

Jun. 30, 2012

Employment Agreements:

Employment Agreements

9.             EMPLOYMENT AGREEMENTS

Effective January 1, 2012, we entered into a new employment agreement with Mr. Joseph J. Flynn. (the “New Flynn Agreement”).  The New Flynn Employment Agreement provides that Mr. Flynn will be employed as our President and CEO.  The New Flynn Employment Agreement has a term of two years, provides for an annual base salary of $269,087, and will automatically renew for subsequent twelve month terms unless either party provides advance written notice to the other that such party does not wish to renew the agreement for a subsequent twelve months.  Mr. Flynn also receives the customary employee benefits available to our employees.  Mr. Flynn is also entitled to receive a bonus of up to $110,000 per year, the achievement of which is based on Company performance metrics.  We may terminate Mr. Flynn’s employment under this agreement without cause at any time on thirty days advance written notice, at which time Mr. Flynn would receive severance pay for six months and be fully vested in all options and warrants granted to date.

Effective January 1, 2012, we entered into a new employment agreement with Mr. Paul T. Anthony to serve as our Executive Vice President (“EVP”) and CFO.  The employment agreement has a term of two years, and provides for an annual base salary of $219,037.  The agreement will automatically renew for subsequent twelve month terms unless either party provides advance written notice to the other that such party does not wish to renew the agreement for a subsequent twelve months.  Mr. Anthony also receives the customary employee benefits available to our employees.  Mr. Anthony is also entitled to receive a bonus of up to $70,000 per year, the achievement of which is based on Company performance metrics.  We may terminate Mr. Anthony’s employment under this agreement without cause at any time on thirty days advance written notice, at which time Mr. Anthony would receive severance pay for six months and be fully vested in all options and warrants granted to date.

XML

Document and Entity Information	3 Months Ended
	Jun. 30, 2012	Aug. 14, 2012
Document and Entity Information
Entity Registrant Name	AUXILIO INC
Document Type	10-Q
Document Period End Date	Jun. 30, 2012
Amendment Flag	false
Entity Central Index Key	0001011432
Current Fiscal Year End Date	--12-31
Entity Common Stock, Shares Outstanding		19,595,309
Entity Filer Category	Smaller Reporting Company
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Well-known Seasoned Issuer	No
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q2

XML

Concentrations

3 Months Ended

Jun. 30, 2012

Concentrations:

Concentrations

10.          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 three largest customers accounted for approximately 56% of our revenues for the six months ended June 30, 2012.  Net accounts receivable for these customers totaled approximately $3,500,000 as of June 30, 2012.  Our two largest customers accounted for approximately 43% of our revenues for the six months ended June 30, 2011.

XML

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(UNAUDITED) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Revenues	$ 10,722,165	$ 4,803,793	$ 17,260,144	$ 9,486,894
Cost of revenues	9,323,015	4,019,128	15,511,094	8,358,340
Gross profit	1,399,150	784,665	1,749,050	1,128,554
Operating expenses:
Sales and marketing	559,543	467,265	1,251,753	825,406
General and administrative expenses	954,502	884,013	1,842,738	1,728,653
Total operating expenses	1,514,045	1,351,278	3,094,491	2,554,059
Loss from operations	(114,895)	(566,613)	(1,345,441)	(1,425,505)
Other income (expense):
Interest expense	(116,939)	(3,292)	(214,381)	(6,528)
Interest income	16	209	300	616
Change in fair value of derivative liabilities	205,000		(85,000)
Total other income (expense)	88,077	(3,083)	(299,081)	(5,912)
Loss before provision for income taxes	(26,818)	(569,696)	(1,644,522)	(1,431,417)
Income tax expense			(1,600)	(2,400)
Net loss	$ (26,818)	$ (569,696)	$ (1,646,122)	$ (1,433,817)
Net Loss Per Share:
Basic	$ 0.00	$ (0.03)	$ (0.08)	$ (0.07)
Diluted	$ 0.00	$ (0.03)	$ (0.08)	$ (0.07)
Number of weighted average shares:
Basic	19,568,513	19,336,651	19,509,148	19,336,651
Diluted	19,568,513	19,336,651	19,509,148	19,336,651

