0001445866-15-000309.txt : 20150330 0001445866-15-000309.hdr.sgml : 20150330 20150330134824 ACCESSION NUMBER: 0001445866-15-000309 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20141231 FILED AS OF DATE: 20150330 DATE AS OF CHANGE: 20150330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AUXILIO INC CENTRAL INDEX KEY: 0001011432 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 880350448 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-27507 FILM NUMBER: 15733726 BUSINESS ADDRESS: STREET 1: 26300 LA ALAMEDA STREET 2: SUITE 100 CITY: MISSION VIEJO STATE: CA ZIP: 92691 BUSINESS PHONE: 9496140700 MAIL ADDRESS: STREET 1: 26300 LA ALAMEDA STREET 2: SUITE 100 CITY: MISSION VIEJO STATE: CA ZIP: 92691 FORMER COMPANY: FORMER CONFORMED NAME: PEOPLEVIEW INC DATE OF NAME CHANGE: 20040329 FORMER COMPANY: FORMER CONFORMED NAME: E PERCEPTION INC DATE OF NAME CHANGE: 20020118 FORMER COMPANY: FORMER CONFORMED NAME: CORPORATE DEVELOPMENT CENTERS INC DATE OF NAME CHANGE: 19990927 10-K 1 aux10k12312014.htm 10-K aux10k12312014.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.20549
FORM 10-K
 
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2014.
 
[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____ to _____
 
Commission File Number: 000-27507
 
AUXILIO, INC.
 
  (Exact name of registrant as specified in its charter)
 
Nevada
88-0350448
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
  26300 La Alameda, Suite 100, Mission Viejo, California  92691
  (Address of principal executive offices) (Zip Code)
 
  (949) 614-0700
  (Registrant’s telephone number, including area code)
 
  Securities registered under Section 12(b) of the Act: None
  Securities registered under Section 12(g) of the Act:
 
  Common Stock, $.001 par value
  (Title of Class)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes [  ]No [X]
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes [  ]No [X]
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [X]     No [  ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [X]     No [  ]
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [  ]
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.
 

 
 

 

 
Large accelerated filer  ¨
Accelerated filer  ¨
Non-accelerated filer  ¨
Smaller reporting company  ý
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes [  ]                 No [X]
 
The aggregate market value of the registrant’s common stock, $0.001 par value per share (“Common Stock”), held by non-affiliates of the registrant on June 30, 2014, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $24.0 million (based on the average bid price of the Common Stock on that date).  Shares of Common Stock held by each officer and director and each person known to the registrant to own 10% or more of the outstanding voting securities of the registrant were excluded in that such persons may be deemed to be affiliates.  This determination of affiliate status is not a determination for other purposes.  The registrant has one class of securities, its Common Stock.
 
As of March 27, 2015, the registrant had 23,752,536 shares of Common Stock outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE.
 
Part III incorporates by reference certain information from the registrant’s definitive proxy statement (the “Proxy Statement”) for the 2015 Annual Meeting of Stockholders to be filed on or before April 10, 2015.
 

 
 

 

ANNUAL REPORT ON FORM 10-K
 
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2014
 
TABLE OF CONTENTS
 
  Page
   
Cautionary Note Regarding Forward-Looking Statements 1
     
PART I   1
     
     
     
     
     
     
     
  13
     
     
     
     
     
     
     
     
     
  20
     
     
     
     
     
     
  22
     



 
From time to time, we and our representatives may provide information, whether orally or in writing, including certain statements in this Annual Report on Form 10-K (this “Annual Report”), which are deemed to be “forward-looking” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that concern matters that involve risks and uncertainties which could cause actual results to differ materially from those projected in the forward-looking statements. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995 (the “Litigation Reform Act”) and are based on our beliefs as well as assumptions made by us using information currently available. All statements other than statements of historical fact contained in this Annual Report, including statements regarding future events, our future financial performance, our future business strategy and the plans and objectives of management for future operations, are forward-looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” “should” and similar expressions, as they relate to us, are intended to identify forward-looking statements.  Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions.  Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended or using other similar expressions. In accordance with the provisions of the Litigation Reform Act, we are making investors aware that such forward-looking statements, because they relate to future events, are by their very nature subject to many important factors that could cause actual results to differ materially from those contemplated by the forward-looking statements contained in this Annual Report, any exhibits to this Annual Report and other public statements we make.  Such factors are set forth in the “Business” section, the “Risk Factors” section, the “Legal Proceedings” section, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and other sections of this Annual Report, as well as in our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. We expressly disclaim any intent or obligation to update any forward-looking statements after the date hereof to conform such statements to actual results or to changes in our opinions or expectations, except as required by applicable law.
 
 
BUSINESS.
 
Introduction
 
Auxilio, Inc. (including our subsidiaries, Auxilio Solutions, Inc. and Delphiis, Inc.; referred to collectively in this Annual Report, as “Auxilio,” the “Company,” “we,” “our” and “us”) is engaged in the business of providing fully outsourced print management services and IT security consulting services to the healthcare industry.  Auxilio was incorporated in Nevada on August 29, 1995, under the name Corporate Development Centers, Inc.  As a result of a series of transactions, we changed our name to “Auxilio, Inc.” in April 2004.  Our principal executive offices are located at 26300 La Alameda, Suite 100, Mission Viejo, California 92691.
 
For more information on Auxilio and our products and services, please see the section entitled “Principal Products or Services” below or visit our website at www.auxilioinc.com.  The inclusion of our Internet address in this Annual Report does not include or incorporate by reference into this Annual Report any information on our website.  Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports and other filings with the Securities and Exchange Commission (the “SEC”) are generally available through the EDGAR system maintained by the SEC at www.sec.gov.
 
Background
 
Auxilio, Inc., a Nevada corporation, was incorporated on August 29, 1995.  We had no significant operations from our incorporation until approximately January 2002.  In January of 2002, our predecessor-in-interest, e-Perception Technologies, Inc. (“e-Perception”), a Human Resources software concern, completed a tender offer with Corporate Development Centers, Inc. (“CDC”), whereby the stockholders of e-Perception received one share of CDC’s common stock for four shares of e-Perception’s common stock.  As a result of the transaction, e-Perception became a wholly owned subsidiary of CDC, and CDC changed its name to “e-Perception, Inc.”
 

 
Approximately eighteen months after the completion of the tender offer, e-Perception changed its name to “PeopleView, Inc.” and traded on the Over-The-Counter Bulletin Board (the “OTCBB”) under the symbol “PPVW,” and subsequently changed its name to Auxilio, Inc. From approximately January 1, 2003 through March 31, 2004, we 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 of 2004, we entered into an asset purchase and sale agreement with Workstream, Inc. (“Workstream”) whereby we sold to Workstream substantially all of our assets, including, among other things, our software products and related intellectual property, our accounts receivable, certain computer equipment, customer lists, and the “PeopleView, Inc.” name.  Pursuant to the asset purchase and sale agreement, as modified by an addendum, we received cash consideration in the amount of $250,000, 246,900 shares of Workstream’s common stock, and a warrant to purchase an additional 50,000 shares of Workstream’s common stock at an exercise price of $3.00 per share.
 
On April 1, 2004, we acquired Alan Mayo and Associates, Inc. dba The Mayo Group (“TMG”), a managed print company.  TMG provided outsourced print management services to healthcare facilities throughout California, which services we provide as the successor-in-interest to TMG.  After we acquired TMG, we changed our name to “Auxilio, Inc.” and changed the name of TMG’s former subsidiary to “Auxilio Solutions, Inc.”  As more fully described in this Annual Report and in our Current Report on Form 8-K, filed with the SEC, on July 8, 2014, effective July 1, 2014, we acquired Delphiis, Inc., which provides IT security consulting services.  Our Common Stock currently trades on the OTCBB under the symbol “AUXO.”
 
Principal Products and Services
 
We are engaged in the business of providing fully-outsourced managed print services and data security services to the healthcare industry, working exclusively with hospitals and health systems throughout the United States.
 
Our managed print service group is vendor independent, provides workflow solutions, and is a risk-free program with guaranteed savings. We assume all costs related to print environments through customized streamlined and seamless integration of services at predictable fixed rates. Our on-site staff creates manageable, dependable print management programs by managing the back-office processes of our hospital clients.  The process is initiated through a detailed proprietary assessment.  The assessment is a strategic, operational and financial analysis that is performed at the customer’s premises using a combination of proprietary processes and innovative technology for data collection and report generation.  After the assessment and upon engagement, we charge the customer on a per print basis.  This charge covers the entire print management process and includes placement of a highly trained on-site resident team.
 
Our data security group is built on four pillars to serve the most common security needs in healthcare: Security Process and Program Development, Regulatory and Penetration Assessments, Incident and Breach Response and Delphiis™ IT Risk Manager SaaS Solution. Through our proven and prescriptive methodology we help build the foundation needed to ensure the confidentiality, integrity and security of patient health information (PHI). And our Delphiis™ application suite streamlines how hospitals and health systems perform annual and on-going risk assessments on their business associates, clinics, projects and hospitals.
 
Competition
 
We operate in a highly competitive market.  The majority of the competition in the healthcare industry market for print management services comes from the large photocopy/multi-functional digital device manufacturers such as Xerox, Canon, Konica Minolta, Ricoh and Sharp.  The competitive landscape also contains a number of regional and local equipment dealers and distributors that exist in the communities which the hospitals serve.  In addition, we compete with in-house departments performing the functions that we are seeking to have them outsource to us.
 



The majority of the competition in the healthcare industry market for data security services comes from large or niche consulting and technology firms such as Accenture, Leidos Health, Dell Secureworks, Accuvant, and Coal Fire.
 
Nevertheless, our analysis of the competitive landscape shows a very strong opportunity for fully-outsourced managed print services and data security services to the healthcare industry, and we believe that we have a strong competitive position in the marketplace due to a number of important factors:
 
 
·
We are entirely focused on the healthcare industry.  We are not aware of any other vendor/service provider which has its entire business dedicated to solving issues within the healthcare provider industry with the expertise and knowledge base that we have.  This is unmatched in the market.
 
 
·
By focusing solely on the hospital campus, we enjoy much lower turn-around times for service, greater up-sell opportunities and a much deeper service relationship with the customer.
 
 
·
We have more experience building and implementing security programs than other vendor/service providers and a key principal on our team wrote the definitive book on security program development.
 
 
·
We have technology that is revolutionizing the way in which healthcare providers perform their annual HIPAA analysis, regulatory and on-going risk assessments, by making it fast, effective and affordable for both the assessor and responder.
 
 
·
We believe that we are the only provider offering a unique approach to managed security services.  We can deploy a knowledgeable resource allocated 100% to perform a predefined security role on-site or virtually for a defined amount of time, which results in hospital gaining the staff with expertise they need.
 
 
·
We have a unique approach to providing fully-outsourced managed print service programs.  Our program is completely outsourced and hospitals need only pay a single invoice.  We operate the print management process as a department in the hospital with full-time staff on-site.  In contrast, other print vendors and dealers in the majority of instances do not provide full-time staff on-site, which results in delays in providing service and supplies to the hospitals.
 
 
·
We are not restricted to any single equipment vendor, which allows us to bring the best printer and copier hardware and software solutions to our customers.  Our approach is to use the most appropriate technology to provide a superior solution without any prejudice as to equipment.
 
 
·
We maintain a daily connection with the hospital, which allows us to provide a detailed strategy and plan on printer and copier equipment acquisitions saving the organization a great deal of time, effort and money in this process.
 
Customers
 
The majority of our customers are hospitals and their related off-site facilities.  The loss of any key customer could have a material adverse effect upon our financial condition, business, prospects and results of operation.  During the year ended December 31, 2014, our three largest customers represented approximately 42% of our revenues.
 
Intellectual Property
 
We maintain a database that contains our managed print services customers’ image and document outputs for certain periods of time, for each piece of machinery maintained at the customer’s location and trends for each of the foregoing.  Our database allows us to anticipate our customers’ future needs and to meet those needs. In addition, we maintain a database that contains information related to our current security customers and their assigned responders who use our Delphiis™ IT Risk Manager application suite.
 


 
We have a patent pending for our Delphiis™ IT Risk Manager and have not applied or been granted a patent with respect to any managed print service technology, or processes, as related to document and image management.  We have trademarked certain process documents and related marketing documents.  The most valuable of which is the Image Management Maturity Model which allows us to detail processes and offer a service that is duplicable in distributed regions.
 
Employees
 
As of December 31, 2014, we had 211 full-time employees and three part-time employees, including 188 employees engaged in providing services, 9 employees engaged in sales and marketing, and 14 employees engaged in general and administrative activities.  Our employees are not represented by any collective bargaining agreement, and we have never experienced a work stoppage.  We believe our employee relations are good.
 
RISK FACTORS
 
Before deciding to purchase, hold or sell our Common Stock, you should carefully consider the risks described below in addition to the other information contained in this Annual Report and in our other filings with the SEC, including subsequent reports on Forms 10-Q and 8-K.  The risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business.  If any of these known or unknown risks or uncertainties actually occurs with material adverse effects on Auxilio, our business, financial condition, results of operations and/or liquidity could be seriously harmed.  In that event, the market price of our Common Stock will likely decline, and you may lose all or part of your investment.
 
Risks Related to Our Industry
 
We face substantial competition from better established companies that may offer similar products and services at a lower cost to our customers, resulting in a reduction in the sale of our products and services.
 
The market for our products and services is competitive and is likely to become even more competitive in the future.  Increased competition could result in pricing pressures, reduced sales, reduced margins or the failure of our products and services to achieve or maintain market acceptance, any of which would have a material adverse effect on our business, results of operations and financial condition.  Many of our current and potential competitors enjoy substantial competitive advantages, such as:
 
 
·
greater name recognition and larger marketing budgets and resources;
 
·
established marketing relationships and access to larger customer bases;
 
·
substantially greater financial, technical and other resources; and
 
·
larger technical and support staffs.
 
As a result, our competitors may be able to respond more quickly than we can to new or changing opportunities, technologies, standards or customer requirements.  For all of the foregoing reasons, we may not be able to compete successfully against our current and future competitors.
 
We are dependent upon our vendors to continue to supply us equipment, parts, supplies, and services at comparable terms and price levels as the business grows.
 
