UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

 

 

For the fiscal year ended December 31, 2012.2015.

 

 

For the transition period from _____ to _____

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DOCUMENTS INCORPORATED BY REFERENCE.

 

 

ANNUAL REPORT ON FORM 10-K

 

TABLE OF CONTENTS

 

 

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”"Annual Report"), which are deemed to be “forward-looking”"forward-looking" within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”"Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”"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"Litigation Reform Act”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”"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”"Business" section, the “Risk Factors”"Risk Factors" section, the “Legal Proceedings”"Legal Proceedings" section, the “Management’s"Management's Discussion and Analysis of Financial Condition and Results of Operations”Operations" section and other sections of this Annual Report, as well as in our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. We expressly disclaim any intent or obligation to update any forward-looking statements after the date hereof to conform such statements to actual results or to changes in our opinions or expectations, except as required by applicable law.

 

PART I

 

 

 

Auxilio, Inc. (including our subsidiary,subsidiaries, Auxilio Solutions, Inc. areand Delphiis, Inc.; referred to collectively in this Annual Report, as “Auxilio,” “we,” “our”"Auxilio," the "Company," "we," "our" and “us”"us") is engaged in the business of providing fully outsourced print management services and cyber security professional services primarily to the healthcare industry.industry, and also to financial institutions, gaming and other industries. Auxilio was incorporated in Nevada on August 29, 1995, under the name Corporate Development Centers, Inc. As a result of a series of transactions, we changed our name to “Auxilio,"Auxilio, Inc.”" in April 2004. Our principal executive offices are located at 26300 La Alameda,27271 Las Ramblas, Suite 100,200, Mission Viejo, California 92691.

 

 

 

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.”

 

 

We are engaged in the business of providing fully-outsourced managed print services and IT security consulting services primarily to the healthcare industry, working exclusively with hospitalsand also to financial institutions, gaming and other industries. Our business is operated throughout the United States. We are vendor independent

Our managed print service group  provides workflow solutions, and provide intelligent solutions,is a risk freerisk-free program andwith guaranteed savings. We assume all costs related to print environments through customized streamlined and seamless integration of services at predictable fixed rates.

Our data security group is built on four pillars to manageserve the entire process.most common security needs in healthcare: Security Process and Program Development, Regulatory and Penetration Assessments, Incident and Breach Response and Delphiis™ IT Risk Manager SaaS Solution. Through our proven and prescriptive methodology we help build the foundation needed to ensure the confidentiality, integrity and security of patient health information (PHI). And our software application suite streamlines how hospitals and health systems perform annual and on-going risk assessments on their business associates, clinics, projects and hospitals.

 

 

We operate in a highly competitive market. The majority of the competition in the healthcare industry market for print management services comes from the large photocopy/multi-functional digital device manufacturers such as Xerox, Canon, Konica Minolta, Ricoh and Sharp. The competitive landscape also contains a number of regional and local equipment dealers and distributors that exist in the communities in which the hospitals serve. In addition, we compete with in-house departments performing the functions that we are seeking to have them outsource to us.

 

Nevertheless, our analysis of the competitive landscape shows a very strong opportunity for fully outsourcedfully-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:

 

 

 

 

 

 

AllThe 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, 2012,2015, our fourthree largest customers represented approximately 59%50% of our revenues.

 

 

We maintain a database that contains information related to our current and prospective customers’managed print services customers' image and document outputs for certain periods of time, image and document outputs for each piece of machinery maintained at the customer’scustomer's location and trends for each of the foregoing. Our database allows us to anticipate our customers’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 for or been granted any patentsa patent with respect to ourany managed print service technology, or processes, as such intellectual property related to document and image management or document and image processing.  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.management.

 

 

As of December 31, 2012,2015, we had 173291 full-time employees and three part-time employees, including 152252 employees engaged in providing services, 714 employees engaged in sales and marketing, and 1422 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.

 

 

 

 

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:

 

 

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.

 

 

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.

 

 

 

The loss of any key customer could have a material adverse effect upon our financial condition, business, prospects and results of operation. Our fourthree largest customers represented approximately 59%50% of our revenues for the year ended December 31, 2012.2015. We anticipate that these customers will represent approximately 40%50% of revenue for 2013;2016; therefore the loss of one or more of these customers may contribute to our inability to operate as a going concern and may require us to obtain equity funding or debt financing to continue our operations. We cannot be certain that we will be able to obtain such financing on commercially reasonable terms, or at all.

 

 

The healthcare industry is highly regulated.  Recent legislationLegislation such as the Patient Protection and Affordable Care Act of 2010 has changed and will likely continue to change how healthcare services are provided and managed.  In addition, legislation related to electronic medical records may impact our business.  In 2009, the American Recovery and Reinvestment Act of 2009 included incentives and penalties related to electronic medical records.  For example, Medicare/Medicaid reimbursements will be less for providers who failfailed to use electronic medical records by 2015.