XML

Net Loss Per Share

3 Months Ended

Jun. 30, 2012

Net Loss Per Share:

Net Loss Per Share

5.             NET (LOSS) PER SHARE

Basic net loss per share is calculated using the weighted average number of shares of our common stock issued and outstanding during a certain period, and is calculated by dividing the 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.  Secured convertible notes, options and warrants are not included in the computation of diluted net loss per share because inclusion would be anti-dilutive.

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

	Three Months Ended June 30,		Six Months Ended June 30,
	2012	2011	2012	2011
Numerator:
Net loss	$   (26,818)	$  (569,696)	$ (1,646,122)	$ (1,433,817)
Denominator:
Denominator for basic calculation weighted average shares	19,568,513	19,336,651	19,509,148	19,336,651
Dilutive common stock equivalents:
Secured convertible notes	-	-	-	-
Options and warrants	-	-	-	-
Denominator for diluted calculation weighted average shares	19,568,513	19,336,651	19,509,148	19,336,651
Net Loss per share:
Basic net loss per share	$           .00	$            (.03)	$            (.08)	$            (.07)
Diluted net loss per share	$          (.00)	$            (.03)	$            (.08)	$            (.07)

XML

Restricted Stock

3 Months Ended

Jun. 30, 2012

Restricted Stock:

Restricted Stock

4.             RESTRICTED STOCK

On May 11, 2011, we amended the joint marketing agreement with Sodexo.  Under the revised agreement, Sodexo will provide additional sales and marketing resources and will expand the marketing effort directed towards existing or potential Sodexo hospital clients.  The term of the agreement is extended to December 31, 2014.  Upon signing the amended agreement, we granted 200,000 shares of restricted stock to Sodexo.  These shares vest as follows:  66,667 immediately, 66,667 on May 11, 2013 and 66,666 on May 11, 2014.  The immediately vested shares resulted in a charge to marketing expense of $54,667.  The cost of the remaining shares will be recognized over the vesting periods using the current market price of the stock at each periodic reporting date.  On April 18, 2012, we granted 23,437 shares as a result of a new sale.  These shares vest as follows:  7,812 on April 11, 2013, 7,812 on April 11, 2014 and 7,813 on April 11, 2015.  For the six months ended June 30, 2012, the cost recognized for these shares totaled $48,533.  Sodexo will be granted additional restricted stock for new sales resulting from their efforts.  Under the amended joint marketing agreement Sodexo will also receive a quarterly commission based on actual revenues derived from these new accounts over the life of the contract along with an annual marketing fee based on  total revenues received by us, excluding for certain existing accounts.  For the six months ended June 30, 2012, commissions and marketing fees due to Sodexo totaled $97,087.

In January 2011, we entered into an independent contractor services agreement with a sales channel partner to provide us marketing services.  In March 2012, this sales channel partner became fully vested in a grant of 85,526 restricted stock units provided for in the agreement.  The cost recognized for the 85,526 restricted stock units was $102,631.

XML

Options and Warrants: Schedule of Employee Service Share-based Compensation, Allocation of Recognized Period Costs (Tables)

3 Months Ended

Jun. 30, 2012

Schedule of Employee Service Share-based Compensation, Allocation of Recognized Period Costs:

Schedule of Employee Service Share-based Compensation, Allocation of Recognized Period Costs

	Three Months Ended June 30,		Six months Ended June 30,
	2012	2011	2012	2011
Cost of revenues	$    27,862	$ 38,028	$       53,164	$     74,151
Sales and marketing	35,759	4,969	45,113	9,861
General and administrative expense	57,473	63,217	114,533	107,980
Total stock based compensation expense	$ 121,094	$ 106,214	$     212,810	$  191,992

XML

Segment Reporting

3 Months Ended

Jun. 30, 2012

Segment Reporting:

Segment Reporting

11.          SEGMENT REPORTING

We have adopted ASC 280, “Segment Reporting”.  Because we operate in one business segment based on our integration and management strategies, segment disclosure has not been presented.