Our access to equipment, parts, supplies, and services depends upon our relationships with, and our ability to purchase these items on competitive terms from our principal vendors.  We rarely enter into long-term supply contracts with these vendors and we have no current plans to change this in the future.  These vendors are not required to use us to distribute their equipment and are free to change the prices and other terms at which they sell to us.  In addition, we compete with the selling efforts of some of these vendors.  Significant deterioration in relationships with, or in the financial condition of, these significant vendors could have an adverse impact on our ability to sell equipment as well as our ability to provide effective service and technical support.  If one of these vendors terminates or significantly curtails its relationship with us, or if one of these vendors ceases operations, we would be forced to expand our relationships with our existing vendors or seek out new relationships with previously unused vendors.
 


Risks Related to Our Business
 
A substantial portion of our business is dependent on our largest customers.
 
The loss of any key customer could have a material adverse effect upon our financial condition, business, prospects and results of operation.  Our three largest customers represented approximately 42% of our revenues for the year ended December 31, 2014.  We anticipate that these customers will represent approximately 40% of revenue for 2015; therefore the loss of one or more of these customers may contribute to our inability to operate as a going concern and may require us to obtain equity funding or debt financing to continue our operations.  We cannot be certain that we will be able to obtain such financing on commercially reasonable terms, or at all.
 
Healthcare legislation and regulation.
 
The healthcare industry is highly regulated.  Recent legislation such as the Patient Protection and Affordable Care Act of 2010 will likely change how healthcare services are provided and managed.  In addition, legislation related to electronic medical records may impact our business.  In 2009, the American Recovery and Reinvestment Act of 2009 included incentives and penalties related to electronic medical records.  For example, Medicare/Medicaid reimbursements will be less for providers who fail to use electronic medical records by 2015.
 
The use of electronic medical records does not necessarily mean a hospital’s printing demands will decrease, but we cannot be sure whether this will be the case.  Increased adoption and use of electronic medical records may negatively impact our business.
 
New legislation or regulation.
 
As to prospective legislation and regulation, we cannot determine what effect additional state or federal governmental legislation, regulations, or administrative orders would have on our business in the future.  New legislation or regulation may require the reformulation of our business to meet new standards, require us to cease operations, impose stricter qualification and/or registration standards, impose additional record keeping, or require expanded consumer protection measures.
 
We may be unable to recruit and maintain our senior management and other key personnel on whom we are dependent.
 
We are highly dependent upon senior management and key personnel, and we do not carry any life insurance policies on such persons.  The loss of any of our senior management, or our inability to attract, retain and motivate the additional highly-skilled employees and consultants that our business requires, could substantially hurt our business, prospects, financial condition and results of operations.  In addition, we rely on the ability of our management team to work together effectively.  If our management team fails to work together effectively, our business could be harmed.
 
The market may not accept our products and services and we may not be able to continue our business operations; or if the market is receptive to our products but not our services, our revenues and profitability will be harmed.
 
Our products and services are targeted to the healthcare market, a market in which there are many competing service providers.  Accordingly, the demand for our products and services is very uncertain.  The market may not accept our products and services.  Even if our products and services achieve market acceptance, our products and services may fail to adequately address the market’s requirements.
 



In addition, if we are able to sell our products but are unable to provide ongoing services, our revenues and profitability will be harmed.  Our services are integral to the successful deployment of our solutions.  If we do not effectively service and support our customers, our revenues and operating results would be harmed.
 
Defects, errors or vulnerabilities in our solutions or the failure of our solutions to prevent a security breach could harm our reputation and adversely impact our operating results.
 
Defects may cause our solutions to be vulnerable to security attacks, cause them to fail to help secure networks or temporarily interrupt customers’ networking traffic. Because the techniques used by computer hackers to access or sabotage networks change frequently and generally are not recognized until launched against a target, our solutions may not be able to protect our customers’ networks. Our security solutions may also fail to detect or prevent viruses, worms or similar threats due to a number of reasons such as the evolving nature of such threats and the continual emergence of new threats that we may fail to add to our threat intelligence database or other virus databases in time to protect our customers’ networks. In addition, defects or errors in our solutions could result in a failure to effectively update customers’ solutions and thereby leave our customers vulnerable to attacks. Our facilities may experience technical failures and downtime, may fail to distribute appropriate updates, or may fail to meet the increased requirements of a growing customer base, any of which could temporarily or permanently expose our customers’ networks, leaving their networks unprotected against the latest security threats. Any defects, errors or vulnerabilities in our solutions could result in:

·
expenditure of significant financial and product development resources in efforts to analyze, correct, eliminate or work around errors or defects or to address and eliminate vulnerabilities;

·
loss of existing or potential customers;

·
delayed or lost revenue;

·
delay or failure to attain market acceptance;

·
negative publicity, which will harm our reputation and brand;

·
an increase in warranty claims compared with our historical experience, or an increased cost of servicing warranty claims, either of which would adversely affect our operating results; and

·
litigation, regulatory inquiries, or investigations that may be costly and harm our reputation and brand.
 
If our security measures are breached or unauthorized access to customer data is otherwise obtained or our customers experience data losses, our brand, reputation and business could be harmed and we may incur significant liabilities.
 
Our customers rely on our security solutions to secure their data, which may include financial records, credit card information, business information, customer information, health information, other personally identifiable information or other sensitive personal information. A breach of our network security and systems or other events that cause the loss or public disclosure of, or access by third parties to, our customers’ stored files or data could have serious negative consequences for our business, including possible fines, penalties and damages, reduced demand for our solutions, an unwillingness of our customers to use our solutions, harm to our brand and reputation, and time-consuming and expensive litigation. The techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently, often are not recognized until launched against a target, and may originate from less regulated or remote areas around the world. As a result, we may be unable to proactively prevent these techniques, implement adequate preventative or reactionary measures, or enforce the laws and regulations that govern such activities. If our customers experience any data loss, or any data corruption or inaccuracies, whether caused by security breaches or otherwise, our brand, reputation and business could be harmed. Moreover, if a high profile security breach occurs with respect to another provider of information security services and solutions, our clients and potential clients may lose trust in the security of our business model generally, which could adversely impact our ability to retain existing clients or attract new ones.


 
If an actual or perceived breach of network security occurs in our internal systems, our services may be perceived as not being secure and clients may curtail or stop using our solutions.
 
As a provider of network security solutions, we are a high profile target and our networks and solutions may have vulnerabilities that may be targeted by hackers and could be targeted by attacks specifically designed to disrupt our business and harm our reputation. We will not succeed unless the marketplace continues to be confident that we provide effective network and security protection. If an actual or perceived breach of network security occurs in our internal systems it could adversely affect the market perception of our solutions. We may not be able to correct any security flaws or vulnerabilities promptly, or at all. In addition, such a security breach could impair our ability to operate our business, including our ability to provide subscription and support services to our customers. If this happens, our business and operating results could be adversely affected.

Because our solutions could be used to protect personal information, privacy concerns could result in additional cost and liability to us or inhibit sales of our solutions.
 
Personal privacy has become a significant issue in the United States and in many other countries where we offer our solutions. The regulatory framework for privacy issues worldwide is currently complex and evolving, and it is likely to remain uncertain for the foreseeable future. Many federal, state and foreign government bodies and agencies have adopted or are considering adopting laws and regulations regarding the collection, use and disclosure of personal information. In the United States, these include rules and regulations promulgated under the authority of the Federal Trade Commission, the Health Insurance Portability and Accountability Act of 1996 and state breach notification laws.
 
In addition to government regulation, privacy advocacy and industry groups may propose new and different self-regulatory standards that either legally or contractually apply to us. Because the interpretation and application of privacy and data protection laws are still uncertain, it is possible that these laws may be interpreted and applied in a manner that is in conflict with one another, and is inconsistent with our existing data management practices or the features of our solutions. If so, in addition to the possibility of fines, lawsuits and other claims, we could be required to fundamentally change our business activities and practices or modify our software, which could have an adverse effect on our business. Any inability to adequately address privacy concerns, even if unfounded, or comply with applicable privacy or data protection laws, regulations and policies, could result in additional cost and liability to us, damage our reputation, inhibit sales and harm our business.
 
Furthermore, the costs of compliance with, and other burdens imposed by, the laws, regulations, and policies that are applicable to the businesses of our customers may limit the use and adoption of, and reduce the overall demand for, our solutions. Privacy concerns, whether valid or not valid, may inhibit market adoption of our solutions particularly in certain industries and foreign countries.

Our ability to sell our products and services is dependent on the quality of our technical support services, and our failure to offer high quality technical support services would have a material adverse effect on our sales and results of operations.

Once our products are deployed within our end-customers’ networks, our end-customers depend on our technical support services, as well as the support of our channel partners, to resolve any issues relating to our products. If we or our channel partners do not effectively assist our customers in deploying our products, succeed in helping our customers quickly resolve post-deployment issues, and provide effective ongoing support, our ability to sell additional products and services to existing customers would be adversely affected and our reputation with potential customers could be damaged. Many large end-customers require higher levels of support than smaller end-customers because of their more complex deployments. If we fail to meet the requirements of our larger end-customers, it may be more difficult to execute on our strategy to increase our penetration with enterprises and other service providers.

As a result, our failure to maintain high quality support services would have a material adverse effect on our business, financial condition and results of operations.
 



Achieving the desired benefits of the acquisition of Delphiis, Inc. may be subject to a number of challenges and uncertainties which make it hard to predict the future success of each entity.
 
We acquired Delphiis, Inc. with expected benefits including, among other things, operating efficiencies, procurement savings, innovation, sharing of best practices and increased market share that may allow for future growth.  Achieving the anticipated benefits may be subject to a number of significant challenges and uncertainties, including, without limitation, whether unique corporate cultures will work collaboratively in an efficient and effective manner, the coordination of separate organizations, the possibility of imprecise assumptions underlying expectations regarding potential synergies and the integration process, unforeseen expenses and delays, and competitive factors in the marketplace.  We could also encounter unforeseen transaction and integration-related costs or other circumstances such as unforeseen liabilities or other issues.  Many of these potential circumstances are outside of our control and any of them could result in increased costs, decreased revenue, decreased synergies and the diversion of management time and attention.  If we are unable to achieve our objectives within the anticipated time frame, or at all, the expected benefits may not be realized fully or at all, or may take longer to realize than expected, which could have an adverse effect on our business, financial condition and results of operations.
 
We may need additional capital in the future and, if such capital is not available on terms acceptable to us or available to us at all, this may impact our ability to continue to grow our business operations.
 
We may need capital in the future to expand our business operations.  If we need capital, we cannot be certain that it will be available on terms acceptable to us or available to us at all.  In the event we need to raise capital, we may not be able to:
 
 
·
develop or enhance our service offerings;
 
·
take advantage of future opportunities; or
 
·
respond to customers and competition.
 
Risks Related to the Market for Our Securities
 
Because the public market for shares of our Common Stock is limited, stockholders may be unable to resell their shares of Common Stock.
 
Currently, there is only a limited public market for our Common Stock on the OTCBB and our stockholders may be unable to resell their shares of Common Stock.  Currently, the average daily trading volume of our Common Stock is not significant, and it may be more difficult for you to sell your shares in the future, if at all.
 
The development of an active trading market depends upon the existence of willing buyers and sellers who are able to sell shares of our Common Stock as well as market makers willing to create a market in such shares.  Under these circumstances, the market bid and ask prices for the shares may be significantly influenced by the decisions of the market makers to buy or sell the shares for their own account.  Such decisions of the market makers may be critical for the establishment and maintenance of a liquid public market in our Common Stock.  Market makers are not required to maintain a continuous two-sided market and are free to withdraw quotations at any time.  We cannot assure our stockholders that an active public trading market for our Common Stock will develop or be sustained.
 
The price of our Common Stock may be volatile and could decline in value, resulting in loss to our stockholders.
 
The market for our Common Stock is volatile, having ranged in the last twelve months from a low of $0.81 to a high of $1.72 on the OTCBB.  The market price for our Common Stock has been, and is likely to continue to be, volatile.  The following factors may cause significant fluctuations in the market price of shares of our Common Stock:
 
 
·
fluctuations in our quarterly revenues and earnings or those of our competitors;
 



 
·
variations in our operating results compared to levels expected by the investment community;
 
 
·
announcements concerning us or our competitors;
 
 
·
announcements of technological innovations;
 
 
·
sale or purchases of shares by traders or other investors;
 
 
·
market conditions in the industry; and
 
 
·
the conditions of the securities markets.
 
The factors discussed above may depress or cause volatility of our share price, regardless of our actual operating results.  In addition, the highly volatile nature of our stock price may cause investment losses for our stockholders.  In the past, securities class action litigation has often been brought against companies following periods of volatility in the market price of their securities. If securities class action litigation is brought against us, such litigation could result in substantial costs while diverting management’s attention and resources.
 
There are a large number of shares of Common Stock that may be issued or sold, and if such shares are issued or sold, the market price of our Common Stock may decline.
 
As of December 31, 2014, we had 23,623,619 shares of our Common Stock outstanding.
 
If all warrants, options and restricted stock grants outstanding as of December 31, 2014 are exercised prior to their expiration, up to approximately 7.5 million additional shares of Common Stock could become freely tradable. Such sales of substantial amounts of Common Stock in the public market could adversely affect the prevailing market price of our Common Stock and could also make it more difficult for us to raise funds through future offerings of Common Stock. Additionally we have $257,835 in debt which was converted to stock in February 2015.
 
Our stockholders approved a reverse stock split for our Common Stock at the 2014 Annual Meeting which, if effected, would have certain dilutive effects, among other effects, on our Common Stock
 
At the 2014 annual meeting of stockholders, our stockholders approved a reverse stock split at a ratio of not less than one-for-one-and-one-half (1:1.5) and not more than one-for-three (1:3) (the “Reverse Stock Split”).  The decision to proceed with the Reverse Stock Split is at the discretion of the Board of Directors.  If the Reverse Stock Split is effected and the market price of our Common Stock declines, the percentage decline may be greater than would occur in the absence of the Reverse Stock Split. The market price of our Common Stock will also be based on performance and other factors, which are unrelated to the number of shares outstanding.
 