 

The use of electronic medical records does not necessarily mean a hospital’shospital'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.

 

 

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 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.

 

 

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’smarket'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.

 

 

We may need capital in the future to continueexpand our business operations or to expand.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 needare unable to raise capital, we may not be able to:

 

 

 

 

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 market for our Common Stock is volatile, having ranged in the last twelve months from a low of $0.73$0.91 to a high of $1.47$1.25 on the OTCBB.OTCQB. The market price for our Common Stock has been, and is likely to continue to be, volatile. The following factors may cause significant fluctuations in the market price of shares of our Common Stock:

 

 

 

 

 

 

 

 

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’smanagement's attention and resources.

 

 

As of December 31, 2012,2015, we had approximately 19,818,64224,452,085 shares of our Common Stock outstanding.

 

If all warrants, options and optionsrestricted stock grants outstanding as of December 31, 20122015 are exercised prior to their expiration, up to approximately 8.26.5 million additional shares of Common Stock could become freely tradable. Additionally, we have granted 265,179 Restricted Stock Units which vest in 2013. 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

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 $1,800,000 in convertible debt which, if converted to stock, would furtheran anti-takeover effect. For example, the issuance of a large block of Common Stock could dilute the perstock 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.

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 value.price requirement.

 

 

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.

 

 

 

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 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.

 

 

A deterioration in the global credit markets, the financial services industry and the U.S. economy has resultedcould result in a period of substantial turmoil and uncertainty characterized by unprecedented intervention by the United States federal government and the failure, bankruptcy, or sale of various financial and other institutions.turmoil. The impact of these events on our business and the severity of the currentan economic crisis is uncertain. It is possible that the currenta crisis in the global credit markets, the financial services industry andor the U.S. economy maycould adversely affect our business, vendors and prospects as well as our liquidity and financial condition. As a result, no assurances can be given as toThis could impact our ability to increase our customer base and generate positive cash flows. Although we werehave been able to raise additional working capital through convertible note agreements and private placement offerings of our Common Stock in the past, we may not be able to continue this practice in the future or we may not be able to obtain additional working capital through other debt or equity financings. In the event that sufficient capital cannot be obtained, we may be forced to significantly reduce operating expensesminimize growth to a point that would be detrimental to our business operations and business development activities. These courses of action may be detrimental to our business prospects and result in material 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.

 

 

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”"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”"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.

 

 

 

 

We lease approximately 10,00017,000 square feet of office space in one building located  at 26300 La Alameda,27271 Las Ramblas, Suite 100,200, Mission Viejo, California  92691. TheThis lease terminates in SeptemberApril of 2015.2021. We also lease approximately 3,000 square feet of office space at 4690 Carpinteria Ave, Suite B, Carpinteria, CA 93013. This lease is currently on a month-to-month rental. We expect that the current leased premises will be satisfactory until the future growth of our business operations necessitates an increase in office space.  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.

 

 

We are not a party to any material legal proceedings, nor has any material proceedingsproceeding been terminated during the fiscal year ended December 31, 2012.2015.

 

 

 

 

Our Common Stock is traded on the OTCBBOTCQB under the symbol “AUXO.OB.”"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, 20132016 (through March 27, 2013)28, 2016), and the fiscal years ended December 31, 20122015 and 2011,2014, furnished by the OTCBB.OTCQB.

 

 

 

On March 27, 2013,28, 2016, we had approximately 103 stockholders of record.

 

 

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”"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.

 

 

During the fiscal year ended December 31, 2012,2015, we did not repurchase any of our securities.

 

 

The following table provides certain information as of December 31, 20122015 with respect to our existing equity compensation plans under which shares of our Common Stock isare authorized for issuance.

 

 

 

 

 

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.

 

 

We provide integration strategiesfully-outsourced managed print services and outsourceddata security services for print managementto the healthcare industry that help reduce expenses, increase efficiency and mitigate risks across a hospital or health system. We work exclusively in healthcare facilities. We helpand 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’scustomer's premises using a combination of proprietary processes and innovative web basedweb-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 fixes this price per print for the term of the contract and includes the placement of a highly trained resident team on-site to manage the entire process.  We are focused solely on the healthcare industry.

 

 

The SEC defines critical accounting policies as those that are, in management’smanagement'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.”"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:

 

 

 

 

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

 

 

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 expense.  These estimates and assumptionsfinancial 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 the requirementstheir characteristics.  Realization of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) relating to accounting for uncertaintydeferred tax asset is dependent on generating sufficient taxable income in income taxes.  Our policyfuture years.  Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is to classify interest and penalties related to unrecognized income tax benefits as a component of income tax expense.

