AUXILIO INC (Form: 10-Q, Received: 05/14/2014 13:17:06)

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2014

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission file number 000-27507

(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)

(Issuer’s telephone number)

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

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

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

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

Large accelerated filer o Accelerated filer o

Non-accelerated filer o Smaller reporting company þ

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

The number of shares of the issuer's common stock, $0.001 par value, outstanding as of May 13, 2014 was 20,770,632.

ITEM 1. FINANCIAL STATEMENTS.

AUXILIO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

	MARCH 31, 2014			DECEMBER 31, 2013
	(unaudited)

ASSETS
Current assets:
Cash and cash equivalents	$	4,752,319		$	4,668,624
Accounts receivable, net		3,592,189			3,856,791
Supplies		1,039,388			967,354
Prepaid and other current assets		345,859			332,759
Total current assets		9,729,755			9,825,528

Property and equipment, net		151,222			160,709
Deposits		34,413			34,413
Loan acquisition costs		29,236			51,162
Goodwill		1,517,017			1,517,017
Total assets	$	11,461,643		$	11,588,829

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable and accrued expenses	$	5,231,390		$	5,057,339
Accrued compensation and benefits		1,130,925			1,556,513
Line of credit		400,000			400,000
Deferred revenue		848,397			868,186
Convertible notes payable, net of discount of $47,000 and $82,250 at March 31, 2014 and December 31, 2013, respectively		1,553,000			1,617,750
Current portion of capital lease obligations		64,960			71,933
Total current liabilities		9,228,672			9,571,721

Long-term liabilities:
Capital lease obligations less current portion		32,692			46,558
Total long-term liabilities		32,692			46,558

Commitments and contingencies

Stockholders' equity:
Common stock, par value at $0.001, 33,333,333 shares authorized, 20,743,966 and 20,643,966 shares issued and outstanding at March 31, 2014 and December 31, 2013, respectively		20,745			20,645
Additional paid-in capital		23,791,992			23,491,490
Accumulated deficit		(21,612,458	)		(21,541,585	)
Total stockholders' equity		2,200,279			1,970,550
Total liabilities and stockholders’ equity	$	11,461,643		$	11,588,829

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

AUXILIO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

	Three Months Ended March 31,
	2014			2013
Revenues	$	10,244,574		$	10,092,152
Cost of revenues		8,504,940			8,515,938
Gross profit		1,739,634			1,576,214
Operating expenses:
Sales and marketing		508,210			682,187
General and administrative expenses		1,201,874			992,479
Total operating expenses		1,710,084			1,674,666
Income (loss) from operations		29,550			(98,452	)
Other income (expense):
Interest expense		(98,823	)		(126,348	)
Total other income (expense)		(98,823	)		(126,348	)
Loss before provision for income taxes		(69,273	)		(224,800	)
Income tax expense		1,600			5,500
Net loss	$	(70,873	)	$	(230,300	)

Net loss per share:
Basic	$	(0.00	)	$	(0.01	)
Diluted	$	(0.01	)	$	(0.01	)

Number of weighted average shares:
Basic		20,658,573			20,115,873
Diluted		22,258,573			20,115,873

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

AUXILIO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
THREE MONTHS ENDED MARCH 31, 2014
(UNAUDITED)


					Additional					Total
	Common Stock				Paid-in		Accumulated			Stockholders’
	Shares		Amount		Capital		Deficit			Equity
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 directors		-		-		200,602		-			200,602
Conversion of convertible note payable		100,000		100		99,900		-			100,000
Net loss		-		-		-		(70,873	)		(70,873	)
Balance at March 31, 2014		20,743,966	$	20,745	$	23,791,992	$	(21,612,458	)	$	2,200,279

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

AUXILIO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

	Three Months Ended March 31,
	2014			2013
Cash flows from operating activities:
Net loss	$	(70,873	)	$	(230,300	)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation		24,169			34,487
Stock compensation expense for warrants and options issued to employees and directors		200,602			196,516
Fair value of stock granted for marketing services		-			190,484
Interest expense related to accretion of debt discount costs		35,250			35,250
Interest expense related to amortization of loan acquisition costs		21,926			37,052
Changes in operating assets and liabilities:
Accounts receivable		264,602			697,236
Supplies		(72,034	)		(197,928	)
Prepaid and other current assets		(13,100	)		(54,040	)
Deposits		-			1,250
Accounts payable and accrued expenses		174,051			915,760
Accrued compensation and benefits		(425,588	)		(603,921	)
Deferred revenue		(19,789	)		25,843
Net cash provided by operating activities		119,216			1,047,689
Cash flows from investing activities:
Purchases of property and equipment		(14,682	)		-
Net cash used for investing activities		(14,682	)		-
Cash flows from financing activities:
Net repayments on line of credit agreement		-			(528,486	)
Payments on capital leases		(20,839	)		(26,460	)
Net proceeds from issuance of common stock through employee stock options		-			1,175
Net cash used for financing activities		(20,839	)		(553,771	)
Net increase in cash and cash equivalents		83,695			493,918
Cash and cash equivalents, beginning of period		4,668,624			2,190,972
Cash and cash equivalents, end of period	$	4,752,319		$	2,684,890