There can be no assurance that the Reverse Stock Split will result in any particular price for our Common Stock.  As a result, the trading liquidity of our Common Stock may not necessarily improve.
 
There can be no assurance that the market price per share of our Common Stock after the Reverse Stock Split will increase in proportion to the reduction in the number of shares of our Common Stock outstanding before the Reverse Stock Split.  Accordingly, the total market capitalization of our Common Stock after the Reverse Stock Split may be lower than the total market capitalization before the Reverse Stock Split. Moreover, in the future, the market price of our Common Stock following the Reverse Stock Split may not exceed or remain higher than the market price prior to the Reverse Stock Split.
 
Because the number of issued and outstanding shares of Common Stock would decrease as a result of the Reverse Stock Split, the number of authorized but unissued shares of Common Stock would increase on a relative basis. If we issue additional shares of Common Stock, the ownership interest of our current stockholders would be diluted, possibly substantially.

 
 
The proportion of unissued, authorized shares to issued shares could, under certain circumstances, have an anti-takeover effect. For example, the issuance of a large block of Common Stock could dilute the stock ownership of a person seeking to effect a change in the composition of our Board of Directors or contemplating a tender offer or other transaction for the combination of Auxilio with another company. The Reverse Stock Split, however, was not proposed in response to any effort of which we are aware to accumulate shares of our Common Stock or obtain control of the Company, nor is it part of a plan by management to recommend a series of similar amendments to the Board of Directors and stockholders.

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

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

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

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

If our Common Stock is determined to be a “penny stock,” a broker-dealer may find it more difficult to trade our Common Stock and an investor may find it more difficult to acquire or dispose of our Common Stock in the secondary market.
 
Our Common Stock may be subject to the so-called “penny stock” rules.  The SEC has adopted regulations that define a “penny stock” to be any equity security that has a market price per share of less than $5.00, subject to certain exceptions, such as any securities listed on a national securities exchange.  For any transaction involving a “penny stock,” unless exempt, the rules impose additional sales practice requirements on broker-dealers, subject to certain exceptions.  If our Common Stock is determined to be a “penny stock,” a broker-dealer may find it more difficult to trade our Common Stock and an investor may find it more difficult to acquire or dispose of our Common Stock on the secondary market.
 
We do not intend to pay dividends.
 
We have never declared or paid any cash dividends on our Common Stock.  We do not anticipate paying dividends on our Common Stock in the foreseeable future.  We may not have sufficient funds to legally pay dividends.  Even if funds are legally available to pay dividends, we may nevertheless decide in our sole discretion not to pay dividends and to retain any future earnings to fund growth.
 
Other Risks
 
It may be difficult for a third party to acquire us even if doing so would be beneficial to our stockholders.
 
Some provisions of our Articles of Incorporation, as amended, and Bylaws, as well as some provisions of Nevada or California law, may discourage, delay or prevent third parties from acquiring us, even if doing so would be beneficial to our stockholders.
 



As a public company, we are subject to complex legal and accounting requirements that will require us to incur significant expenses.
 
As a public company, we are subject to numerous legal and accounting requirements that do not apply to private companies. The cost of compliance with many of these requirements is material, not only in absolute terms but, more importantly, in relation to the overall scope of the operations of a small company.  The cost of such compliance may prove to be a substantial competitive disadvantage vis-à-vis our privately held and larger public competitors.
 
The impact of any deterioration of the global credit markets, financial services industry and U.S. economy may negatively affect our business and our ability to obtain capital, if needed.
 
A deterioration in the global credit markets, the financial services industry and the U.S. economy could result in a period of substantial turmoil.  The impact of these events on our business and the severity of an economic crisis is uncertain.  It is possible that a crisis in the global credit markets, the financial services industry or the U.S. economy could adversely affect our business, vendors and prospects as well as our liquidity and financial condition.  This could impact our ability to increase our customer base and generate positive cash flows.  Although we were able to raise additional working capital through convertible note agreements and private placement offerings of our Common Stock, we may not be able to continue this practice in the future or we may not be able to obtain additional working capital through other debt or equity financings.  In the event that sufficient capital cannot be obtained, we may be forced to minimize growth to a point that would be detrimental to our business development activities.  These courses of action may be detrimental to our business prospects and result in material charges to our operations and financial position.  In the event that any future financing should take the form of the sale of equity securities, the current equity holders may experience dilution of their investments.
 
The forward looking statements contained in this Annual Report may prove incorrect.
 
This Annual Report contains certain forward-looking statements. These forward-looking statements are based largely on our current expectations and are subject to a number of risks and uncertainties. Actual results could differ materially from these forward-looking statements. In addition to the other risks described elsewhere in this “Risk Factors” discussion, important factors to consider in evaluating such forward-looking statements include: (i) changes to external competitive market factors or in our internal budgeting process which might impact trends in our results of operations; (ii) anticipated working capital or other cash requirements; (iii) changes in our business strategy or an inability to execute our strategy due to unanticipated changes in our industry; and (iv) various competitive factors that may prevent us from competing successfully in the marketplace. In light of these risks and uncertainties, many of which are described in greater detail elsewhere in this “Risk Factors” discussion, there can be no assurance that the events predicted in forward-looking statements contained in this Annual Report will, in fact, transpire.  Any negative change in the factors listed above could adversely affect the financial condition and operating results of the Company and its products and services.
 
UNRESOLVED STAFF COMMENTS.
 
None.
 
PROPERTIES.
 
We lease approximately 10,000 square feet of office space in one building located at 26300 La Alameda, Suite 100, Mission Viejo, California  92691. The lease terminates in September of 2015. We expect that the current leased premises will be satisfactory until the future growth of our business operations necessitates an increase in office space.  There is an ample supply of office space in the Orange County, California area and we do not anticipate any problems in securing additional space if, and when, necessary.
 



LEGAL PROCEEDINGS.
 
We are not a party to any material legal proceedings, nor has any material proceeding been terminated during the fiscal year ended December 31, 2014.
 
MINE SAFETY DISCLOSURES.
 
              Not applicable.


 
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
 
Market Information
 
Our Common Stock is traded on the OTCBB under the symbol “AUXO.”  As such, the market for our Common Stock may be less liquid, receive less coverage by security analysts and news media, and generate lower prices than might otherwise be obtained if it were listed on a national exchange.
 
The following table presents quarterly information on the high and low sales prices of our Common Stock for the fiscal year ending December 31, 2015 (through March 27, 2015), and the fiscal years ended December 31, 2014 and 2013, furnished by the OTCBB.
 
   
High
   
Low
 
Fiscal Year Ending December 31, 2015
           
First Quarter (through March 27, 2015)
  $ 1.25     $ 0.96  
                 
Fiscal Year Ended December 31, 2014
               
First Quarter
  $ 1.72     $ 1.18  
Second Quarter
  $ 1.72     $ 1.21  
Third Quarter
  $ 1.33     $ 0.96  
Fourth Quarter
  $ 1.17     $ 0.81  
                 
Fiscal Year Ended December 31, 2013
               
First Quarter
  $ 1.03     $ 0.82  
Second Quarter
  $ 1.03     $ 0.81  
Third Quarter
  $ 1.05     $ 0.81  
Fourth Quarter
  $ 1.59     $ 0.95  

The high and low sales prices for our Common Stock on March 27, 2015, as quoted on the OTCBB, were $1.21 and $1.16, respectively.
 
Holders
 
On March 27, 2015, we had approximately 115 stockholders of record.
 
Dividends
 
We have never paid cash dividends on our Common Stock and do not anticipate paying such dividends in the foreseeable future.  The future payment of dividends, if any, will be determined by our Board of Directors (the “Board”) in light of conditions then existing, including our financial condition and requirements, future prospects, restrictions in financing agreements, business conditions and other factors deemed relevant by the Board.
 
Repurchases
 
During the fiscal year ended December 31, 2014, we did not repurchase any of our securities.
 
Securities Authorized for Issuance under Equity Compensation Plans
 
The following table provides certain information as of December 31, 2014 with respect to our existing equity compensation plans under which shares of our Common Stock are authorized for issuance.
 



Plan
 
Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights
   
Weighted Average Exercise Price of Outstanding Options, Warrants and Rights
   
Number of Securities Remaining Available for Future Issuances Under Plans (excluding securities reflected in column (a))
 
   
(a)
   
(b)
   
(c)
 
Equity compensation plans approved by security holders (1)
    4,886,829     $ 1.05       688,484  
Equity compensation plans not approved by security holders (2)
    2,208,565     $ 1.11       -  
Restricted stock units (3)
    400,000       -       -  
Total
    7,495,384               688,484  

(1)
These plans consist of the 2001 Stock Option Plan, the 2003 Stock Option Plan, the 2004 Stock Option Plan, the 2007 Stock Option Plan and the 2011 Stock Incentive Plan.
(2)
From time to time and at the discretion of the Board, we may issue warrants and stock options to our key individuals or officers as performance-based compensation.  We have also issued warrants to debt holders in connection with a convertible debt agreement and to Cambria Capital, LLC in consideration for financing arrangements.
(3)
The Board has authorized the issuance of restricted stock units to Mike Gentile in connection with his employment agreement. As of December 31, 2014, these shares have not been issued.
 
SELECTED FINANCIAL DATA.
 
As a smaller reporting company, we are not required to include this information in our Annual Report on Form 10-K.
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
The following discussion presents information about our consolidated results of operations, financial condition, liquidity and capital resources and should be read in conjunction with our consolidated financial statements and the notes thereto beginning on page F-1 of this Annual Report.
 
Overview
 
We provide fully-outsourced managed print services and data security services to the healthcare industry that help reduce expenses, increase efficiency and mitigate risks across a hospital or health system. We work exclusively in healthcare and intimately understand the needs we solve on a daily basis.
 
Our managed print services group helps hospitals and health systems reduce expenses and create manageable, dependable document image management programs by managing their back-office processes.  The process is initiated through a detailed proprietary managed print services assessment.  The assessment is a strategic, operational and financial analysis that is performed at the customer’s premises using a combination of proprietary processes and innovative web-based technology for data collection and report generation.  After the assessment and upon engagement, we charge the customer on a per print basis.  This charge covers the entire print management process and includes the placement of a highly trained resident team on-site to manage the entire process.  
 
Our data security group is built on four pillars that addresses the most common security needs in healthcare: Security Process and Program Development, Regulatory and Penetration Assessments, Incident and Breach Response and Delphiis™ IT Risk Manager SaaS Solution. Our team has the expertise needed to help hospitals and health systems build the foundation needed to ensure the confidentiality, integrity and security of patient health information (PHI). Our technology revolutionizes the way in which hospitals and health systems perform their annual HIPAA analysis, regulatory and on-going risk assessments by making it fast, effective and affordable.
 


Application of Critical Accounting Policies
 
The SEC defines critical accounting policies as those that are, in management’s view, most important to the portrayal of our financial condition and results of operations and most demanding of our judgment. The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which were prepared in accordance with accounting principles generally accepted in the U.S., which is referred to as “GAAP.”  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities.  On an on-going basis, we evaluate these estimates, including those related to stock-based compensation, customer programs and incentives, bad debts, supply inventories, intangible assets, income taxes, contingencies and litigation.  We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.
 
We consider the following accounting policies to be those most important to the portrayal of our financial condition and those that require the most subjective judgment:
 
Revenue recognition and deferred revenue
 
The Company derives its revenue from four sources: (1) managed print services revenue; (2) equipment revenue; (3) software subscription services revenue, which is comprised of subscription fees from customers accessing the Company’s enterprise cloud computing services and customers purchasing additional ongoing managed services beyond the standard support that is included in the basic software subscription fees; and (4) consulting services such as process mapping, project management and implementation services.
 
The Company commences revenue recognition when all of the following conditions are satisfied:
 
 
·
there is persuasive evidence of an arrangement;
 
·
the service has been or is being provided to the customer;
 
·
the collection of the fees is reasonably assured; and
 
·
the amount of fees to be paid by the customer is fixed or determinable.
 
 
·
Managed Print Services and MFD equipment revenue
 
Revenue is recognized pursuant to ASC Topic 605, “Revenue Recognition” (ASC 605).  Monthly service and supply revenue is earned monthly during the term of the contract, as services and supplies are provided. Revenues from equipment sales transactions are earned when there is persuasive evidence of an arrangement, delivery has occurred, the sales price has been determined and collectability has been reasonably assured. For equipment that is to be placed at a customer’s location at a future date, revenue is deferred until the placement of such equipment.
 
We enter into arrangements that include multiple deliverables, which typically consist of the sale of Multi-Function Device (“MFD”) equipment and a support services contract.  We account for each element within an arrangement with multiple deliverables as separate units of accounting.  Revenue is allocated to each unit of accounting under the guidance of ASC Topic 605-25, Multiple-Deliverable Revenue Arrangements, which provides criteria for separating consideration in multiple-deliverable arrangements by establishing a selling price hierarchy for determining the selling price of a deliverable.  The selling price used for each deliverable is based on vendor-specific objective evidence (“VSOE”) if available, third-party evidence if VSOE is not available, or estimated selling price if neither VSOE nor third-party evidence is available.  We are required to determine the best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a standalone basis.  We generally do not separately sell MFD equipment or service on a standalone basis.

 
Therefore, we do not have VSOE for the selling price of these units. As we purchase the equipment, we have third-party evidence of the cost of this element.  We estimate the proceeds from the arrangement to allocate to the service unit based on historical cost experiences.  Based on the relative costs of each unit to the overall cost of the arrangement, we utilize the same relative percentage to allocate the total arrangement proceeds.
 
 
·
Software Subscriptions and Managed Services Revenue
 
Software subscriptions and managed services revenues are recognized ratably over the contract terms beginning on the commencement date of each contract, which is the date the Company’s service is made available to customers.
 
Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on whether the revenue recognition criteria have been met.
 
The Company’s software subscription service arrangements are non-cancelable and do not contain refund-type provisions.
 
 
·
Consulting Service Revenues
 
The majority of the Company’s consulting services contracts are on a time and material basis. When these services are not combined with subscription revenues as a single unit of accounting, these revenues are recognized as the services are rendered for time and material contracts, and when the milestones are achieved and accepted by the customer for fixed price contracts.