 

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’smanagement's judgment in its application. There are also areas in which management’smanagement'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.

 

 

Year Ended December 31, 20122015 Compared to the Year Ended December 31, 20112014

 

 

 

Cost of Revenue

 

Gross margin decreased to 17% of revenues atrevenue in 2015 as compared to 19% in 2014. This decrease is primarily a result of the start of our engagement with mostsignificant increase in new customers.recurring revenue customers in 2015. In addition to the costs associated with implementing our services, we absorb our new customer’scustomers' legacy contracts with third-party vendors.  As we implement our programs, we strive to improve upon these legacy contracts, thus reducereducing costs over the term of the contract. We anticipate this trend to continue but anticipate an overall increase in the cost of revenues sold as a result of the expansion of our customer base.

 

 

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 $2,604,783$2,809,377 for the year ended December 31, 2012,2015, as compared to $1,830,538$2,125,085 for the same period in 2011. We incurred2014. Staffing costs, including commissions, increased approximately $700,000 in 2015 because we increased sales commissions to employees totalingstaff headcount with approximately $490,000 in 2012 compared to $130,000 in 2011.  Also included in sales and marketing costs in 2012 is a non-cash chargehalf of approximately $350,000 in connection with restricted stock units granted to channel partners for marketing and placement services.  This compares to approximately $80,000 paid in 2011 for the same services.cost increase coming from our new security offerings.

 

 

 

 

Income tax expense for the year ended December 31, 20122015 was $7,440$152,436 and was $7,495$78,860 for the year ended December 31, 2011.2014. The charges in both years areincrease is primarily for minimum payments and charges for state income taxes in apportioneddue to our recent expansion into states that disallow consolidated tax return filings.where we have no NOL's to offset taxable earnings.

 

 

At December 31, 2012,2015, our cash and cash equivalents were $2,190,972$6,436,732 and our negative working capital was $661,457.$3,243,652. By comparison, our working capital was $2,790,005 as of December 31, 2014. Our principal cash requirements were for operating expenses, including equipment, supplies, employee costs, and capital expenditures and funding of the operations. Our primary sources of cash were from service and equipment sale revenues, commercial line of credit borrowings, the exercise of options and warrants and the sale of Common Stock in compliance with applicable federal and state securities laws.revenues.

 

During the year ended December 31, 2012,2015, cash used forprovided by operating activities was $29,601$2,445,586 as compared to $2,023,052cash provided by operating activities of $1,480,510 for the same period in 2011.  The difference in2014.  Our cash generated from operating activities in 2011 was2015 improved over 2014 primarily due to the costs incurred to implement our new recurring revenue contracts, more aggressive sales and marketing efforts to obtain new clients and legal and consulting fees in connection with the development of operational training tools, statutory filings, the drafting and adoption of the new stock incentive plan and investor relations.successful trade receivable collection efforts.

 

We expect to continue to establish recurring revenue contracts to new customers throughout 2013.  Since we2016, though at a slower rate than in 2015. We expect to have higher cost of revenues at the start of our engagementthe engagements with most new customers,customers. In June 2015, we may seek additional financing, which may include debt and/or equity financing or funding through third party agreements.  In July of 2011, we closed onborrowed $2,000,000 under a private offering of secured convertible notes and warrants with gross proceeds of $1,850,000.  In addition, in May 2012 we entered into an asset based line of creditfour year, $4,000,000 term loan agreement with a financial institution. This facility provides for borrowings up toinstitution where we also have in place the availability of a $2,000,000 not to exceed 80%line 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.credit. Any equity financing may result in dilution to existing stockholders and any debt financing may include restrictive covenants. Management believes that cash generated from debt and/or equity financing arrangements along with funds from operations will be sufficient to sustain our business operations over the next twelve months. Management believes that cash flows from operations together with cash reserves and our bank line of credit availability will allow us to operate without disruption.

 

 

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"Contractual Obligations, Contingent Liabilities and Commitments.”" As of December 31, 2012,2015, we did not have any other relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

 

 

As of December 31, 2012,2015, expected future cash payments, including interest portion, related to contractual obligations, contingent liabilities, and commitments were as follows:

 

 

Not applicable.

 

 

The financial statements required by this item are included in Part IV, Item 15 of this Annual Report.

 

 

None.

 

 

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’sSEC'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"disclosure controls and procedures”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.

 

 

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, 2012,2015, of our internal control over financial reporting, based on the framework established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”("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, 2012.2015.

 

This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’sManagement'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’smanagement's report in this Annual Report on Form 10-K.

 

 

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.

 

 

 

 

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 20132016 Annual Meeting of Stockholders (“("Proxy Statement”Statement"), is hereby incorporated by reference.

 

 

The information with respect to compensation of our executive officers appearing in our Proxy Statement is hereby incorporated by reference.