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

AUXILIO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)

	Three Months Ended March 31,
	2014		2013
Supplemental disclosure of cash flow information:

Interest paid	$	42,313	$	54,045

Income taxes paid	$	49,460	$	5,655

Non-cash investing and financing activities:

Property and equipment acquired through capital leases	$	-	$	25,834

Conversion of note payable into common stock	$	100,000	$	-

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

THREE MONTHS ENDED MARCH 31, 2014 AND 2013

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of Auxilio, Inc. and its subsidiaries (the “Company”, “we”, “us” or “Auxilio”) have been prepared in accordance with generally accepted accounting principles of the United States of America (“GAAP”) for interim financial statements pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, these financial statements do not include all of the information and notes required by GAAP for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, as filed with the Securities and Exchange Commission (“SEC”) on March 31, 2014.

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

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

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

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

2 . RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

From time to time, new accounting pronouncements are issued that we adopt as of the specified effective date. Unless otherwise discussed in these financial statements and notes or in our financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2013, we believe the impact of any other recently issued standards that are not yet effective are either not applicable to us at this time or will not have a material impact on our consolidated financial statements upon adoption.

3. OPTIONS AND WARRANTS

Below is a summary of Auxilio stock option and warrant activity during the three month period ended March 31, 2014:

Options	Shares			Weighted Average Exercise Price		Weighted Average Remaining Term in Years		Aggregate Intrinsic Value
Outstanding at December 31, 2013		5,256,349		$	1.03
Granted		200,000			1.25
Exercised		-			-
Cancelled		(11,538	)		1.11
Outstanding at March 31, 2014		5,444,811		$	1.04		5.14	$	3,923,964
Exercisable at March 31, 2014		4,646,052		$	1.03		4.53	$	3,096,333

Warrants	Shares		Weighted Average Exercise Price		Weighted Average Remaining Term in Years		Aggregate Intrinsic Value
Outstanding at December 31, 2013		2,983,565	$	1.15
Granted		-		-
Exercised		-		-
Cancelled		-		-
Outstanding at March 31, 2014		2,983,565	$	1.15		4.19	$	1,695,032
Exercisable at March 31, 2014		2,283,565	$	1.20		4.19	$	1,198,032

During the three months ended March 31, 2014, we granted a total of 200,000 options to an employee to purchase shares of our common stock at an exercise price of $1.25 per share. The exercise price equals the fair value of our stock on the grant date. The fair value of the options was determined using the Black-Scholes option-pricing model. The assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 0.07%; (ii) estimated volatility of 64.00%; (iii) dividend yield of 0.0%; and (iv) expected life of the options of three years. Of these options, 100,000 have graded vesting annually over three years starting February 2014.The other 100,000 vest contingent with the achievement of certain financial performance metrics of the Company for the year ended December 31, 2014, which would then begin a graded vesting over three years beginning in February 2015.

For the three months ended March 31, 2014 and 2013, stock-based compensation expense recognized in the statement of operations was as follows:

	2014		2013
Cost of revenues	$	127,164	$	70,969
Sales and marketing		15,075		54,706
General and administrative expenses		58,363		70,841
Total stock based compensation expense	$	200,602	$	196,516

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 cost of the remaining shares was 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.

In October 2012 we again amended the Sodexo Agreement and eliminated the additional sales and marketing resources that we added under the May 2011 Amendment (such amendment referred to herein as the “October 2012 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 $14,101 and $7,791 for the three months ended March 31, 2014 and 2013, respectively. On January 7, 2013, we granted another 25,253 shares to Sodexo as a result of another new sale. These shares vested immediately.

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 three months ended March 31, 2013.

5. NET LOSS PER SHARE

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

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

	Three Months Ended March 31,
	2014			2013
Numerator:
Net loss	$	(70,873	)	$	(230,300	)
Effects of dilutive securities:
Convertible notes payable		(42,524	)		-
Loss after effects of conversion of note payable	$	(113,397	)	$	(230,300	)

Denominator:
Denominator for basic calculation weighted average shares		20,658,573			20,115,873

Dilutive common stock equivalents:
Convertible notes payable		1,600,000			-
Denominator for diluted calculation weighted average shares		22,258,573			20,115,873

Net loss per share:
Basic net loss per share	$	(0.00	)	$	(0.01	)
Diluted net loss per share	$	(0.01	)	$	(0.01	)

6. ACCOUNTS RECEIVABLE

A summary of accounts receivable is as follows:

	March 31, 2014			December 31, 2013
Trade receivable	$	4,269,403		$	4,572,656
Unapplied advances and unbilled revenue		(677,214	)		(715,865	)
Allowance for doubtful accounts		-			-
Total accounts receivable	$	3,592,189		$	3,856,791

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 (the “Avidbank Amendment”). Under the Avidbank Amendment, the term of the revolving line-of-credit of up to $2.0 million extends through April 26, 2014, at an interest rate of prime plus 2.0% per annum. As of March 31, 2014 the interest rate was 5.25%. Minimum interest payable with respect to any calendar quarter is $5,000. The amount available to us at any given time is the lesser of (a) $2.0 million, or (b) the amount available under our borrowing base (80% of our eligible accounts, minus (1) accrued client lease payables, and minus (2) accrued equipment pool liability). While there are outstanding credit extensions, we must maintain a minimum balance of unrestricted cash and cash equivalents at Avidbank of at least $400,000, measured on a monthly basis, our adjusted EBITDA shall be positive, as measured on a quarterly basis; provided however that 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 Avidbank Amendment, which is found as Exhibit 10.1 to our Form 10-Q filed with the SEC on May 15, 2013. We believe we were in compliance with all of the Avidbank agreement covenants as of March 31, 2014 and December 31, 2013.

In connection with our entry into the Loan and Security Agreement, we granted Avidbank (a) a general, first-priority security interest in all of our assets, equipment and inventory, and (b) a security interest in all of our intellectual property under an Intellectual Property Security Agreement. Each holder of convertible promissory notes issued in a private offering in July 2011 agreed to subordinate its right of payment and security interest in and to our assets to Avidbank throughout the term of the Loan and Security Agreement. 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.

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. There will no longer be a 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 this filing.

Interest charges associated with the Avidbank line of credit, including amortization of the discounts and loan acquisition costs totaled $5,250 and $29,126, respectively, for the three months ended March 31, 2014 and 2013, respectively.

8. 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 consists of (i) a $5,000 secured convertible promissory note (each a “Note” and collectively “Notes”) and (ii) a warrant (each a “Warrant” and collectively “Warrants”) to purchase 1,000 shares of our common stock at an exercise price of $1.50 per share. The Notes mature July 29, 2014 and are secured by our tangible and intangible assets, subject to the senior security interest of AvidBank, as discussed in the immediately preceding note. The Notes accrue interest at a rate of eight percent (8%) per annum, compounded annually, and the interest on the outstanding balance of the Notes is payable no later than thirty (30) days following the close of each calendar quarter. The Notes are convertible into 1,850,000 shares of common stock. The Warrants expire April 29, 2016 and are exercisable to purchase up to 370,000 shares of our common stock. We additionally granted piggyback registration rights to the investors in this offering. Several members of our Board at the time, including John Pace, Michael Joyce, Mark St. Clare and Michael Vanderhoof, participated in the offering.

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

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

Interest charges associated with the convertible notes payable, including amortization of the discounts and loan acquisition costs totaled $90,888 and $93,177 for the three months ended March 31, 2014 and 2013, respectively.

We also agreed to pay Cambria Capital, LLC a placement fee of $149,850 in sales commissions, reimbursement for costs associated with the placement of the Units and to issue a warrant to purchase up to 199,800 shares of common stock exercisable at a price of $1.50 per share. Cambria Capital, LLC is an affiliate of Michael Vanderhoof, a member of the Board. The engagement of Cambria Capital, LLC, the payment of the placement fee and the issuance of the warrant to Cambria Capital, LLC were approved by a majority of the disinterested members of the Board. We additionally granted piggyback registration rights to Cambria Capital, LLC that are the same as those afforded to the investors in the offering.

9. 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 is 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 Joseph J. 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. These warrants will vest contingent with the achievement of certain financial performance metrics of the Company in calendar years 2014, 2015 and 2016. 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 this filing.

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, and provided for an annual base salary of $219,037and contained an auto renewal provision. Mr. Anthony also received the customary employee benefits available to our employees. Mr. Anthony is 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 Executive Vice President (“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. These warrants will vest contingent upon the achievement of certain financial performance metrics of the Company in calendar years 2014, 2015 and 2016. 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 to the full context of the employment agreement which is found as Exhibit 10.3 to this filing.

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 .

Our three largest customers accounted for approximately 43% of our revenues for the three months ended March 31, 2014 and our three largest customers accounted for approximately 54% of our revenues for the three months ended March 31, 2013. Our largest customers had net accounts receivable totaling approximately $1,352,000 and $1,516,000 as of March 31, 2014 and December 31, 2013 respectively.

11. SEGMENT REPORTING

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

We performed an impairment test of goodwill as of December 31, 2013, determining that its estimated fair value based on its market capitalization was greater than our carrying amount including goodwill. We did not perform step 2 since the fair value was greater than the carrying amount.