Accounts receivable valuation and related reserves
 
We estimate the losses that may result from that portion of our accounts receivable that may not be collectible as a result of the inability of our customers to make required payments.  Management specifically analyzes customer concentration, customer credit-worthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts.  We review past due accounts on a monthly basis and record an allowance for doubtful accounts where we deem appropriate.
 
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 first involves assessing qualitative factors to determine if there is a possible impairment and if it is necessary to perform the first step of the two-step impairment test that compares the fair value based on market capitalization of the Company with its book value of net assets, including goodwill and intangibles. We have not had to perform step 2 of the impairment test because the fair value has exceeded the carrying amount. For other intangible assets with definite lives, we compare future undiscounted cash flow forecasts prepared by management to the carrying value of the related intangible asset group to determine if there is impairment.
 
Stock-based compensation
 
Under the fair value recognition provisions of the authoritative guidance, stock-based compensation cost granted to employees is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service or performance period, which is the vesting period.  Stock options and warrants issued to consultants and other non-employees as compensation for services to be provided to us are accounted for based upon the fair value of the services provided or the estimated fair value of the option or warrant, whichever can be more clearly determined.  We currently use the Black-Scholes option pricing model to determine the fair value of stock options.  The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, the expected term of the award, the risk-free interest rate and any expected dividends. Compensation cost associated with grants of restricted stock units are also measured at fair value. We evaluate the assumptions used to value restricted stock units on a quarterly basis. When factors change, including the market price of the stock, stock-based compensation expense may differ significantly from what has been recorded in the past. If there are any modifications or cancellations of the underlying unvested securities, we may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense.
 


 
Income taxes
 
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial reporting requirements and those imposed under federal and state tax laws.  Deferred taxes are provided for timing differences in the recognition of revenue and expenses for income tax and financial reporting purposes and are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.  Deferred income tax expense represents the change during the period in the deferred tax assets and liabilities.  The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics.  Realization of the deferred tax asset is dependent on generating sufficient taxable income in future years.  Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
 
The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP, with no need for management’s judgment in its application.  There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. Please see our audited financial statements and notes thereto which begin on page F-1 of this Annual Report on Form 10-K, which contain accounting policies and other disclosures required by GAAP and please refer to the disclosures in Note 1 of our financial statements for a summary of our significant accounting policies.
 
Results of Operations
 
Year Ended December 31, 2014 Compared to the Year Ended December 31, 2013
 
Net Revenue
 
Revenues consist of equipment sales, ongoing service fees and licensed software sales.  Net revenue increased by $1,057,098 to $44,032,076 for the year ended December 31, 2014, as compared to the same period in 2013.  Of this increase, approximately $3,300,000 is a result of the addition of new recurring service revenue contracts between December 2013 and October 2014. We added approximately $1,200,000 in consulting revenues and software subscriptions from our newly acquired company, Delphiis, Inc. Partially offsetting these increases was a net reduction of approximately $1,100,000 from existing customers, where there was a reduction in unit price and sales volume, and non-renewing contracts, offset by the expansion of services. We also saw an additional drop in sales volume with some of our existing customers due to the consolidation of operations and the impact from the severe storms that hit the east coast at the beginning of this year. We still anticipate overall revenue growth as a result of the expansion of our customer base.  Equipment sales for 2014 were approximately $3,600,000 as compared to approximately $5,900,000 in 2013. Equipment revenues in 2013 were primarily from copier fleet refresh activities at three customers which were not repeated in 2014 as these fleet refreshes are typically done every five years at any one customer facility.
 
Cost of Revenues
 
Cost of revenues consists of document imaging equipment, parts, supplies and salaries expense for field services personnel.  Cost of revenues was $35,799,726 for the year ended December 31, 2014, as compared to $35,294,204 for the same period in 2013. The increase in the cost of revenues in 2014 is attributed primarily to the addition of new recurring service revenue contracts between December 2013 and October 2014. We incurred approximately $1,050,000 in additional staffing, approximately $200,000 of additional travel costs and approximately $1,000,000 in additional service and supply costs, primarily as a result of our new customers. Equipment costs decreased by approximately $1,700,000 in 2014, primarily as a result of the decrease in equipment revenues from the copier fleet refresh activities.
 


Gross margin increased slightly to 19% of revenue in 2014 as compared to 18% in 2013. We saw an improvement in our gross margin from accounts that came on board over the last couple of years that was partially offset by the lower revenue from the drop in sales volume from the existing customers noted above.  We anticipate this trend to continue but anticipate an overall increase in cost of revenues sold as a result of the expansion of our customer base.
 
Sales and Marketing
 
Sales and marketing expenses include salaries, commissions and expenses of sales and marketing personnel, travel and entertainment, and other selling and marketing costs.  Sales and marketing expenses were $2,125,085 for the year ended December 31, 2014, as compared to $2,112,285 for the same period in 2013. Staffing costs, including commissions, increased approximately $150,000 in 2014 because we increased sales staff headcount. Offsetting this, our channel marketing costs decreased approximately $110,000 due to the termination of a marketing agreement with a channel partner in mid-2013.
 
General and Administrative
 
General and administrative expenses, which include personnel costs for finance, administration, information systems, and general management, as well as facilities expenses, professional fees, and other administrative costs, increased by $646,596 to $4,432,374 for the year ended December 31, 2014.  The increase is due to the professional fees incurred to acquire Delphiis, Inc. in July 2014 along with amortization of the identified intangible assets acquired under that transaction. Also contributing to the increase was the addition of an Executive Vice President, Consulting and Managed IT Services Group to the Company in February 2014 and executive severance costs incurred in March 2014.
 
Other Income (Expense)
 
Interest expense for the year ended December 31, 2014 was $259,112, compared to $436,476 for the same period in 2013. The reduction is due to the reduction in the average borrowings on the bank line of credit and the conversion of $1,700,000 of debt to equity in July 2014.
 
Other income in 2013 of $80,000 was the proceeds from a contract settlement with a former customer. We had no such activity in 2014.
 
Income Tax Expense
 
Income tax expense for the year ended December 31, 2014 was $78,860 and was $78,419 for the year ended December 31, 2013. They were relatively comparable as a result of similar taxable income outcomes for both years.
 
Liquidity and Capital Resources
 
At December 31, 2014, our cash and cash equivalents were $4,743,395 and our working capital was $2,790,005.  By comparison, our working capital was $253,807 as of December 31, 2013. Our principal cash requirements were for operating expenses, including equipment, supplies, employee costs, and capital expenditures and funding of the operations.  Our primary sources of cash were from service and equipment sale revenues.
 
During the year ended December 31, 2014, cash provided by operating activities was $1,480,510 as compared to cash provided by operating activities of $2,578,804 for the same period in 2013.  Our cash generated from operating activities in 2014 was level with earnings while in 2013 our cash generated was greater than earnings due primarily to lowered accounts receivable balances at year end as a result of more successful collection efforts then.
 

 
 
We expect to continue to establish recurring revenue contracts to new customers throughout 2015 which we expect to have higher cost of revenues at the start of the engagements with most new customers. In addition, we plan to continue to grow our recent strategy to diversify our business into the data security industry. As a result of these two factors, we may seek additional financing, which may include debt and/or equity financing or funding through third party agreements. In May 2012, we entered into an asset-based line of credit agreement with a financial institution. This facility provides for borrowings up to $2,000,000 not to exceed 80% of eligible receivables.  We may seek additional financing; however there can be no assurance that additional financing will be available on acceptable terms, if at all.  Any equity financing may result in dilution to existing stockholders and any debt financing may include restrictive covenants.  Management believes that cash generated from debt and/or equity financing arrangements along with funds from operations will be sufficient to sustain our business operations over the next twelve months. Management believes that cash flows from operations together with cash reserves and our bank line of credit availability will allow us to complete these transactions without disrupting operations.
 
Off-Balance Sheet Arrangements
 
Our off-balance sheet arrangements consist primarily of conventional operating leases and purchase and other commitments arising in the normal course of business, as further discussed below under the section “Contractual Obligations, Contingent Liabilities and Commitments.”  As of December 31, 2014, 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.
 
Related Party Transactions
 
On November 1, 2012, we entered into a consulting agreement with John D. Pace, Chairman of the Board, to provide support to us in the capacity of Chief Strategy Officer. The agreement provided for payment to Mr. Pace of $4,000 per month as compensation for his services through December 31, 2013.  The agreement expired and was not renewed.  During the fiscal year ended December 31, 2013, we paid Mr. Pace $48,000 for these consulting services.
 
Contractual Obligations, Contingent Liabilities and Commitments
 
As of December 31, 2014, expected future cash payments, including interest portion, related to contractual obligations, contingent liabilities, and commitments were as follows:
 
   
Payments Due by Period
 
   
Total
   
Within 1 year
   
Year 2-3
   
Year 4-5
   
More than 5 years
 
Notes payable
  $ 390,396     $ 14,549     $ 375,847     $ -     $ -  
Capital leases
    117,857       64,598       53,259       -       -  
Operating leases
    178,059       178,059       -       -       -  
Total
  $ 686,312     $ 257,206     $ 429,106     $ -     $ -  
 
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
Not applicable.
 
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
The financial statements required by this item are included in Part IV, Item 15 of this Annual Report.
 



CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
 
None.
 
CONTROLS AND PROCEDURES.
 
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)  that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
 
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our “disclosure controls and procedures” as of the end of the period covered by this Annual Report, pursuant to Rules 13a-15(b) and 15d-15(b) under the Exchange Act. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures, as of the end of the period covered by this Annual Report, were effective.
 
Management’s Report on Internal Control over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Management conducted an assessment of the effectiveness, as of December 31, 2014, of our internal control over financial reporting, based on the framework established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on their assessment under the COSO framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2014.
 
This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to final rules of the Securities and Exchange Commission that permit us to provide only management’s report in this Annual Report on Form 10-K.
 
Changes in Internal Control over Financial Reporting
 
There has been no change in our internal control over financial reporting during the most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
OTHER INFORMATION.
 
None.
 
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
 
The information with respect to our executive officers and directors appearing in our Definitive Proxy Statement to be filed with the SEC in connection with the 2015 Annual Meeting of Stockholders (“Proxy Statement”), is hereby incorporated by reference.
 



EXECUTIVE COMPENSATION.
 
The information with respect to compensation of our executive officers appearing in our Proxy Statement is hereby incorporated by reference.
 
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
 
The information with respect to the security ownership of certain beneficial owners and management appearing in our Proxy Statement is hereby incorporated by reference.
 
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.
 
The information with respect to certain relationships and related transactions with management appearing in our Proxy Statement is hereby incorporated by reference.
 
PRINCIPAL ACCOUNTING FEES AND SERVICES.
 
The information with respect to the principal accounting fees and services appearing in the Proxy Statement is hereby incorporated by reference.
 


 
EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
 
(a)
 
     (1)                      Financial Statements
 
The following consolidated financial statements and related notes thereto, and the report of our independent auditor are filed as part of this Annual Report:
 
 
Page
Report of Independent Registered Public Accounting Firm
F-1
Consolidated Balance Sheets as of December 31, 2014 and 2013
F-2
Consolidated Statements of Operations for the years ended December 31, 2014 and 2013
F-3
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2014 and 2013
F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2014 and 2013
F-5
Notes to Consolidated Financial Statements
F-7
 
     (2)                      Financial Statement Schedules
 
All other financial statement schedules were omitted because they are not applicable, not required or the information required is shown in the financial statements or the notes thereto.
 
     (3)                      Exhibits
 
The exhibits listed on the accompanying index to exhibits immediately following the financial statements are filed as part of, or hereby incorporated by reference into, this Annual Report.
 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders
 
Auxilio, Inc.
 
We have audited the accompanying consolidated balance sheets of Auxilio, Inc. (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2014.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on the consolidated financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Auxilio, Inc. as of December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.
 
/s/ HASKELL & WHITE LLP
 
Irvine, California
March 30, 2015


AUXILIO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
   
As of December 31,
 
   
2014
   
2013
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 4,743,395     $ 4,668,624  
Accounts receivable, net
    6,808,183       3,856,791  
Prepaid and other current assets
    214,105       332,759  
Supplies
    1,066,132       967,354  
Total current assets
    12,831,815       9,825,528  
                 
Property and equipment, net
    215,747       160,709  
Deposits
    34,413       34,413  
Loan acquisition costs
    -       51,162  
Intangible assets, net
    1,265,000       -  
Goodwill
    2,473,656       1,517,017  
Total assets
  $ 16,820,631     $ 11,588,829  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
               
                 
Current liabilities:
               
Accounts payable and accrued expenses
  $ 7,417,361     $ 5,057,339  
Accrued compensation and benefits
    1,447,132       1,556,513  
Line of credit
    200,000       400,000  
Deferred revenue
    921,771       868,186  
Convertible notes payable, net of discount of $82,250 at December 31, 2013
    -       1,617,750  
Current portion of capital lease obligations
    55,546       71,933  
Total current liabilities
    10,041,810       9,571,721  
                 
                 
Long-term liabilities:
               
Notes payable to related parties, net of discount of $30,189 at December 31, 2014
    333,534       -  
Capital lease obligations, less current portion
    49,822       46,558  
Total long-term liabilities
    383,356       46,558  
                 
Commitments and contingencies
               
                 
Stockholders’ equity (deficit):
               
Common stock, par value at $0.001, 33,333,333 shares authorized, 23,623,619 shares issued and outstanding at December 31, 2014 and 20,643,966 shares issued and outstanding at December 31, 2013
    23,625       20,645  
Additional paid-in capital
    26,576,506       23,491,490  
Accumulated deficit
    (20,204,666 )     (21,541,585 )
Total stockholders’ equity (deficit)
    6,395,465       1,970,550  
Total liabilities and stockholders’ equity (deficit)
  $ 16,820,631     $ 11,588,829  
 
The accompanying notes are an integral part of these consolidated financial statements.