XML

Convertible Notes Payable

3 Months Ended

Jun. 30, 2012

Convertible Notes Payable:

Convertible Notes Payable

8.             CONVERTIBLE NOTES PAYABLE

Effective July 29, 2011, we closed on a private offering of secured convertible notes and warrants (“Units”) for gross proceeds of $1,850,000.  Each of the Units consists 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 $1.50 per share.  The Notes mature July 29, 2014 and are secured by our tangible and intangible assets.  The Notes accrue interest at a rate of eight percent (8%) per annum, compounded annually, and the interest on the outstanding balance of the Notes is payable no later than thirty (30) days following the close of each calendar quarter.  The Notes are 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, including John Pace, Michael Joyce, Mark St. Clare and Michael Vanderhoof, participated in the offering.

We may call the Notes for prepayment (“Call Option”) if (a) our Common Stock closes at or above $2.00 per share for 20 consecutive days; and (b) our Common Stock has had daily trading volume at or above 100,000 shares for the same 20 consecutive days.  Investors shall have 60 days from the date on which we call the Notes to convert the Notes(thereafter we may prepay any outstanding Notes).

At any time prior to the maturity date, the holders of the Notes may elect to convert all or part of the unpaid principal amount of the Notes and any unpaid interest accrued thereon, into shares of our Common Stock.  The conversion price will be $1.00 per share of Common Stock, subject to adjustment upon the occurrence of certain capital events.  If (a) there is any transaction, or a series of transactions, that results, directly or indirectly, in the transfer of 100% of Auxilio including, without limitation, any sale of stock, sale of assets, sale of membership interests, merger or consolidation, reorganization, recapitalization or restructuring, tender or exchange offer, negotiated purchase or  leveraged buyout, and (b) the per share price of our Common Stock in such transaction equals or exceeds $1.00, then the Notes will be automatically converted into our Common Stock.

The Note agreement provides the note holders with certain dilution protections.  If (a) by July 29, 2012, we complete an additional round of debt financing with new investors (“New Debt”) and (b) the New Debt contains more favorable interest rate, payment frequency, amortization, conversion price, warrant coverage and registration rights terms to the New Debt holders than the Notes, then the holder of Notes shall have the option to exchange the Notes for an equal principal amount of new notes with the same terms as the New Debt (the “Exchange Feature”).  The Exchange Feature does not provide for fixed terms for the associated Warrants or can allow for an adjustment to the conversion rate of the Notes.

We allocated the proceeds from the sale of the Notes and Warrants in connection with ASC Topic 470-25.  Due to the existence of the Exchange Feature, the Warrants were determined to not be indexed to its own underlying stock and therefore did not qualify for equity classification.  Therefore the proceeds allocated to the Warrants were determined to be a derivative liability and were measured at fair value.

The conversion rights and the Call Option held by us, or the “Additional Investment Rights”, are embedded derivatives of the host debt contract.  The potential variability of the conversion rate and the terms of the Call Option, due to the existence of the Exchange Feature, also caused the Additional Investment Rights to not qualify for equity classification.  Under the accounting guidance for multiple embedded derivatives, we combined these rights into one embedded derivative and allocated proceeds from the offering to the bundled derivative.  Accordingly, the bundled Additional Investment Rights are accounted for as a derivative liability to be measured at fair value.  We allocated $1,427,000 to the convertible Notes payable, $166,000 to the derivative Warrant liability and $257,000 to the derivative Additional Investments Rights liability.  The debt discount of $423,000 will be amortized as interest expense over the term of the convertible notes payable.  The valuation methodologies for the fair values of the Derivative Warrant Liability and the Derivative Additional Investment Rights Liability are described in Note 9 below.