Although the Company has experienced a net loss for the three months ended March 31, 2014, the net cash provided by operating activities totaled $119,216. No other triggering events were noted during the three months ended March 31, 2014, therefore management did not feel it was necessary to perform an interim impairment test.

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

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

Readers should carefully review the risk factors described below under the heading “Risk Factors” and in other documents we file from time to time with the SEC, including our Form 10-K for the fiscal year ended December 31, 2013. Our filings with the SEC, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those filings, pursuant to Sections 13(a) and 15(d) of the Exchange Act, are available free of charge at www.auxilioinc.com, when such reports are available via the EDGAR system maintained by the SEC at www.sec.gov.

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

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

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

APPLICATION OF CRITICAL ACCOUNTING POLICIES

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

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

● Revenue recognition and deferred revenue

Revenue is recognized pursuant to ASC Topic 605, “Revenue Recognition” (“ASC 605”). Revenues from equipment sales transactions are earned when there is persuasive evidence of an arrangement, delivery has occurred, the sales price has been determined and collectability has been reasonably assured. For the placement of equipment that is to be placed at a customer’s location at a future date, revenue is deferred until the placement of such equipment. Monthly service and supply revenue is earned monthly during the term of the contract, as services and supplies are provided.

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

● Accounts receivable valuation and related reserves

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

● New customer implementation costs

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

● Impairment of intangible assets

The Company performs an impairment test of goodwill at least annually or on an interim basis if any triggering events occur that would merit another test. The impairment test compares our estimate of our fair value based on its market capitalization to the Company’s carrying amount including goodwill. We have not had to perform step 2 of the impairment test because the fair value has exceeded the carrying amount.

● Stock-based compensation

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

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

Reference is made to our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 filed on March 31, 2014 for a discussion of our critical accounting policies.

RESULTS OF OPERATIONS

For the Three Months Ended March 31, 2014 Compared to the Three Months Ended March 31, 2013

Revenue increased by $152,422 to $10,244,574 for the three months ended March 31, 2014, as compared to the same period in 2013. Since the first quarter of 2013 we had a net increase of three recurring revenue contracts bringing us approximately $700,000 in additional revenue. Additionally we have a net expansion of service areas at several existing customers accounting for approximately $200,000 in additional service revenue. Equipment sales for the three months ended March 31, 2014 were approximately $400,000 as compared to approximately $1,200,000 for the same period in 2013. This reduction is due to the variance in equipment reaching the end of their initial lease term at our customers, thus not being ready for replacement.

Cost of revenue consists of document imaging equipment, parts, supplies and salaries and expenses of field services personnel. Cost of revenue was $8,504,940 for the three months ended March 31, 2014, as compared to $8,515,938 for the same period in 2013. While cost of revenue for the first quarter of 2014 is comparable to the same period in 2013, service and supply costs were approximately $400,000 more in 2014 and labor costs were approximately $200,000 more in 2014 due to the increase in recurring service contracts in comparison to the prior year. Offsetting this, equipment costs, which includes equipment provided under the recurring service contracts and equipment sold, was approximately $600,000 lower in 2014 due to the lower amount of equipment revenues during that period.

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

Sales and marketing expenses include salaries, commissions and expenses for sales and marketing personnel, travel and entertainment, and other selling and marketing costs. Sales and marketing expenses were $508,210 for the three months ended March 31, 2014, as compared to $682,187 for the same period in 2013. The variance is primarily a result of the termination of a channel partner agreement in 2013 which accelerated the vesting of equity instruments used in payment for marketing services.

General and Administrative

General and administrative expenses include personnel costs for finance, administration, information systems, and general management, as well as facilities expenses, professional fees, legal expenses and other administrative costs. General and administrative expenses increased by $209,395 to $1,201,874 for the three months ended March 31, 2014, as compared to $992,479 for the three months ended March 31, 2013. General and administrative expenses increased as a result of severance compensation paid to a terminated employee and additional travel incurred for the purpose of promoting customer relations and new business development opportunities.

Other Income (Expense)

Interest expense for the three months ended March 31, 2014 was $98,823, compared to $126,348 for the same period in 2013. The decrease is a result of lower average amount borrowed in 2014 on the line of credit when compared to 2013. Also borrowings on the convertible notes payable in 2014 as a portion of the debt was converted to stock. Lastly, our borrowings on capital leases were lower in 2014 when compared to 2013.

Income tax expense for each of the three months ended March 31, 2014 and March 31, 2013, was $1,600 and $5,500 respectively, which represents the respective provisions for state income taxes.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2014, our cash and cash equivalents were $4,752,319 and our working capital was $501,083. Our principal cash requirements are for operating expenses, including equipment, supplies, employee costs, and capital expenditures and funding of the operations. Our primary sources of cash are service and equipment sale revenues, the exercise of options and warrants and the sale of common stock.