AUXILIO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
 
   
Year Ended December 31,
 
   
2014
   
2013
 
Net revenues
  $ 44,032,076     $ 42,974,978  
Cost of revenues
    35,799,726       35,294,204  
Gross profit
    8,232,350       7,680,774  
Operating expenses:
               
Sales and marketing
    2,125,085       2,112,285  
General and administrative expenses
    4,432,374       3,785,778  
Total operating expenses
    6,557,459       5,898,063  
Income from operations
    1,674,891       1,782,711  
Other income (expense):
               
Interest expense
    (259,112 )     (436,476 )
Other income
    -       80,000  
Total other income (expense)
    (259,112 )     (356,476 )
                 
Income before provision for income taxes
    1,415,779       1,426,235  
Income tax expense
    78,860       78,419  
Net income
  $ 1,336,919     $ 1,347,816  
                 
Net income per share:
               
Basic
  $ 0.06     $ 0.07  
Diluted
  $ 0.06     $ 0.06  
                 
Number of weighted average shares outstanding:
               
Basic
    22,062,789       20,259,776  
Diluted
    23,437,628       22,843,480  
 
The accompanying notes are an integral part of these consolidated financial statements.


AUXILIO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2014 AND 2013
 
   
Common Stock
                   
   
Shares
   
Amount
   
Additional Paid-in Capital
   
Accumulated Deficit
   
Total Stockholders’ Equity (Deficit)
 
Balance at January 1, 2013
    19,818,642     $ 19,820     $ 22,491,361     $ (22,889,401 )   $ (378,220 )
Stock compensation expense for options and warrants granted to employees and consultants
    -       -       576,195       -       576,195  
Options and warrants exercised
    396,570       396       133,880       -       134,276  
Restricted stock granted for marketing services
    328,754       329       190,154       -       190,483  
Conversion of convertible note payable
    100,000       100       99,900       -       100,000  
Net income
    -       -       -       1,347,816       1,347,816  
Balance at December 31, 2013
    20,643,966       20,645       23,491,490       (21,541,585 )     1,970,550  
Stock compensation expense for options and warrants granted to employees and consultants
    -       -       280,061       -       280,061  
Stock compensation expense for restricted stock granted to key employee
    -       -       30,634       -       30,634  
Options and warrants exercised
    349,247       349       64,951       -       65,300  
Conversion of convertible note payable
    1,700,000       1,700       1,698,300       -       1,700,000  
Acquisition of Delphiis, Inc.
    930,406       931       1,011,070       -       1,012,001  
Net income
    -       -       -       1,336,919       1,336,919  
Balance at December 31, 2014
    23,623,619     $ 23,625     $ 26,576,506     $ (20,204,666 )   $ 6,395,465  
 
The accompanying notes are an integral part of these consolidated financial statements.


AUXILIO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
Year Ended December 31,
 
   
2014
   
2013
 
Cash flows provided by operating activities:
           
Net income
  $ 1,336,919     $ 1,347,816  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation
    107,621       123,725  
Amortization of intangible assets
    105,000       -  
Stock compensation expense for options and warrants granted to employees and consultants
    280,061       576,195  
Fair value of restricted stock granted for marketing services
    -       190,483  
Stock compensation expense for restricted stock issued to key employee
    30,634       -  
Interest expense related to accretion of debt discount costs
    91,784       141,000  
Interest expense related to amortization of loan acquisition costs
    51,162       107,874  
Changes in operating assets and liabilities:
               
Accounts receivable
    (2,579,359 )     836,869  
Prepaid and other current assets
    118,654       (280,646 )
Supplies
    (98,778 )     92,376  
Deposits
    -       1,875  
Accounts payable and accrued expenses
    2,266,006       (522,381 )
Accrued compensation and benefits
    (128,690 )     (2,026 )
Deferred revenue
    (100,504 )     (34,356 )
Net cash provided by operating activities
    1,480,510       2,578,804  
Cash flows (used for) investing activities:
               
Purchases of property and equipment
    (94,165 )     (11,841 )
Purchase of Delphiis, Inc. net of cash acquired
    (995,257 )     -  
Net cash (used for) investing activities
    (1,089,422 )     (11,841 )
Cash flows (used for) financing activities:
               
Net (repayments on) proceeds from line of credit agreement
    (200,000 )     (128,486 )
Payments on notes payable to related parties
    (100,000 )     -  
Payments on capital leases
    (81,617 )     (95,101 )
Proceeds from exercise of options and warrants
    65,300       134,276  
Net cash (used for) financing activities
    (316,317 )     (89,311 )
Net increase in cash and cash equivalents
    74,771       2,477,652  
Cash and cash equivalents, beginning of year
    4,668,624       2,190,972  
Cash and cash equivalents, end of year
  $ 4,743,395     $ 4,668,624  
 
The accompanying notes are an integral part of these consolidated financial statements.


AUXILIO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
 
   
Year Ended December 31,
 
   
2014
   
2013
 
Supplemental disclosure of cash flow information:
           
Interest paid
  $ 116,100     $ 187,602  
Income tax paid
  $ 102,733     $ 6,345  
                 
Non-cash investing and financing activities:
               
Property and equipment acquired through capital leases
  $ 68,494     $ 45,589  
Conversion of convertible note payable
  $ 1,700,000     $ 100,000  
Common stock issued for acquisition of Delphiis, Inc.
  $ 1,012,000     $ -  
 
The accompanying notes are an integral part of these consolidated financial statements.


AUXILIO, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
 
(1)           Basis of Presentation and Summary of Significant Accounting Policies
 
Business Activity
 
We are engaged in the business of providing fully-outsourced managed print services to the healthcare industry, working exclusively with hospitals throughout the United States.
 
Basis of Presentation
 
The accompanying consolidated financial statements were prepared in conformity with GAAP, and include the accounts of Auxilio and our wholly-owned subsidiaries.  All intercompany balances and transactions were eliminated.
 
Use of Estimates
 
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.
 
Revenue Recognition and Deferred Revenue
 
The Company derives its revenue from four sources: (1) managed print services revenue; (2) equipment revenue; (3) software subscription services revenue, which is comprised of subscription fees from customers accessing the Company’s enterprise cloud computing services and customers purchasing additional ongoing managed services beyond the standard support that is included in the basic software subscription fees; and (4) consulting services such as process mapping, project management and implementation services.
 
The Company commences revenue recognition when all of the following conditions are satisfied:
 
 
there is persuasive evidence of an arrangement;
 
the service has been or is being provided to the customer;
 
the collection of the fees is reasonably assured; and
 
the amount of fees to be paid by the customer is fixed or determinable.

 
·
Managed Print Services and MFD Equipment Revenue
 
Revenue is recognized pursuant to ASC Topic 605, “Revenue Recognition” (ASC 605).  Monthly service and supply revenue is earned monthly during the term of the contract, as services and supplies are provided. Revenues from equipment sales transactions are earned when there is persuasive evidence of an arrangement, delivery has occurred, the sales price has been determined and collectability has been reasonably assured. For equipment that is to be placed at a customer’s location at a future date, revenue is deferred until the placement of such equipment.
 
We enter into arrangements that include multiple deliverables, which typically consist of the sale of Multi-Function Device (“MFD”) equipment and a support services contract.  We account for each element within an arrangement with multiple deliverables as separate units of accounting.  Revenue is allocated to each unit of accounting under the guidance of ASC Topic 605-25, Multiple-Deliverable Revenue Arrangements, which provides criteria for separating consideration in multiple-deliverable arrangements by establishing a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable is based on vendor-specific objective evidence (“VSOE”) if available, third-party evidence if VSOE is not available, or estimated selling price if neither VSOE nor third-party evidence is available. We are required to determine the best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a standalone basis. We generally do not separately sell MFD equipment or service on a standalone basis. Therefore, we do not have VSOE for the selling price of these units. As we purchase the equipment, we have third-party evidence of the cost of this element. We estimate the proceeds from the arrangement to allocate to the service unit based on historical cost experiences. Based on the relative costs of each unit to the overall cost of the arrangement, we utilize the same relative percentage to allocate the total arrangement proceeds.
 

 
 
 
·
Software Subscriptions and Managed Services Revenue
 
Software subscriptions and managed services revenues are recognized ratably over the contract terms beginning on the commencement date of each contract, which is the date the Company’s service is made available to customers.
 
Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on whether the revenue recognition criteria have been met.
 
The Company’s software subscription service arrangements are non-cancelable and do not contain refund-type provisions.
 
 
·
Consulting Service Revenues
 
The majority of the Company’s consulting services contracts are on a time and material basis. When these services are not combined with subscription revenues as a single unit of accounting, these revenues are recognized as the services are rendered for time and material contracts, and when the milestones are achieved and accepted by the customer for fixed price contracts.
 
Cash and Cash Equivalents
 
For purposes of the statement of cash flows and balance sheet classification, cash equivalents include all highly liquid debt instruments with original maturities of three months or less which are not securing any corporate obligations.
 
Accounts Receivable
 
We provide an allowance for doubtful accounts equal to the estimated uncollectible amounts. Our estimate is based on historical collection experience and a review of the current status of trade accounts receivable.  It is reasonably possible that our estimate of the allowance for doubtful accounts will change.  Management believes that no accounts receivable were uncollectible at December 31, 2014 or 2013.
 
Supplies
 
Supplies consist of parts and supplies for the automated office equipment, including copiers, facsimile machines and printers.  Supplies are valued at the lower of cost or market value on a first-in, first-out basis.
 
Property and Equipment
 
Property and equipment are carried at cost less accumulated depreciation.  Depreciation of the property and equipment is provided using the straight-line method over the assets’ estimated economic lives, which range from two to seven years.  Expenditures for maintenance and repairs are charged to expense as incurred.
 


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.
 
Intangible Assets
 
Under ASC Topic 350, “Intangibles, Goodwill and Other” (“ASC 350”), goodwill and intangible assets with indefinite lives are reviewed for impairment at least annually (December 31), or more frequently when indicators of impairment are present.  Intangible assets with definite lives are reviewed for impairment when indicators of impairment exist.  For goodwill, management compares the carrying value of the reporting unit to its related estimated fair value and recognizes an impairment charge in the amount by which the carrying value exceeds the estimated fair value.  For indefinite life intangible assets, management compares the estimated fair value of the intangible asset to its carrying value and an impairment charge is recognized in the amount by which the carrying value exceeds estimated fair value.  For definite life intangible assets, if the carrying value cannot be recovered from expected undiscounted future cash flows, then an impairment charge is recognized in the amount by which the carrying value exceeds the estimated fair value of the intangible asset.
 
To test for impairment, first we perform a qualitative assessment. If we determine, based on qualitative factors, that the fair value of goodwill is more likely than not greater than the carrying amount, a quantitative calculation would not be needed. Our methodology for a quantitative assessment of testing for goodwill impairment consists of one, and possibly two steps. In step one of the goodwill impairment test, management compares the carrying amount (including goodwill) of the entity-wide reporting unit and the fair value based on market capitalization. Our market capitalization is based on the closing price of our Common Stock as quoted on the OTCBB multiplied by our outstanding shares of Common Stock.
 
We first assessed qualitative factors to determine if there has been a possible impairment where the fair value was less than the carrying amount.  For certain intangibles, we felt it necessary to complete the first step in an impairment test which indicated that the fair value based on market capitalization of the Company exceeded the book value of net assets, including goodwill and intangibles. As a result it was unnecessary to perform the second step of the impairment test comparing the implied fair value of the goodwill with the book value. Given the results of these tests, we have concluded that there is no impairment of the intangibles.
 
Long-Lived Assets
 
In accordance with ASC Topic 350, long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If there are indications of impairment, we use future undiscounted cash flows of the related asset or asset grouping over the remaining life in measuring whether the assets are recoverable.  In the event such cash flows are not expected to be sufficient to recover the recorded asset values, the assets are written down to their estimated fair value.  Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value of asset less the cost to sell. As of December 31, 2014, management determined there was no impairment of these assets.
 
Income Taxes
 
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial reporting requirements and those imposed under federal and state tax laws.  Deferred taxes are provided for timing differences in the recognition of revenue and expenses for income tax and financial reporting purposes and are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and liabilities. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics. Realization of the deferred tax asset is dependent on generating sufficient taxable income in future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
 


 
Fair Value of Financial Instruments
 
We account for our Financial Instruments in accordance with ASC Topic 820, “Fair Value Measurements,” (“ASC 820”). ASC 820 defines fair value, provides a framework for measuring fair value and expands the disclosures required for fair value measurements. The standard applies to other accounting pronouncements, but does not require any new fair value measurements.
 
The fair value hierarchy consists of three broad levels, which are described below:
 
Level 1 - Quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
 
Level 2 - Observable inputs, other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
 
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
 
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, line of credit and capital lease obligations approximate fair value due to the short-term nature of these financial instruments. The carrying amount of our host debt contract of our convertible debt approximates its fair value as we believe the credit market has not materially changed since the original borrowing date.
 
Stock-Based Compensation
 
We recognize stock-based compensation as an expense in accordance with ASC Topic 718 “Share-Based Payments” (“ASC 718”) and value the equity securities based on the fair value of the security on the date of grant.  Stock option awards are valued using the Black-Scholes option-pricing model.
 
For the years ended December 31, 2014 and 2013, stock-based compensation expense recognized in the consolidated statements of operations is as follows:
 
   
Year Ended December 31,
 
   
2014
   
2013
 
Cost of revenues
  $ 173,089     $ 149,010  
Sales and marketing
    19,371       116,189  
General and administrative expenses
    118,235       310,996  
Total stock based compensation expense
  $ 310,695     $ 576,195  

The weighted average estimated fair value of stock options granted during 2014 and 2013 was $0.55 and $0.39 per share, respectively.  These amounts were determined using the Black-Scholes option-pricing model, which values options based on the stock price at the grant date, the expected life of the option, the estimated volatility of the stock, the expected dividend payments, and the risk-free interest rate over the expected life of the option.  The assumptions used in the Black-Scholes model were as follows for stock options granted in 2014 and 2013:
 


 
 
2014
2013
Risk-free interest rate
0.07% to 0.09%
0.11% to 0.16%
Expected volatility of our Common Stock
57.08% to 64.72%
61.40% to 63.00%
Dividend yield
0%
0%
Expected life of options
3 years
3-5 years

The Black-Scholes model was developed for estimating the fair value of traded options that have no vesting restrictions and are fully transferable.  Because option valuation models require the use of subjective assumptions, changes in these assumptions can materially affect the fair value of the options.
 