In April, 2012 a note holder elected to convert $10,000 of his note into 10,000 shares of common stock.

Interest charges associated with the convertible notes payable, including amortization of the discounts and loan acquisition costs totaled $188,211for the six months ended June 30, 2012.

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

XML

Accounts Receivable

3 Months Ended

Jun. 30, 2012

Accounts Receivable:

Accounts Receivable

6.             ACCOUNTS RECEIVABLE

A summary as of June 30, 2012 is as follows:

Trade receivable	$  6,000,500
Customer advances	(269,128)
Allowance for doubtful accounts	-
Total accounts receivable	$  5,731,372

XML

Line of Credit

3 Months Ended

Jun. 30, 2012

Line of Credit:

Line of Credit

7.             LINE OF CREDIT

On May 4, 2012, we entered into a Loan and Security Agreement (the “Loan and Security Agreement”) with AvidBank Corporate Finance, a Division of Avidbank (“AvidBank”).  The Loan and Security Agreement provides us with a revolving line-of-credit up to $2.0 million at an interest rate of prime plus 3.75%; provided, however that at no time shall the rate be less than seven percent (7.0%) per annum.  The amount available to us at any given time is the lesser of (a) $2.0 million, or (b) the amount available under our borrowing base (80% of our eligible accounts, minus (1) accrued client lease payables, and minus (2) accrued equipment pool liability).  While there are outstanding credit extensions, we must maintain a minimum balance of unrestricted cash and cash equivalents at AvidBank of at least $400,000, measured on a monthly basis, and our maximum quarterly consolidated adjusted EBITDA loss must not exceed:  $1,000,000 for the quarter ended March 31, 2012, $250,000 for the quarter ending June 30, 2012, $500,000 for the quarter ending September 30, 2012, and $100,000 for the quarter ending December 31, 2012.  We covenanted not to, among other things, (a) dispose of assets (other than in the ordinary course), (b) change our business, (c) change our CEO or CFO, (d) merge or consolidate with any other person, (e) acquire all or substantially all of the capital stock or property of another person, or (f) become liable for any indebtedness (other than permitted indebtedness, as set forth in the Loan and Security Agreement).  The foregoing description is qualified in its entirety by reference to the Loan and Security Agreement, which is found in our 8-K filing on May 8, 2012 as Exhibit 10.1 and is incorporated herein by reference.

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.  Each holder of convertible promissory notes issued in a private offering in July 2011 agreed to subordinate its right of payment and security interest in and to our assets to AvidBank throughout the term of the Loan and Security Agreement pursuant to a subordination agreement.  In addition, we issued AvidBank a 5-year warrant to purchase up to 72,098 shares of our common stock at an exercise price of $1.387 per share, as additional consideration for the Loan and Security Agreement.  The foregoing descriptions are qualified in their entirety by reference to related agreements.  These agreements are found in our 8-K filing on May 9, 2012 as Exhibits 10.2, 10.3 and 10.4, respectively, and are incorporated herein by reference.

Interest charges associated with the line of credit, including amortization of the discounts and loan acquisition costs totaled $19,264 for the three and six months ended June 30, 2012.

XML

Derivative Liabilities

3 Months Ended

Jun. 30, 2012

Derivative Liabilities:

Derivative Liabilities

9.             DERIVATIVE LIABILITIES

Our derivative liability instruments were measured at fair value using the Black-Scholes model.  We evaluated the use of other valuation models and determined that given the fact pattern these methods were not anticipated to be materially different from the amounts calculated using the Black-Scholes model.  This determination was based on management’s belief that the likelihood of another round of financing prior to the expiration of the Exchange Feature is remote, and another round of financing with terms more favorable to new investors is even more remote.  If another round of financing were to occur, we believe that our need for an additional round of financing would most likely be driven by significant growth in our business.  This growth would likely result in more favorable terms to us, thus rendering the instruments subject to the Exchange Feature with nominal value.  As a result, we believe that the Black-Scholes model was an appropriate method for valuing the warrants and additional investment rights subject to the Exchange Feature.