 

 

The information with respect to the security ownership of certain beneficial owners and management appearing in our Proxy Statement is hereby incorporated by reference.

 

 

The information with respect to certain relationships and related transactions with management appearing in our Proxy Statement is hereby incorporated by reference.

 

 

The information with respect to the principal accounting fees and services appearing in the Proxy Statement is hereby incorporated by reference.

 

 

 

 

 

The following consolidated financial statements and related notes thereto, and the report of our independent auditorregistered public accounting firm are filed as part of this Annual Report:

 

 

 

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.

 

 

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

 

 

We have audited the accompanying consolidated balance sheets of Auxilio, Inc. (the “Company”"Company") as of December 31, 20122015 and 2011,2014, and the related consolidated statements of operations, stockholders’income, stockholders' equity, and cash flows for each of the years in the two-year period ended December 31, 2012.then ended. These consolidated financial statements are the responsibility of the Company’sCompany'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’sCompany'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.

 

 

 

AUXILIO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONSINCOME

 

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

AUXILIO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

AUXILIO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

 

AUXILIO, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 20122015 AND 20112014

 

 

 

We are engaged in the business of providing fully-outsourced managed print services and IT security consulting data security services primarily to the healthcare industry, working exclusively with hospitalsand also to financial institutions, gaming and other industries.  Our business is operated throughout the United States.

 

 

The accompanying consolidated financial statements were prepared in conformity with GAAP, which contemplate continuation of Auxilio as a going concern. We have reported a net loss of $2,381,866 for the year ended December 31, 2012 and an accumulated deficit of $22,889,401 as of December 31, 2012. We reported a net loss of $2,591,642 for the year ended December 31, 2011. We have negative working capital of $661,457 as of December 31, 2012.

 

 

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

 

We enter into arrangements that include multiple deliverables, which typically consist of the sale of MFDMulti-Function Device ("MFD") equipment and a support services contract.  We account for each element within an arrangement with multiple deliverables as separate units of accounting.  Revenue is allocated to each unit of accounting under the guidance of FASB ASC Topic 605-25, Multiple-Deliverable Revenue Arrangements, which provides criteria for separating consideration in multiple-deliverable arrangements by establishing a selling price hierarchy for determining the selling price of a deliverable.  The selling price used for each deliverable is based on vendor-specific objective (“VSOE”evidence ("VSOE") evidence 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.

 

 

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.

 

 

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 arewere uncollectible at December 31, 2012.2015 or 2014.

 

 

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 are carried at cost less accumulated depreciation. Depreciation of the property and equipment is provided using the straight-line method over the assets’assets' estimated economic lives, which range from 2two to 7seven years. Expenditures for maintenance and repairs are charged to expense as incurred.

 

To test for impairment, charge infirst we perform a qualitative assessment. If we determine, based on qualitative factors, that 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 chargegoodwill is recognized in the amount by whichmore likely than not greater than the carrying value exceeds estimated fair value.  For definite life intangible assets, if the carrying value cannotamount, a quantitative calculation would not 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.

 

 

 

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

 

 

 

 

The weighted average estimated fair value of stock options granted during 20122015 and 20112014 was $0.55$0.42 and $0.44$0.55 per share, respectively. These amounts were determined using the Black-Scholes option-pricing model, which values options based on the stock price at the grant date, the expected life of the option, the estimated volatility of the stock, the expected dividend payments, and the risk-free interest rate over the expected life of the option. The assumptions used in the Black-Scholes model were as follows for stock options granted in 20122015 and 2011:2014:

 

The Black-Scholes option valuation 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, 2012,2015, we have not granted any restricted stock units under the 2011 Stock Incentive Plan.

 

 

In accordance with ASC Topic 260, “Earnings"Earnings Per Share,”" basic net lossincome 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 lossincome by the weighted average number of shares of our Common Stock issued and outstanding during such period. Diluted net lossincome 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, 2012,2015, potentially dilutive securities consisted of options and warrants to purchase 8,179,6376,529,786 shares of our Common Stock at prices ranging from $0.30 to $2.15 per share. Of these potentially dilutive securities, noneonly 828,364 of the shares ofto purchase Common Stock underlyingfrom the options and warrants wereare included infrom the computation of diluted earnings per share as theirbecause the effect of including the remaining instruments would be anti-dilutive.

 

As of December 31, 2011,2014, potentially dilutive securities consisted of options and warrants to purchase 9,349,5617,095,394 shares of our Common Stock at prices ranging from $0.30 to $6.75$2.15 per share. Of these potentially dilutive securities, noneonly 1,374,839 of the shares ofto purchase Common Stock underlyingfrom the options and warrants wereare included in the computation of diluted earnings per share as theirbecause the effect of including the remaining instruments would be anti-dilutive.

 

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