Compensation cost associated with grants of restricted stock units are also measured at fair value. We evaluate the assumptions used to value restricted stock units on a quarterly basis. When factors change, including the market price of the stock, share-based compensation expense may differ significantly from what was recorded in the past. If there are any modifications or cancellations of the underlying unvested securities, we may be required to accelerate, increase or cancel any remaining unearned share-based compensation expense. As of December 31, 2014, we have not granted any restricted stock units under the 2011 Stock Incentive Plan.
 
Basic and Diluted Net Income Per Share
 
In accordance with ASC Topic 260, “Earnings Per Share,” basic net income per share is calculated using the weighted average number of shares of our Common Stock issued and outstanding during a certain period, and is calculated by dividing net income by the weighted average number of shares of our Common Stock issued and outstanding during such period. Diluted net income per share is calculated using the weighted average number of common and potentially dilutive common shares outstanding during the period, using the as-if converted method for secured convertible notes, and the treasury stock method for options and warrants.
 
As of December 31, 2014, potentially dilutive securities consisted of options and warrants to purchase 7,095,394 shares of our Common Stock at prices ranging from $0.30 to $2.15 per share. Of these potentially dilutive securities, only 1,374,839 of the shares to purchase common stock from the options are included in the computation of diluted earnings per share because the effect of including the remaining instruments would be anti-dilutive.
 
As of December 31, 2013, potentially dilutive securities consisted of options and warrants to purchase 8,239,914 shares of our Common Stock at prices ranging from $0.30 to $2.15 per share and convertible notes that could convert into 1,700,000 shares of Common Stock. Of these potentially dilutive securities, 7,356,210 shares of Common Stock underlying such options, warrants and convertible notes are excluded from the computation of diluted earnings per share, as their effect would be anti-dilutive.
 



The following table sets forth the computation of basic and diluted net income per share:
 
   
Year Ended December 31,
 
   
2014
   
2013
 
Numerator:
           
Net income
  $ 1,336,919     $ 1,347,816  
Effects of dilutive securities:
               
Convertible notes payable
    75,189       8,966  
Income after effects of conversion of note payable
  $ 1,412,108     $ 1,356,782  
                 
Denominator:
               
Denominator for basic calculation weighted averages
    22,062,789       20,259,776  
                 
Dilutive Common Stock equivalents:
               
Convertible debt
    -       1,700,000  
Options and warrants
    1,374,839       883,704  
Denominator for diluted calculation weighted average
    23,437,628       22,843,480  
                 
Net income per share:
               
Basic net income per share
  $ .06     $ .07  
Diluted net income per share
  $ .06     $ .06  

Segment Reporting
 
Based on our integration and management strategies, we operate in a single business segment.  For the years ended December 31, 2014 and 2013, all revenues were derived from domestic operations.
 
Subsequent Events
 
Management has evaluated events subsequent through the date of filing of this Annual Report on Form 10-K and, except for the debt converted to stock in February 2015, as described in Note (6),  there is no effect on the financial statements, nor any items that would require disclosure.
 
New Accounting Pronouncements
 
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board that we adopt as of the specified effective date.  Unless otherwise discussed in these financial statements and notes or in our Annual Report on Form 10-K for the year ended December 31, 2014, we believe the impact of any 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.
 
(2)           Accounts Receivable
 
A summary of accounts receivable follows:
 
   
As of December 31,
 
   
2014
   
2013
 
Trade receivables
  $ 8,105,330     $ 4,572,656  
Unapplied advances and unbilled revenue, net
    (1,297,147 )     (715,865 )
Allowance for doubtful accounts
    -       -  
    $ 6,808,183     $ 3,856,791  




(3)           Property and Equipment
 
A summary of property and equipment follows:
 
   
As of December 31,
 
   
2014
   
2013
 
Furniture and fixtures
  $ 68,184     $ 55,695  
Computers and office equipment
    650,352       576,025  
Fleet equipment
    260,866       240,157  
Leasehold improvements
    3,838       3,838  
      983,240       875,715  
Less accumulated depreciation and amortization
    (767,493 )     (715,006 )
    $ 215,747     $ 160,709  

Depreciation and amortization expense for property, equipment, and improvements amounted to $107,621 and $123,725 for the years ended December 31, 2014 and 2013, respectively.
 
(4)           Intangible Assets

Intangible assets consist of the following:

   
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Net
Carrying
Amount
   
Useful Life (years)
 
Acquired technology
  $ 900,000     $ (45,000 )   $ 855,000       10  
Customer relationships
    400,000       (40,000 )     360,000       5  
Trademarks
    50,000       (16,667 )     33,333       1.5  
Non-compete agreements
    20,000       (3,333 )     16,667       3  
 Total intangible assets
  $ 1,370,000     $ (105,000 )   $ 1,265,000          

Please see Note 16, Stock Purchase Agreement – Delphiis, Inc., below for further discussion of the origin of these intangible assets.

(5)           Line of Credit
 
On May 4, 2012, we entered into a Loan and Security Agreement (the “Loan and Security Agreement”) with Avidbank Corporate Finance, a Division of Avidbank (“Avidbank”).  On April 26, 2013, we amended the Loan and Security Agreement with Avidbank. On April 25, 2014, we again amended the Loan and Security Agreement with Avidbank (the “Second Avidbank Amendment”). Under the Second Avidbank Amendment, the term of the revolving line-of-credit of up to $2.0 million extends through April 25, 2015, at an interest rate of prime plus 1.0% per annum.  As of December 31, 2014 the interest rate was 4.25%.  There will be no minimum interest payable with respect to any calendar quarter. The amount available to us at any given time is the lesser of (a) $2.0 million, or (b) the amount available under our borrowing base (80% of our eligible accounts, minus (1) accrued client lease payables, and minus (2) accrued equipment pool liability).  While there are outstanding credit extensions, our adjusted EBITDA may be an adjusted EBITDA loss of up to $200,000 for any single quarter so long as we achieve a positive adjusted EBITDA for the prior quarter and subsequent quarter. The foregoing description is qualified in its entirety by reference to the Second Amendment to the Loan and Security Agreement between Avidbank Corporate Finance and Auxilio, Inc. which is found as Exhibit 10.1 to Form 10-Q as filed with the Securities and Exchange Commission (“SEC”) on May 14, 2014. We were in compliance with all of the Avidbank agreement covenants as of December 31, 2014 and December 31, 2013.
 
In connection with our entry into the Loan and Security Agreement, as amended, 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. As additional consideration for the Loan and Security Agreement, we issued Avidbank a 5-year warrant to purchase up to 72,098 shares of our Common Stock at an exercise price of $1.387 per share. The foregoing descriptions are qualified in their entirety by reference to the respective agreements. These agreements are found in our Form 8-K filed on May 9, 2012 as Exhibits 10.1, 10.2, 10.3 and 10.4.
 

 
 
Interest charges associated with the Avidbank line of credit, including amortization of the discounts and loan acquisition costs totaled $22,776 and $50,664, respectively, for the years ended December 31, 2014 and 2013, respectively.
 
(6)           Notes Payable – Related Parties
 
We assumed debt totaling $463,723 when we acquired Delphiis, Inc. effective July 1, 2014 (see Note 16).  In July 2014, we paid $100,000 to the note holders upon Delphiis’s collection of $100,000 from accounts receivable outstanding as of June 30, 2014. For the remaining $363,723 we have outstanding promissory notes payable to an employee and another principal who were majority owners of Delphiis, Inc.  The notes bear interest at the rate of 4% per annum, upon which we are to make quarterly interest-only payments on the total principal amount outstanding at the end of each calendar quarter.  The notes mature on July 31, 2016 and contain no prepayment penalty. Pursuant to the terms of the notes, we will accelerate payment on fifty percent (50%) of the outstanding amount due under such notes at such time as Delphiis, Inc. achieves $1,500,000 of bookings measured from the date of the Agreement, and the remaining fifty percent (50%) will be paid at such time as Delphiis, Inc. achieves $4,000,000 of bookings measured from July 1, 2014.     Interest expense on the notes, including amortization of the discount, for the year ended December 31, 2014 totaled $16,808.
 
In February 2015, Delphiis reached the first bookings target of $1,500,000 resulting in payment and vesting of 50% of the outstanding debt. On February 19, 2015, a holder of $257,835 of the notes agreed to convert the principal amount of his note into 257,835 shares of our common stock. Since Delphiis had reached the $1,500,000 bookings target, on February 24, 2015, we issued 128,917 of the shares to the note holder. The remaining $128,918 of his note was converted to restricted stock units and shares will be issued at the earlier of the achievement of the $4,000,000 of bookings target is reached, or July 31, 2016. The foregoing summary of the note conversion is qualified in its entirety by reference to the full context of the Note Conversion Agreement which is found as Exhibit 99.1 to our 8-K filing on February 27, 2015.
 
(7)           Convertible Notes Payable
 
Effective July 29, 2011, we closed on a private offering of secured convertible promissory notes and warrants (“Units”) for gross proceeds of $1,850,000.  Each of the Units consisted of (i) a $5,000 secured convertible promissory note (each a “Note” and collectively “Notes”) and (ii) a warrant (each a “Warrant” and collectively “Warrants”) to purchase 1,000 shares of our common stock at an exercise price of $1.50 per share.  The Notes matured July 29, 2014 and were secured by our tangible and intangible assets, subject to the senior security interest of Avidbank.  The Notes accrued interest at a rate of eight percent (8%) per annum, compounded annually, and the interest on the outstanding balance of the Notes was payable no later than thirty (30) days following the close of each calendar quarter.  The Notes were convertible into 1,850,000 shares of common stock.  The Warrants expire April 29, 2016 and are exercisable to purchase up to 370,000 shares of our common stock. We additionally granted piggyback registration rights to the investors in this offering.  Several members of our Board at the time, including John Pace, Michael Joyce, Mark St. Clare and Michael Vanderhoof, participated in the offering.
 
Interest charges associated with the convertible notes payable, including amortization of the discounts and loan acquisition costs totaled $208,601 and $371,084 for the years ended December 31, 2014 and 2013, respectively.
 


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 after full disclosure of Mr. Vanderhoof’s interest. We additionally granted piggyback registration rights to Cambria Capital, LLC in this offering that are the same as those afforded to the investors in the offering.
 
The holders of the Notes elected to convert all of the principal into 1,850,000 shares of common stock during the term of the Notes with 150,000 shares converted during 2012 and 2013, 150,000 shares converted from March 2014, to June 2014 and the remaining 1,550,000 shares converted in July 2014. The warrants remain outstanding until their exercise or expiration.
 
(8)           Warrants
 
Below is a summary of warrant activity during the years ended December 31, 2013 and 2014:
 
   
Number of Shares
   
Weighted Average Exercise Price
   
Weighted Average Remaining Term in Years
   
Aggregate Intrinsic Value
 
Outstanding at January 1, 2013
    2,454,606     $ 1.34              
Granted in 2013
    1,500,000     $ 1.01              
Exercised in 2013
    (321,345 )   $ 0.46              
Cancelled in 2013
    (649,696 )   $ 1.87              
Outstanding at December 31, 2013
    2,983,565     $ 1.15       4.08     $ 998,372  
Granted in 2014
    -     $ -                  
Exercised in 2014
    (122,500 )   $ 1.01                  
Cancelled in 2014
    (652,500 )   $ 1.31                  
Outstanding at December 31, 2014
    2,208,565     $ 1.11       3.35     $ 235,750  
                                 
Warrants exercisable at December 31, 2014
    1,508,565     $ 1.16       3.35     $ 165,750  

The following tables summarize information about warrants outstanding and exercisable at December 31, 2014:
 
Range of
Exercise Prices
   
Number of Shares Outstanding
   
Weighted Average Remaining in Contractual Life
in Years
   
Outstanding Warrants Weighted Average Exercise Price
   
Number of Warrants Exercisable
   
Exercisable Warrants Weighted Average Exercise Price
 
$0.30 to $0.75       141,667       1.36     $ 0.60       141,667     $ 0.60  
$0.91 to $1.84       2,066,898       3.56     $ 1.15       1,366,898     $ 1.22  
$0.30 to $1.84       2,208,565       3.35     $ 1.11       1,508,565     $ 1.16  

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

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

 
Our Board of Directors determined that the performance measures for 2014 were not met. As such the warrants for 2014 did not vest to the three executives.
 
(9)
Stock Option and Stock Incentive Plans
 
In October 2001, we approved the 2001 Stock Option Plan under which all employees may be granted options to purchase shares of our Common Stock.  The maximum number of shares of the Common Stock available for issuance under the 2001 Plan was 5,400,000 shares. Under the 2001 Stock Option Plan (the “2001 Plan”), the option exercise price was equal to the fair market value of the Common Stock on the date of grant.  Options expired no later than 10 years from the grant date and generally vested within five years.
 
The Board approved the 2003 Stock Option Plan (the “2003 Plan”) and it became effective immediately upon stockholder approval at the Annual Meeting on May 15, 2003.  The maximum number of shares of the Common Stock available for issuance under the 2003 Plan was 4,400,000 shares. On May 15, 2003, 899,500 shares were available to grant under the 2003 Plan, and 567,167 had been granted under our former 2000 Stock Option Plan (the “2000 Plan”) and the 2001 Plan.  Although we no longer granted options under the 2000 Plan or the 2001 Plan, all outstanding stock options continue to be subject to the terms and conditions of the stock option agreement and the underlying plans, except to the extent the Board or the Compensation Committee elected to extend one or more features of the 2003 Plan to the outstanding stock options that were granted pursuant to the 2000 Plan or the 2001 Plan.  Under the 2003 Plan, the option exercise price was equal to the fair market value of the Common Stock at the date of grant.  Stock options expired no later than 10 years from the grant date and generally vested within five years.
 
In May of 2004, the Board and stockholders approved the 2004 Stock Incentive Plan (the “2004 Plan”). The maximum number of shares of the Common Stock available for issuance under the 2004 Plan was 6,400,000 shares. As of the date of stockholder approval, May 12, 2004, options to purchase 714,750 shares had been granted pursuant to the 2000 Plan, 2001 Plan and 2003 Plan. Under the terms and conditions of the 2004 Plan, the option exercise price is equal to the fair market value of the Common Stock at the date of grant.  Options expired no later than 10 years from the grant date and generally vested within five years.
 