Derivative Warrant Liability

We have warrants outstanding that were issued in connection with the convertible notes payable financing that have potentially variable terms that could have allowed for the reduction in the exercise price of the warrants in the event that, prior to July 29, 2012, we completed an additional round of debt financing with new investors that called for better economic terms.  However, no such debt financing occurred.  We accounted for these warrants in accordance with FASB ASC Topic 815.

We recognize all of our warrants subject to the Exchange Feature as a derivative liability in our consolidated balance sheet.  The derivative liability is revalued at each reporting period and changes in fair value are recognized currently in the consolidated statements of operations.  The initial recognition and subsequent changes in fair value of the derivative liability have no effect on our cash flows.

The revaluation of these warrants at the end of the reporting period resulted in the recognition of a $20,000 charge within our consolidated statements of operations for the six months ended June 30, 2012, under the caption “Change in fair value of derivative liabilities”.  The fair value of these warrants at June 30, 2012 was $146,000, which is reported on the consolidated balance sheet under the caption “Derivative Warrant Liability”.

Fair Value Assumptions Used in Accounting for Derivative Warrant Liability

We have determined our derivative warrant liability to be a Level 3 fair value measurement.  The fair value as of December, 2011and June 30, 2012 required the data inputs listed in the table below:

	December 31, 2011	June 30, 2012
Exercise price	$   1.50	$   1.50
Term (years)	4.33	3.83
Risk-free interest rate	0.83%	0.72%
Estimated volatility	79%	77%
Dividend rate	0	0
Stock price	$   0.76	$   0.90

Derivative Additional Investment Rights Liability

We have Additional Investment Rights outstanding with terms that could allow for more beneficial consideration to the note holders in the event that, prior to July 29, 2012, we complete an additional round of debt financing with new investors that calls for better economic terms.  We accounted for these Additional Investment Rights in accordance with FASB ASC Topic 815.

We recognize all of our Additional Investment Rights subject to the Exchange Feature as derivative liabilities in our consolidated balance sheet.  The derivative liability is revalued at each reporting period and changes in fair value are recognized in the consolidated statements of operations.  The initial recognition and subsequent changes in fair value of the derivative Additional Investment Rights liability have no effect on our cash flows.

The revaluation of the Additional Investment Rights at each reporting period resulted in the recognition of a $65,000 charge within our consolidated statements of operations for the six months ended June 30, 2012, under the caption “Change in fair value of derivative liabilities”.  The fair value of the Additional Investments Rights at June 30, 2012 was $300,000, which is reported on the consolidated balance sheet under the caption “Derivative Additional Investment Rights Liability”.

Fair Value Assumptions Used in Accounting for Derivative Additional Investment Rights Liability

We have determined that our derivative additional investment rights liability to be a Level 3 fair value measurement.  The fair value as of December 31, 2011and June 30, 2012 required the data inputs listed in the table below:

	December 31, 2011	June 30, 2012
Conversion price (range)	$1.00-$2.00	$1.00-$2.00
Term (years)	2.58	2.08
Risk-free interest rate	0.36%	0.41%
Estimated volatility	79%	77%
Dividend rate	0	0
Stock price	$            0.76	$            0.90

XML

Accounts Receivable: Schedule of Accounts Receivable (Details) (USD $)	Jun. 30, 2012	Dec. 31, 2011
Accounts Receivable, Gross, Current	$ 6,000,500
Customer Advances, Current	(269,128)
Accounts receivable, net	$ 5,731,372	$ 2,032,738

XML

Options and Warrants: Schedule of Share-based Compensation, Stock Options, Activity (Tables)