During the three months ended March 31, 2014, our cash provided by operating activities amounted to $119,216, as compared to $1,047,689 provided by operating activities for the same period in 2013. The decrease in cash provided by operating activities in 2014 is primarily due to the costs incurred to implement new recurring revenue contracts. The cash provided by operating activities in 2013 was primarily a result of improved margins being generated from our recurring revenue contracts at our legacy customers.

We expect to close additional recurring revenue contracts to new customers throughout 2014 but at a slower rate than during 2012 and 2013. Because we expect higher cost of revenues at the start of our engagement with most new customers, we have maintained an accounts receivable line of credit with a commercial bank. Management believes that cash available from the line of credit along with funds from operations will be sufficient to sustain our business operations over the next twelve months.

OFF-BALANCE SHEET ARRANGEMENTS

Our off-balance sheet arrangements consist primarily of conventional operating leases, purchase commitments and other commitments arising in the normal course of business, as further discussed below under “Contractual Obligations and Contingent Liabilities and Commitments.” As of March 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.

CONTRACTUAL OBLIGATIONS AND CONTINGENT LIABILITIES AND COMMITMENTS

As of March 31, 2014, expected future cash payments related to contractual obligations and commercial commitments were as follows:

	Payments Due by Period
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Convertible notes	$	1,676,378	$	1,676,378	$	-	$	-	$	-
Capital leases		108,245		72,119		36,126		-		-
Operating leases		352,996		234,086		118,910		-		-
Total	$	2,137,619	$	1,982,583	$	155,036	$	-	$	-

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

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

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

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

PART –II - OTHER INFORMATION

As of the date of this filing, there have been no material changes to the Risk Factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, filed with the SEC on March 31, 2014 (the “2013 Form 10-K”). The Risk Factors set forth in the 2013 Form 10-K should be read carefully in connection with evaluating our business and in connection with the forward-looking statements contained in this Quarterly Report on Form 10-Q. Any of the risks described in the 2013 Form 10-K could materially adversely affect our business, financial condition or future results and the actual outcome of matters as to which forward-looking statements are made. These are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

No.	Item
10.1	Second Amendment to the Loan and Security Agreement between Avidbank Corporate Finance and Auxilio, Inc., April 25, 2014
10.2	Employment Agreement effective as of January 1, 2014, by and between Auxilio, Inc. and Joseph J. Flynn
10.3	Employment Agreement effective as of January 1, 2014, by and between Auxilio, Inc. and Paul T. Anthony
31.1	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1	Certification of the CEO and CFO pursuant to Rule 13a-14(b) and Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 *.
101**	Interactive Data File

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

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

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

		AUXILIO, INC.


Date: May 14, 2014	By:	/s/ Joseph J. Flynn
		Joseph J. Flynn
		Chief Executive Officer
		(Principal Executive Officer)


Date: May 14, 2014		/s/ Paul T. Anthony
		Paul T. Anthony Chief Financial Officer
		(Principal Accounting Officer)

Exhibit 10.1

SECOND AMENDMENT

LOAN AND SECURITY AGREEMENT

This Second Amendment to Loan and Security Agreement is entered into as of April 25, 2014 (the “Amendment”), by and between Avidbank Corporate Finance, a division of Avidbank (“Bank”), Auxilio, Inc ., a Nevada corporation (“Auxilio”) and Auxilio Solutions, Inc., a California corporation (“Auxilio Solutions”). Each of Auxilio and Auxilio Solutions are referred to herein as a “Borrower”, and collectively, as the “Borrowers”.

RECITALS

Borrowers and Bank are parties to that certain Loan and Security Agreement dated as of April 19, 2012 and as amended from time to time, including pursuant to that certain First Amendment to Loan and Security Agreement dated as of April 26, 2013 (collectively, the “Agreement”). The parties desire to amend the Agreement in accordance with the terms of this Amendment.

NOW, THEREFORE, the parties agree as follows:

1. The following definition in Section 1.1 of the Agreement is amended in its entirety to read as follows:

“Revolving Maturity Date” means April 25, 2015.

2. Section 2.3(a) is amended in its entirety to read as follows:

(a) Interest Rates. Except as set forth in Section 2.3(b), the Advances shall bear interest, on the outstanding Daily Balance thereof, at a rate equal to one percent (1.0%) above the Prime Rate.