The Board approved the 2007 Stock Option Plan, as amended (the “2007 Plan”), and it became effective on May 16, 2007 upon receipt of stockholder approval.  On May 16, 2007, options to purchase 2,890,147 shares of Common Stock had been granted pursuant to the 2000 Plan, 2001 Plan, 2003 Plan and 2004 Plan. Under the 2007 Plan, the administrator could grant options to purchase 4,470,000 shares of Common Stock.  The options granted pursuant to the 2004 Plan continue to be governed by the terms and conditions of the 2004 Plan, except to the extent the administrator elected to extend one or more features of the 2007 Plan to the outstanding stock options granted pursuant to the 2004 Plan.  Under the 2007 Plan, the option exercise price was equal to the fair market value of the Common Stock at the date of grant.  Options expired no later than 10 years from the grant date and generally vested within three years.
 
 
 
On March 17, 2011, the Board approved the 2011 Stock Incentive Plan (the “2011 Plan”), and it became effective on May 12, 2011. The 2011 Plan authorizes the issuance of no more than 5,970,000 shares of our Common Stock and it provides for the granting of stock options, stock appreciation rights and restricted stock to our employees, members of the Board and service providers. As of December 31, 2014, there were 688,484 shares available for issuance under the 2011 Plan.
 
Additional information with respect to these Plans’ stock option activity is as follows:
 
   
Number of Shares
   
Weighted Average Exercise Price
   
Weighted Average Remaining Term in Years
   
Aggregate Intrinsic Value
 
Outstanding at January 1, 2013
    5,725,031     $ 1.02              
Granted in 2013
    247,666     $ 0.95              
Exercised in 2013
    (75,225 )   $ 0.59              
Cancelled in 2013
    (641,123 )   $ 0.98              
Outstanding at December 31, 2013
    5,256,349     $ 1.03       5.20     $ 2,638,054  
Granted in 2014
    402,500     $ 1.29                  
Exercised in 2014
    (226,747 )   $ 0.92                  
Cancelled in 2014
    (545,273 )   $ 1.04                  
Outstanding at December 31, 2014
    4,886,829     $ 1.05       4.79     $ 912,287  
                                 
Options exercisable at December 31, 2014
    4,193,631     $ 1.04       4.14     $ 766,830  

The following table summarizes information about stock options outstanding and exercisable at December 31, 2014:
 
Range of
Exercise Prices
   
Number of Shares Outstanding
   
Weighted Average Remaining in Contractual Life
in Years
   
Outstanding Options Weighted Average Exercise Price
   
Number of Options Exercisable
   
Exercisable Options Weighted Average Exercise Price
 
$0.30 to $0.75       947,500       3.10     $ 0.59       949,000     $ 0.58  
$0.76 to $0.90       814,001       5.51     $ 0.80       764,223     $ 0.81  
$0.91 to $1.84       2,894,328       5.45     $ 1.20       2,249,408     $ 1.20  
$1.85 to $2.00       201,000       0.35     $ 1.99       201,000     $ 1.99  
$2.01 to $2.15       30,000       3.67     $ 2.15       30,000     $ 2.15  
$0.30 to $2.15       4,886,829       4.79     $ 1.05       4,193,631     $ 1.04  

Unamortized compensation expense associated with unvested options approximates $260,172 as of December 31, 2014. The weighted average period over which these costs are expected to be recognized is approximately 1.6 years.
 
(10)           Restricted Stock
 
On May 11, 2011, we amended (the “May 2011 Amendment”) the November 2008 joint marketing agreement with Sodexo (the “Sodexo Agreement”).  Pursuant to the Sodexo Agreement, as amended by the May 2011 Amendment, Sodexo provided additional sales and marketing resources and expanded the marketing effort directed towards existing or potential Sodexo hospital clients.  The term of the Sodexo Agreement was extended to December 31, 2014.  Upon signing the May 2011 Amendment, we granted 200,000 shares of restricted stock to Sodexo.  These shares were to 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 in 2011.  The cost of the remaining shares were to 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 to Sodexo as a result of a new sale.  These shares were to vest as follows:  7,812 on April 18, 2013, 7,812 on April 18, 2014 and 7,813 on April 18, 2015. On July 1, 2012, we granted another 31,765 shares to Sodexo as a result of another new sale.  These shares were to vest as follows:  10,588 on July 1, 2013, 10,588 on July 1, 2014 and 10,588 on July 1, 2015.
 
 
 
The Sodexo Agreement was further amended in October 2012 (such amendment referred to herein as the “October 2012 Amendment”) in which we eliminated the additional sales and marketing resources that we added under the May 2011 Amendment. Under the new terms we would no longer pay the annual marketing fee, but continue to pay to Sodexo a quarterly commission based on actual revenues received by us from certain existing customers and any new customers Sodexo had brought to us and had signed an agreement for services by August 3, 2013. These commissions totaled $52,857 and $53,824 for the years ended December 31, 2014 and 2013, respectively.
 
On January 11, 2013 we terminated the Sodexo Agreement. This resulted in the immediate vesting of the remaining 265,179 shares of restricted stock. The cost recognized for all shares vesting totaled $190,484 for the year ended December 31, 2013.
 
In July 2014, in connection with our acquisition of the common stock of Delphiis, Inc., we issued to a key employee 400,000 shares of restricted stock as part of his employment agreement. The shares vest as follows:
 
Vesting Date
 
Shares
 
July 1, 2016
    100,000  
July 1, 2017
    100,000  
July 1, 2018
    100,000  
July 1, 2019
    100,000  
 
The cost recognized for these shares totaled $30,634 for the year ended December 31, 2014.
 
 (11)           Income Taxes
 
For the years ended December 31, 2014 and 2013, the components of income tax expense are as follows:
 
   
Year Ended December 31
 
   
2014
   
2013
 
Current provision:
           
Federal
  $ 20,712     $ 32,167  
State
    58,148       46,252  
      78,860       78,419  
Deferred benefit:
               
Federal
    -       -  
State
    -       -  
      -       -  
Income tax expense
  $ 78,860     $ 78,419  
 
 
 
Income tax provision amounted to $78,860 and $78,419 for the years ended December 31, 2014 and 2013, respectively (an effective rate of 5.6% for 2014 and 5.5% for 2013).  A reconciliation of the provision for income taxes with amounts determined by applying the statutory U.S. federal income tax rate to income before income taxes is as follows:
 
   
Year Ended December 31
 
   
2014
   
2013
 
Computed tax at federal statutory rate of 34%
  $ 465,951     $ 484,920  
State taxes, net of federal benefit
    37,088       30,526  
Non-deductible items
    148,820       172,980  
Other
    24,310       24,896  
Change in valuation allowance
    (597,309 )     (634,903 )
    $ 78,860     $ 78,419  
 
Realization of deferred tax assets is dependent on future earnings, if any, the timing and amount of which is uncertain.  Accordingly, a valuation allowance, in an amount equal to the net deferred tax asset as of December 31, 2014 and 2013 has been established to reflect these uncertainties.  As of December 31, 2014 and 2013, the net deferred tax asset before valuation allowances is approximately $5,346,000 and $5,955,000, respectively, for federal income tax purposes, and $1,067,000 and $1,015,000, respectively for state income tax purposes. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.  Significant components of our deferred tax assets and liabilities are as follows:
 
   
Year Ended December 31
 
   
2014
   
2013
 
Deferred tax assets:
           
Accrued salaries/vacation
  $ 221,900     $ 203,200  
Accrued equipment pool
    105,100       80,300  
State taxes
    17,900       12,400  
Stock options
    844,700       809,200  
Credits
    131,800       98,300  
Net operating loss carryforwards
    5,398,100       6,034,900  
Total deferred tax assets
    6,719,500       7,238,300  
                 
Deferred tax liabilities:
               
Depreciation
    34,500       14,300  
Amortization of intangibles
    4,700       4,700  
Other
    267,400       249,800  
Total deferred tax liabilities
    306,600       268,800  
                 
Net deferred assets before valuation allowance
    6,412,900       6,969,500  
Valuation allowance
    (6,412,900 )     (6,969,500 )
Net deferred tax assets
  $ -     $ -  

At December 31, 2014, we have available unused net operating loss carryforwards of approximately $13,544,000 for federal and $8,156,000 for state that may be applied against future taxable income and that, if unused, expire beginning in 2014 through 2034.
 
Utilization of the net operating loss carryforwards may be subject to a substantial annual limitation due to ownership change limitations provided by the Internal Revenue Code under section 382.  The annual limitation may result in the expiration of net operating loss carryforwards before utilization. Our Federal and state net operating loss carryforwards will begin to expire in 2021 and 2014, respectively.
 
 
 
We evaluate our tax positions each reporting period to determine the uncertainty of such positions based upon one of the following conditions: (1) the tax position is not ‘‘more likely than not’’ to be sustained, (2) the tax position is ‘‘more likely than not’’ to be sustained, but for a lesser amount, or (3) the tax position is ‘‘more likely than not’’ to be sustained, but not in the financial period in which the tax position was originally taken. We have evaluated our tax positions for all jurisdictions and all years for which the statute of limitations remains open. We have determined that no additional liability for unrecognized tax benefits and interest was necessary.
 
(12)           Retirement Plan
 
We sponsor a 401(k) plan (the “Plan”) for the benefit of employees who are at least 21 years of age. Our management determines, at its discretion, the annual and matching contribution. We elected not to contribute to the Plan for the years ended December 31, 2014 and 2013.
 
(13)           Commitments
 
Leases
 
We lease our Mission Viejo, California facility under a non-cancellable operating lease effective March 2010 that expires in September 2015. Rent expense for the years ended December 31, 2014 and 2013 totaled $204,257 and $196,165 respectively.  Future minimum lease payments under non-cancelable operating leases during subsequent years are as follows:
 
December 31,
 
Payments
 
2015
  $ 178,059  
Total
  $ 178,059  

Employment Agreements
 
Effective January 1, 2012, we entered into an employment agreement with Joseph J. Flynn, our President and Chief Executive Officer (“CEO”) since 2009 (the “Flynn Agreement”). The Flynn Agreement provided that Mr. Flynn would continue his employment as our President and CEO. The Flynn Agreement had a term of two years, provided for an annual base salary of $269,087, and contained an auto renewal provision.  Mr. Flynn also received the customary employee benefits available to our employees. Mr. Flynn also received a bonus of $127,324 in 2013, the achievement of which was based on Company performance metrics. The foregoing summary of the Flynn Agreement is qualified in its entirety by reference to the full text of the employment agreement, which was filed as Exhibit 10.2 to our 8-K filing on December 23, 2011.
 
Effective January 1, 2014, we entered into a new employment agreement with Mr. Flynn (the “2014 Flynn Agreement”). The 2014 Flynn Agreement provides that Mr. Flynn will continue his employment as our President and CEO. The 2014 Flynn Agreement has a term of two years, provides for an annual base salary of $275,000, and will automatically renew for subsequent twelve (12) month terms unless either party provides advance written notice to the other that such party does not wish to renew the agreement for a subsequent twelve (12) months.  Mr. Flynn also receives the customary employee benefits available to our employees. Mr. Flynn is also entitled to receive a bonus of up to $150,000 per year, the achievement of which is based on Company performance metrics. Further, the 2014 Flynn Agreement revised the vesting schedule of warrants granted to Mr. Flynn in January 2013. The revision spreads the vesting date of the remaining 300,000 unvested shares from 150,000 on January 1, 2015 and 150,000 on January 1, 2016 to 100,000 on January 1, 2015, 100,000 on January 1, 2016 and 100,000 on January 1, 2017. The warrants will vest contingent with the achievement of certain financial performance metrics of the Company for calendar years 2015 and 2016. The calendar year 2014 performance metrics were not met and as such, they did not vest.   We may terminate Mr. Flynn’s employment under the 2014 Flynn Agreement without cause at any time on thirty (30) days advance written notice, at which time Mr. Flynn would receive severance pay for twelve (12) months and be fully vested in all options and warrants granted to date. The foregoing summary of the 2014 Flynn Agreement is qualified in its entirety by reference to the full context of the employment agreement which is found as Exhibit 10.2 to our 10-Q filing on May 14, 2014.
 
 
 
Effective January 1, 2012, we entered into an employment agreement with Paul T. Anthony, our Chief Financial Officer (“CFO”) since 2004 (the “Anthony Agreement”). The Anthony Agreement provided that Mr. Anthony would continue to serve as our Executive Vice President (“EVP”) and CFO. The Anthony Agreement had a term of two years, provided for an annual base salary of $219,037 and contained an auto renewal provision. Mr. Anthony received the customary employee benefits available to our employees. Mr. Anthony also received a bonus of $93,280 in 2013, the achievement of which was based on Company performance metrics.  The foregoing summary of the Anthony Agreement is qualified in its entirety by reference to the full text of the employment agreement, which was filed as Exhibit 10.1 to our 8-K filing on December 23, 2011.
 
Effective January 1, 2014, we entered into a new employment agreement with Mr. Anthony, (the “2014 Anthony Agreement”). The 2014 Anthony Agreement provides that Mr. Anthony will continue to serve as our EVP and CFO. The 2014 Anthony Agreement has a term of two years, and provides for an annual base salary of $225,000. The 2014 Anthony Agreement will automatically renew for subsequent twelve (12) month terms unless either party provides advance written notice to the other that such party does not wish to renew the agreement for a subsequent twelve (12) months.  Mr. Anthony also receives the customary employee benefits available to our employees. Mr. Anthony is also entitled to receive a bonus of up to $108,000 per year, the achievement of which is based on Company performance metrics.  Further, the 2014 Anthony Agreement revised the vesting schedule of warrants granted to Mr. Anthony in January 2013. The revision spreads the vesting date of the remaining 200,000 unvested shares from 100,000 on January 1, 2015 and 100,000 on January 1, 2016 to 66,667 on January 1, 2015, 66,667 on January 1, 2016 and 66,666 on January 1, 2017. The warrants will vest contingent with the achievement of certain financial performance metrics of the Company for calendar years 2015 and 2016. The calendar year 2014 performance metrics were not met and as such, they did not vest.   We may terminate Mr. Anthony’s employment under the 2014 Anthony Agreement without cause at any time on thirty (30) days advance written notice, at which time Mr. Anthony would receive severance pay for twelve months and be fully vested in all options and warrants granted to date. The foregoing summary of the 2014 Anthony Agreement is qualified in its entirety by reference to the full context of the employment agreement which is found as Exhibit 10.3 to our 10-Q filing on May 14, 2014.
 