3 Months Ended

Jun. 30, 2012

Schedule of Share-based Compensation, Stock Options, Activity:

Schedule of Share-based Compensation, Stock Options, Activity

Options	Shares	Weighted Average Exercise Price	Weighted Average Remaining Term in Years	Aggregate Intrinsic Value
Outstanding at December 31, 2011	5,367,053	$    1.03
Granted	481,000	1.10
Exercised	-	-
Cancelled	(44,348)	2.41
Outstanding at June 30, 2012	5,803,705	$    1.03	6.06	$ 492,265
Exercisable at June 30, 2012	4,092,705	$    1.05	4.95	$ 388,136

XML

Derivative Liabilities: Fair Value Inputs, Warrant Liability, Quantitative Information (Tables)

3 Months Ended

Jun. 30, 2012

Fair Value Inputs, Warrant Liability, Quantitative Information:

Fair Value Inputs, Warrant Liability, Quantitative Information

	December 31, 2011	June 30, 2012
Exercise price	$   1.50	$   1.50
Term (years)	4.33	3.83
Risk-free interest rate	0.83%	0.72%
Estimated volatility	79%	77%
Dividend rate	0	0
Stock price	$   0.76	$   0.90

XML

Concentrations (Details) (USD $)	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Dec. 31, 2011
Revenue Generated from Major Customers, percent	56.00%	43.00%
Accounts receivable, net	$ 5,731,372		$ 2,032,738
Customer Concentration Risk
Accounts receivable, net	$ 3,500,000

XML

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY SIX MONTHS ENDED JUNE 30, 2012 (UNAUDITED) (USD $)	Common Stock Amount	Additional Paid-in Capital	Accumulated Deficit	Total Stockholders' Equity
Stockholders' Equity at Dec. 31, 2011	$ 19,451	$ 20,894,653	$ (20,507,535)	$ 406,569
Shares, Outstanding at Dec. 31, 2011	19,449,783
Stock compensation expense for options and warrants granted to employees and directors		212,810		212,810
Common stock granted for consulting services, value	50	52,450	(52,500)
Common stock granted for consulting services, shares	50,000
Restricted stock granted for marketing services, value	86	151,079		151,165
Restricted stock granted for marketing services, shares	85,526
Warrants issued as loan acquisition costs related to convertible note payable		35,640		35,640
Conversion of convertible note payable, value	10	9,990		10,000
Conversion of convertible note payable, shares	10,000
Net loss			(1,646,122)	(1,646,122)
Stockholders' Equity at Jun. 30, 2012	$ 19,597	$ 21,356,622	$ (22,153,657)	$ (777,438)
Shares, Outstanding at Jun. 30, 2012	19,595,309

XML

Options and Warrants

3 Months Ended

Jun. 30, 2012

Options and Warrants:

Options and Warrants

3.             OPTIONS AND WARRANTS

Below is a summary of Auxilio stock option and warrant activity during the six month period ended June 30, 2012:

Options	Shares	Weighted Average Exercise Price	Weighted Average Remaining Term in Years	Aggregate Intrinsic Value
Outstanding at December 31, 2011	5,367,053	$    1.03
Granted	481,000	1.10
Exercised	-	-
Cancelled	(44,348)	2.41
Outstanding at June 30, 2012	5,803,705	$    1.03	6.06	$ 492,265
Exercisable at June 30, 2012	4,092,705	$    1.05	4.95	$ 388,136

Warrants	Shares	Weighted Average Exercise Price	Weighted Average Remaining Term in Years	Aggregate Intrinsic Value
Outstanding at December 31, 2011	3,982,508	$    1.40
Granted	72,098	1.39
Exercised	-	-
Cancelled	-	-
Outstanding at June 30, 2012	4,054,606	$    1.40	2.37	$ 223,222
Exercisable at June 30, 2012	2,179,606	$    1.37	2.37	$ 200,900