3. The second sentence in Section 2.3(c) (with respect to minimum interest payments) is deleted in its entirety.

4. In addition to the Permitted Indebtedness and Permitted Liens with respect to financed equipment as set forth in the Agreement, Bank consents to Borrower’s incurrence of up to $300,000 in new Indebtedness in calendar year 2014 with respect to additional financed equipment, and such Indebtedness shall constitute “Permitted Indebtedness” under the Agreement, provided that such Indebtedness does not exceed the lesser of the cost or fair market value of the equipment being financed with such Indebtedness and any Lien on such financed equipment to secure the purchase price of such equipment or indebtedness is incurred solely for the purpose of financing the acquisition of such equipment

5. Unless otherwise defined, all initially capitalized terms in this Amendment shall be as defined in the Agreement. The Agreement, as amended hereby, shall be and remain in full force and effect in accordance with its respective terms and hereby is ratified and confirmed in all respects. Except as expressly set forth herein, the execution, delivery, and performance of this Amendment shall not operate as a waiver of, or as an amendment of, any right, power, or remedy of Bank under the Agreement, as in effect prior to the date hereof. Each Borrower ratifies and reaffirms the continuing effectiveness of all agreements entered into in connection with the Agreement.

6. Each Borrower represents and warrants that the representations and warranties contained in the Agreement are true and correct as of the date of this Amendment, and that no Event of Default has occurred and is continuing.

7. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument. In the event that any signature is delivered by facsimile transmission or by e-mail delivery of a “.pdf” format data file, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile or “.pdf” signature page were an original hereof. Notwithstanding the foregoing, Borrowers shall deliver all original signed documents no later than ten (10) Business Days following the date of execution.

8. As a condition to the effectiveness of this Amendment, Bank shall have received, in form and substance satisfactory to Bank, the following:

(a) this Amendment, duly executed by Borrowers;

(b) corporate resolutions and incumbency certificates duly executed by each Borrower;

(c) an amendment fee equal to $10,000, plus an amount equal to all Bank Expenses incurred through the date of this Amendment; and

(d) such other documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate.

[remainder of this page intentionally left blank]

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date first above written.

	AUXILIO, INC. By: __________________________________________________ Title: _________________________________________________ AUXILIO SOLUTIONS, INC. By: __________________________________________________ Title: _________________________________________________
	AVIDBANK CORPORATE FINANCE, A DIVISION OF AVIDBANK By: __________________________________________________ Title: _________________________________________________

Exhibit 10.2

Executive Employment Agreement

This Executive Employment Agreement ("Agreement") is made effective as of January 1, 2014 (“Effective Date”), by and between AUXILIO, Inc., a Nevada corporation (“Company”) and Joseph Flynn ("Executive”).

The parties agree as follows:

1. Employment . Company hereby employs Executive, and Executive hereby accepts such employment, upon the terms and conditions set forth herein.

2. Duties .

2.1 Position . Executive is employed as President and Chief Executive Officer and shall have the duties and responsibilities assigned by the Company’s Board of Directors, as may be reasonably assigned from time to time. Executive shall perform faithfully and diligently all duties assigned to Executive. Company reserves the right to modify Executive’s duties at any time in its sole and absolute discretion.

2.2 Best Efforts/Full-time . Executive will expend Executive’s best efforts on behalf of Company and its subsidiaries, and will abide by all policies and decisions made by Company, as well as all applicable federal, state and local laws, regulations or ordinances. Executive will act in the best interest of Company at all times. Executive shall devote Executive’s full business time and efforts to the performance of Executive’s assigned duties for Company, unless Executive notifies the Board of Directors in advance of Executive’s intent to engage in other paid work and receives the Board of Directors’ express written consent to do so.

3. Term .

3.1 Initial Term . The employment relationship pursuant to this Agreement shall be for an initial term commencing on the Effective Date set forth above and continuing until December 31, 2015 (“Initial Term”), unless sooner terminated in accordance with paragraph 7 below.

3.2 Renewal . On completion of the Initial Term specified in subparagraph 3.1 above, this Agreement will automatically renew for subsequent 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 12 months . In the event either party gives notice of nonrenewal pursuant to this subparagraph 3.2, this Agreement will expire at the end of the current term.

4. Compensation .

4.1 Base Salary . As compensation for Executive’s performance of Executive’s duties hereunder, Company shall pay to Executive an initial Base Salary of $275,000 for the first year, payable in accordance with the normal payroll practices of Company, less

required deductions for state and federal withholding tax, social security and all other employment taxes and payroll deductions. In the event Executive’s employment under this Agreement is terminated by either party, for any reason, Executive will be entitled to receive Executive’s Base Salary prorated to the date of termination.

4.2 Incentive Compensation . Executive will be eligible to earn incentive compensation in accordance with the provisions set forth in Exhibit A.

4.3 Equity Compensation . From time to time, Executive will be granted stock options to purchase shares of the Company’s Common Stock at an exercise price equal to the fair market value of the stock on the date of grant.

5. Customary Fringe Benefits . Executive will be eligible for all customary and usual fringe benefits generally available to executives of Company subject to the terms and conditions of Company’s benefit plan documents. Company reserves the right to change or eliminate the fringe benefits on a prospective basis, at any time, effective upon notice to Executive.