(14)           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
 
For the year ended December 31, 2014, there were three customers that each generated at least 10% of our revenues and these customers represented a total of 42% of revenues.  As of December 31, 2014, net accounts receivable due from these customers totaled approximately $2,800,000.
 
For the year ended December 31, 2013, there were four customers that each generated at least 10% of our revenues and these customers represented a total of 52% of revenues.  As of December 31, 2013, net accounts receivable due from these customers totaled approximately $1,500,000.
 
 
 
(15)           Related Party Transactions
 
On November 1, 2012, we entered into a consulting agreement with John D. Pace, Chairman of the Board, to provide support to us in the capacity of Chief Strategy Officer. The agreement provided for payment to Mr. Pace of $4,000 per month as compensation for his services through December 31, 2013.  The agreement expired and was not renewed.  During the fiscal year ended December 31, 2013, we paid Mr. Pace $48,000 for these consulting services.
 
(16)           Stock Purchase Agreement – Delphiis, Inc.
 
As previously disclosed in our Current Report on Form 8-K, filed with the SEC, on July 8, 2014, on July 7, 2014 we entered into a Stock Purchase Agreement (the “Agreement”) with Delphiis, Inc., a California corporation (“Delphiis”), certain stockholders of Delphiis (the “Stockholders”), and Mike Gentile, as seller representative (“Gentile”).  By agreement of the parties, the effective date of the Agreement was July 1, 2014.
 
Pursuant to the Agreement, we acquired 100% of the issued and outstanding shares of common stock (the “Shares”) of Delphiis from the Stockholders.  The purchase price paid for the Shares consisted of three components: the Securities Consideration, the Cash Consideration, and the Debt Assumption.

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

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

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

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

 
Purchased identifiable intangible assets are amortized on a straight-line basis over the respective useful lives. The estimated useful life of the identifiable intangible assets acquired ranges from 1.5 to 10 years. We recognized goodwill of $956,639. Goodwill is recognized as we expect to be able to realize synergies between the two companies, primarily our ability to provide market and reach for the Delphiis products and services to Auxilio’s customers.
 
The Company incurred approximately $98,000 in legal, accounting and other professional fees related to this acquisition, all of which were expensed during the year ended December 31, 2014.

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

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

Pro Forma Information (unaudited)
 
The following supplemental unaudited pro forma information presents the combined operating results of the Company and the acquired business during the years ended December 31, 2014 and 2013, as if the acquisition had occurred at the beginning of each of the periods presented. The pro forma information is based on the historical financial statements of the Company and that of the acquired business. Amounts are not necessarily indicative of the results that may have been attained had the combinations been in effect at the beginning of the periods presented or that may be achieved in the future.
 
   
Year Ended December 31,
 
   
2014
   
2013
 
             
Pro forma net revenue
  $ 44,625,679     $ 43,891,384  
Pro forma net income
  $ 1,386,037     $ 897,149  
Pro forma basic net income per share
  $ 0.06     $ 0.04  
Pro forma diluted net income per share
  $ 0.06     $ 0.04  

 
PART IV
 
ITEM 15.                                EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
 
No.
Item
2.1
Agreement and Plan of Reorganization dated as of November 20, 2001, by and between Auxilio and e-Perception, Inc., incorporated by reference to Exhibit 1.1 to our Form 8-K filed on January 24, 2002.
2.2
Agreement and Plan of Merger, dated April 1, 2004, by and between Auxilio, PPVW Acquisition Corporation, and Alan Mayo & Associates, Inc., incorporated by reference to Exhibit 2.1 to our Form 8-K filed on April 16, 2004.
3.1
Articles of Incorporation of Auxilio, as amended, incorporated by reference to Exhibit 3.1 to our Form 10-KSB filed on April 19, 2005.
3.2
Amended and Restated Bylaws of Auxilio, incorporated by reference to Exhibit 2 to our Form 10-SB filed on October 1, 1999.
4.1
Subscription Agreement, dated January 9, 2002, by and among Auxilio and each of the stockholders of e-Perception, Inc., incorporated by reference to Exhibit 1.1 to our Form 8-K filed on January 24, 2002.
4.2
Form of Subscription Agreement entered into between April 6, 2009 and April 15, 2009 with Michael Vanderhoof and Edward B. Case, incorporated by reference to Exhibit 4.1 of our Form 8-K filed on May 14, 2009.
10.1
Auxilio’s 2001 Stock Option Plan, incorporated by reference to Exhibit 4.1 to our Form S-8 filed on March 3, 2011.*
10.1.1
Form of Stock Option Agreement under Auxilio’s 2001 Stock Option Plan, incorporated by reference to Exhibit 4.6 to our Form S-8 filed on March 3, 2011.*
10.2
Auxilio’s 2003 Stock Option Plan, incorporated by reference to Exhibit 4.2 to our Form S-8 filed on March 3, 2011.*
10.2.1
Form of Stock Option Agreement under Auxilio’s 2003 Stock Option Plan, incorporated by reference to Exhibit 4.7 to our Form S-8 filed on March 3, 2011.*
10.3
Auxilio’s 2004 Stock Option Plan, incorporated by reference to Exhibit 4.3 to our Form S-8 filed on March 3, 2011.*
10.3.1
Form of Stock Option Agreement under Auxilio’s 2004 Stock Option Plan, incorporated by reference to Exhibit 4.8 to our Form S-8 filed on March 3, 2011.*
10.4
Auxilio’s 2007 Stock Option Plan, incorporated by reference to Exhibit 4.4 to our Form S-8 filed on March 3, 2011.*
10.5
Amendment to Auxilio 2007 Stock Option Plan, incorporated by reference to Exhibit 4.5 to our Form S-8 filed on March 3, 2011.*
10.5.1
Form of 2007 Stock Option Agreement, incorporated by reference to Exhibit 4.9 to our Form S-8 filed on March 3, 2011.*
10.6
Auxilio’s 2011 Stock Incentive Plan, incorporated by reference to Exhibit 4.1 to our Form S-8 filed on August 24, 2011.*
10.6.1
Form of Auxilio’s 2011 Stock Option Agreement under the 2011 Stock Incentive Plan, incorporated by reference to Exhibit 4.3 to our Form S-8 filed on August 24, 2011.*
10.6.2
Form of Restricted Stock Agreement under the Auxilio 2011 Stock Incentive Plan, incorporated by reference to Exhibit 4.4 to our Form S-8 filed on August 24, 2011.*
10.7
Asset Purchase Agreement between Workstream USA, Inc., Workstream, Inc. and PeopleView, Inc. dated March 8,.2004, incorporated by reference to Exhibit 2.1 to our Form 8-K filed on April 2, 2004.
10.8
Addendum dated as of May 27, 2004 to Asset Purchase Agreement dated March 17th, 2004 between Workstream Inc. Workstream USA, Inc. and PeopleView, Inc., incorporated by reference to Exhibit 2.1 to our Form 8-K/A filed on August 3, 2004.
10.9
Standard Office Lease Agreement, dated November 12, 2009, by and between Auxilio and Realty Associates Fund V L.P., incorporated by reference to Exhibit 10.15 to our Form 10-K filed on March 31, 2010.
 
 
No.
Item
10.10
Executive Employment Agreement, effective  January 1, 2012, by and between Auxilio and Joseph Flynn, incorporated by reference to Exhibit 10.2 to our Form 8-K filed on  December 23, 2011.
10.11
Executive Employment Agreement, effective January 1, 2012, by and between Auxilio and Paul T. Anthony, incorporated by reference to Exhibit 10.1 to our Form 8-K filed on December 23, 2011.
10.12
Executive Employment Agreement, effective  January 1, 2014, by and between Auxilio and Joseph Flynn, incorporated by reference to Exhibit 10.2 to our 10-Q filing on May 14, 2014.
10.13
Executive Employment Agreement, effective January 1, 2014, by and between Auxilio and Paul T. Anthony, incorporated by reference to Exhibit 10.2 to our 10-Q filing on May 14, 2014.
10.14
Form of 8% Convertible Promissory Note, dated July 29, 2011, incorporated by reference to Exhibit 10.1 to our Form 8-K filed on August 3, 2011.
10.15
Form of Warrant to Purchase Common Stock, dated July 29, 2011, incorporated by reference to Exhibit 10.2 to our Form 8-K filed on August 3, 2011.
10.16
Placement Agent Warrant to Purchase Common Stock, dated July 29, 2011, incorporated by reference to Exhibit 10.3 to our Form 8-K filed on August 3, 2011.
10.17
Form of Security Agreement, dated July 29, 2011, incorporated by reference to Exhibit 10.4 to our Form 8-K filed on August 3, 2011.
10.18
Form of Registration Rights Agreement, dated July 29, 2011, incorporated by reference to Exhibit 10.5 to our Form 8-K filed on August 3, 2011.
10.19
Form of Investment Unit Purchase Agreement, dated July 29, 2011, incorporated by reference to Exhibit 10.6 to our Form 8-K filed on August 3, 2011.
10.20
Loan and Security Agreement by and among Auxilio, Inc., Auxilio Solutions, Inc. and AvidBank Corporate Finance, a division of AvidBank, dated effective April 19, 2012, incorporated by reference to Exhibit 10.1 to our Form 8-K filed on May 9, 2012.
10.21
Intellectual Property Security Agreement by and among Auxilio, Inc., Auxilio Solutions, Inc. and AvidBank Corporate Finance, a division of AvidBank, dated effective April 19, 2012, incorporated by reference to Exhibit 10.2 to our Form 8-K filed on May 9, 2012.
10.22
Form of Subordination by and among AvidBank Corporate Finance, a division of AvidBank and certain individual creditors dated effective April 19, 2012, incorporated by reference to Exhibit 10.3 to our Form 8-K filed on May 9, 2012.
10.23
Warrant to Purchase Stock issued by Auxilio, Inc. to AvidBank Holdings, Inc. dated effective April 24, 2012, incorporated by reference to Exhibit 10.4 to our Form 8-K filed on May 9, 2012.
10.24
Warrant to Purchase Common Stock issued by Auxilio, Inc. to Joseph Flynn dated January 16, 2013, incorporated by reference to Exhibit 10.1 to our Form 8-K filed on January 22, 2013.
10.25
Warrant to Purchase Common Stock issued by Auxilio, Inc. to Paul Anthony dated January 16, 2013, incorporated by reference to Exhibit 10.1 to our Form 8-K filed on January 22, 2013..
10.26
Warrant to Purchase Common Stock issued by Auxilio, Inc. to Simon Vermooten dated January 16, 2013, incorporated by reference to Exhibit 10.1 to our Form 8-K filed on January 22, 2013..
10.27
Stock Purchase Agreement between Auxilio, Inc., Delphiis, Inc., certain stockholders of Delphiis, Inc., and Mike Gentile as Seller’s Representative dated effective July 1, 2014, incorporated by reference to Exhibit 99.11 to our Form 8-K filed on July 8, 2014.
10.28
Second Amendment to Loan and Security Agreement dated as of April 25, 2014, incorporated by reference to Exhibit 10.1 to our 10-Q filed on May 14, 2014.
10.29
Note Conversion Agreement between Auxilio, Inc. and Mike Gentile dated effective as of January 12, 2015, incorporated by reference to Exhibit 99.1 to our Form 8-K filed on February 27, 2015.
14
Code of Ethics, incorporated by reference to Exhibit 14.1 to our Form 10-KSB filed on April 14, 2004.
16.1
Letter regarding change in certifying accountants, dated February 14, 2002, incorporated by reference to Exhibit 16 to our Form 8-K filed on February 15, 2002.
16.2
Letter regarding change in certifying accountants dated December 22, 2005, incorporated by reference to Exhibit 16.1 to our Form 8-K/A filed on January 24, 2006.
21.1
Subsidiaries.
23.1
Consent of Haskell & White LLP, Independent Registered Public Accounting Firm.
24
Power of Attorney (included on the Signature Page).
31.1
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a).
31.2
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a).
32.1
Certification of CEO and CFO pursuant to 18 U.S.C. §1350 as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002.
 
*           Each of these Exhibits constitutes a management contract, compensatory plan or arrangement.
 


SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) with the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
AUXILIO, INC.
 
By:           /s/ Joseph J. Flynn                                                      
Joseph J. Flynn
Chief Executive Officer and
Principal Executive Officer
 
March 30, 2015
 
By:           /s/ Paul T. Anthony                                                      
Paul T. Anthony
Chief Financial Officer and
Principal Financial Officer
 
March 30, 2015
 
POWER OF ATTORNEY AND SIGNATURES
 
We, the undersigned directors and officers of Auxilio, Inc., do hereby constitute and appoint each of Joseph J. Flynn and Paul T. Anthony as our true and lawful attorneys-in-fact and agents with power of substitution, to do any and all acts and things in our name and behalf in our capacities as directors and officers and to execute any and all instruments for us and in our names in the capacities indicated below, which said attorneys-in-fact and agents, or either of them, may deem necessary or advisable to enable said corporation to comply with the Securities and Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Annual Report on Form 10-K, including specifically but without limitation, power and authority to sign for us or any of us in our names in the capacities indicated below, any and all amendments (including post-effective amendments) hereto; and we do hereby ratify and confirm all that said attorney-in-fact and agent, shall do or cause to be done by virtue hereof.
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
 
Signature
Title
Date
/s/ Joseph J. Flynn
Joseph J. Flynn
 
Chief Executive Officer
(Principal Executive Officer and Director)
March 30, 2015
/s/ Paul T. Anthony
Paul T. Anthony
 
Chief Financial Officer
(Principal Financial Officer and Accounting Officer)
March 30, 2015
/s/ Edward Case
Edward Case
 
 
Director
March 30, 2015
/s/ Michael Joyce
Michael Joyce
 
 
Director
March 30, 2015
/s/ William Leonard
William Leonard
 
 
Director
March 30, 2015
/s/ John D. Pace
John D. Pace
 
 
Director
(Non-executive Chairman of the Board)
March 30, 2015
/s/ Max Poll
Max Poll
 
 
Director
March 30, 2015
/s/ Michael Vanderhoof