During the six months ended June 30, 2012, we granted a total of 481,000 options to our employees and directors to purchase shares of our common stock at an exercise price range of $0.76 to $1.39 per share.  The exercise price equals the fair value of our stock on the grant date.  The options have graded vesting annually over three years starting January 2012.  The fair value of the options was determined using the Black-Scholes option-pricing model.  The assumptions used to calculate the fair market value are as follows:  (i) risk-free interest rate of 0.07% to 0.17%; (ii) estimated volatility of 67.42% to 82.48%; (iii) dividend yield of 0.0%; and (iv) expected life of the options of three years.  In November 2008 we entered into a five year joint marketing agreement with Sodexo Operations, LLC, (“Sodexo”) to provide our document services to Sodexo’s healthcare customer base in the United States.  Sodexo will invest in sales and marketing resources and assist us with marketing our document services to Sodexo’s US healthcare customer base of more than 1,600 hospitals.  Under the terms of the agreement we expect to provide Sodexo with warrants to purchase up to two million shares of our common stock at a price of $1.50 per share.  The first 150,000 warrants vested in June 2009.  An additional 175,000 vested in July 2010 upon the signing of a new customer contract.  The balance of the warrants will vest in increments of between 75,000 and 500,000 shares dependent on the size and number of the new customer contracts that we enter into as a direct result of this agreement.  The expense associated with these performance based warrants will be recognized when the warrants are earned.

For the three and six months ended June 30, 2012 and 2011, stock-based compensation expense recognized in the statement of operations as follows:

	Three Months Ended June 30,		Six months Ended June 30,
	2012	2011	2012	2011
Cost of revenues	$    27,862	$ 38,028	$       53,164	$     74,151
Sales and marketing	35,759	4,969	45,113	9,861
General and administrative expense	57,473	63,217	114,533	107,980
Total stock based compensation expense	$ 121,094	$ 106,214	$     212,810	$  191,992

XML

Derivative Liabilities: Fair Value Assumptions, Derivative Additional Investment Rights Liability (Tables)

3 Months Ended

Jun. 30, 2012

Fair Value Assumptions, Derivative Additional Investment Rights Liability:

Fair Value Assumptions, Derivative Additional Investment Rights Liability

	December 31, 2011	June 30, 2012
Conversion price (range)	$1.00-$2.00	$1.00-$2.00
Term (years)	2.58	2.08
Risk-free interest rate	0.36%	0.41%
Estimated volatility	79%	77%
Dividend rate	0	0
Stock price	$            0.76	$            0.90

XML

Derivative Liabilities: Fair Value Inputs, Warrant Liability, Quantitative Information (Details) (Derivative Financial Instruments, Liabilities, Fair Value, Inputs, Level 3, USD $)	3 Months Ended	12 Months Ended
	Jun. 30, 2012	Dec. 31, 2011
Derivative Financial Instruments, Liabilities | Fair Value, Inputs, Level 3
Fair Value Assumptions, Exercise Price	$ 1.50	$ 1.50
Fair Value Assumptions, Expected Term	3 years 10 months	4 years 4 months
Fair Value Assumptions, Risk Free Interest Rate	0.72%	0.83%
Fair Value Assumptions, Expected Volatility Rate	77.00%	79.00%
Fair Value Assumptions, Expected Dividend Rate	0.00%	0.00%
Share Price	$ 0.90	$ 0.76

XML

Goodwill

3 Months Ended

Jun. 30, 2012

Goodwill:

Goodwill

12.          GOODWILL

We performed an impairment test of goodwill as of December 31,2011 determining that our estimated fair value based on our market capitalization was greater than our carrying amount including goodwill.  We did not perform step 2 since the fair value was greater than the carrying amount.

Although we have experienced a net loss for the six months ended June 30, 2012, these losses were a direct result of operating expenses related to improved sales efforts that recently resulted in our closing six new recurring revenue contracts.  As a result Management did not feel it was necessary to perform an interim impairment test.