6. Business Expenses . Executive will be reimbursed for all reasonable, out-of-pocket business expenses incurred in the performance of Executive’s duties on behalf of Company. To obtain reimbursement, expenses must be submitted promptly with appropriate supporting documentation in accordance with Company’s policies.

7. Termination of Executive’s Employment .

7.1 Termination for Cause by Company . Although Company anticipates a mutually rewarding employment relationship with Executive, Company may terminate Executive’s employment immediately at any time for Cause. For purposes of this Agreement, “Cause” is defined as: (a) acts or omissions constituting gross negligence, recklessness or willful misconduct on the part of Executive with respect to Executive’s obligations or otherwise relating to the business of Company; (b) Executive’s material breach of this Agreement; and (c) Executive’s conviction or entry of a plea of nolo contendere for fraud, misappropriation or embezzlement, or any felony or crime of moral turpitude. In the event Executive’s employment is terminated in accordance with this subparagraph 7.1, Executive shall be entitled to receive Executive’s Base Salary prorated to the date of termination. All other Company obligations to Executive pursuant to this Agreement will become automatically terminated and completely extinguished. Executive will not be entitled to receive the Severance Payment described in subparagraph 7.3 below.

7.2 Termination Without Cause by Company/Severance; Change of Control .

(a) Company may terminate Executive’s employment under this Agreement without Cause at any time on thirty (30) days’ advance written notice to Executive. In the event of (i) such termination without Cause, or (ii) Executive’s inability to perform the essential functions of Executive’s position due to a mental or physical disability or Executive's death, or (iii) in the event of the termination of Executive without Cause following a “Change of Control” (as defined in Section 7.2(b) below), Executive will receive the Base Salary then in effect,

prorated to the date of termination, and a “Severance Payment” equivalent to (a) payment of compensation for an additional twelve months, payable in accordance with Company’s regular payroll cycle or lump sum, (b) upon Officers death, any expiration provisions for all options or warrants occur at the end of the original term or expiration date of the option or warrant and not subject to shorter limitations related to termination of Optionee’s Continuous Service provisions, and (c) an additional provision of accelerating all unvested stock options and warrants provided that Executive : (i) complies with all surviving provisions of this Agreement as specified in subparagraph 13.8 below; and (ii) executes a full general release, releasing all claims, known or unknown, that Executive may have against Company arising out of or any way related to Executive’s employment or termination of employment with Company. Notwithstanding the foregoing, in the event the Company’s securities are publicly traded on the date of Executive’s termination of employment, any portion of the aggregate salary continuation payments described in clause (ii)(a) of this Section 7.2 and any acceleration of unvested stock options and warrants pursuant to clause (ii)(b) of this Section 7.2, which, if paid, would exceed the Section 409A Safe Harbor Limit (as defined in Section 7.2(c) below), such excess portion shall be paid to Executive in a lump sum on the first day of the seventh calendar month immediately following the date of Executive’s termination.

(b) As used herein, “Change of Control” means: (i) a sale of all or substantially all of the assets of the Company; (ii) a merger or consolidation in which the Company is not the surviving entity and in which the holders of the Company’s outstanding voting stock immediately prior to such transaction own, immediately after such transaction, securities representing less than fifty percent (50%) of the voting power of the entity surviving such transaction or, where the surviving entity is a wholly-owned subsidiary of another entity, the surviving entity’s parent; or (iii) a reverse merger in which the Company is the surviving entity but the shares of common stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities of the surviving entity’s parent, cash or otherwise, and in which the holders of the Company’s outstanding voting stock immediately prior to such transaction own, immediately after such transaction, securities representing less than fifty percent (50%) of the voting power of the Company or, where the Company is a wholly-owned subsidiary of another entity.

(c) As used herein, “Section 409A Safe Harbor Limit” means an amount equal to two (2) times the lesser of (i) Executive’s annual rate of compensation for the taxable year immediately preceding the taxable year in which Executive’s employment is terminated by the Company or (ii) the dollar amount in effect under Section 401(a)(17) of the Internal Revenue Code of 1986, as amended, for the taxable year in which Executive’s employment is terminated.

(d) In the event that the benefits provided to you under this Agreement, and any other agreements, plans or arrangements to which you may be a party with the Company, cause you to incur an excise tax under Section 4999 of the Internal Revenue Code of 1986 (the “Code”) or any corresponding provisions of applicable state tax law in connection with a Change of Control, then the Company will pay you an additional amount sufficient to reimburse you for (i) the excise tax imposed on such benefits, and (ii) the federal and state income, employment and excise taxes, determined on a fully “grossed-up” basis, imposed on the benefits payments provided. The Company shall be entitled to withhold from the payment required hereunder such

taxes as it may be required to withhold under applicable tax law, and any such withheld taxes shall be treated as paid to you hereunder.

7.3 Voluntary Resignation by Executive for Good Reason/Severance . Executive may voluntarily resign Executive’s position with Company for Good Reason, at any time on thirty (30) days’ advance written notice. In the event of Executive’s resignation for Good Reason, Executive will be entitled to receive the Base Salary then in effect, prorated to the date of termination, and the Severance described in subparagraph 7.2. above, provided Executive complies with all of the conditions in subparagraph 7.2. above. All other Company obligations to Executive pursuant to this Agreement will become automatically terminated and completely extinguished. Executive will be deemed to have resigned for Good Reason in the following circumstances: (a) Company’s material breach of this Agreement; (b) Executive’s Base Salary is reduced by more than 10% below Executive’s salary in effect at any time during the preceding twelve months, unless the reduction is made as part of, and is generally consistent with, a general reduction of senior executive salaries; (c) Executive’s position and/or duties are modified so that Executive’s duties are no longer consistent with the position of a Chief Executive Officer, or Executive no longer reports to the Board of Directors; and (d) Company relocates Executive’s principal place of work to a location more than sixty (60) miles from the location specified in subparagraph 2.3, without Executive’s prior written approval. Notwithstanding the foregoing, in the event the Company’s securities are publicly traded on the date of Executive’s termination of employment, any portion of the aggregate salary continuation payments described in clause (ii)(a) of Section 7.2 above and any acceleration of unvested stock options and warrants pursuant to clause (ii)(b) of this Section 7.3, which, if paid, would exceed the Section 409A Safe Harbor Limit (as defined in Section 7.2(c) above), such excess portion shall be paid to Executive in a lump sum on the first day of the seventh calendar month immediately following the date of Executive’s termination.

7.4 Voluntary Resignation by Executive Without Good Reason. Executive may voluntarily resign Executive’s position with Company without Good Reason, at any time after the Initial Term, on thirty (30) days’ advance written notice. In the event of Executive’s resignation without Good Reason, Executive will be entitled to receive only the Base Salary for the thirty-day notice period and no other amount for the remaining months of the current term, if any. All other Company obligations to Executive pursuant to this Agreement will become automatically terminated and completely extinguished. In addition, executive will not be entitled to receive the Severance Payment described in subparagraph 7.2 above.

7.5 Termination of Employment Upon Nonrenewal . In the event either party decides not to renew this Agreement for a subsequent 12 months in accordance with subparagraph 3.2 above, the Agreement will expire, Executive’s employment with Company will terminate and Executive will only be entitled to Executive’s Base Salary paid through the last day of the current term. All other Company obligations to Executive pursuant to this Agreement will become automatically terminated and completely extinguished. Executive will not be entitled to the Severance Payment described in subparagraph 7.3 above.

8. No Conflict of Interest . During the term of Executive’s employment with Company and during any period Executive is receiving payments from Company, Executive

must not engage in any work, paid or unpaid, that creates an actual or potential conflict of interest with Company. Such work shall include, but is not limited to, directly or indirectly competing with Company in any way, or acting as an officer, director, employee, consultant, stockholder, volunteer, lender, or agent of any business enterprise of the same nature as, or which is in direct competition with, the business in which Company is now engaged or in which Company becomes engaged during the term of Executive’s employment with Company, as may be determined by the Board of Directors in its sole discretion. If the Board of Directors believes such a conflict exists during the term of this Agreement, the Board of Directors may ask Executive to choose to discontinue the other work or resign employment with Company. If the Board of Directors believes such a conflict exists during any period in which Executive is receiving payments pursuant to this Agreement, the Board of Directors may ask Executive to choose to discontinue the other work or forfeit the remaining severance payments. In addition, Executive agrees not to refer any client or potential client of Company to competitors of Company, without obtaining Company’s prior written consent, during the term of Executive’s employment and during any period in which Executive is receiving payments from Company pursuant to this Agreement.

9. Confidentiality and Proprietary Rights . Executive agrees to read, sign and abide by Company’s Employee Innovations and Proprietary Rights Assignment Agreement, which is provided with this Agreement and incorporated herein by reference.

10. Non-Solicitation .

10.1 Nonsolicitation of Customers or Prospects . Executive acknowledges that information about Company’s customers is confidential and constitutes trade secrets. Accordingly, Executive agrees that during the term of this Agreement and for a period of one (1) year after the termination of this Agreement, Executive will not, either directly or indirectly, separately or in association with others, interfere with, impair, disrupt or damage Company’s relationship with any of its customers or customer prospects by soliciting or encouraging others to solicit any of them for the purpose of diverting or taking away business from Company.

10.2 Nonsolicitation of Company’s Employees . Executive agrees that during the term of this Agreement and for a period of one (1) year after the termination of this Agreement, Executive will not, either directly or indirectly, separately or in association with others, interfere with, impair, disrupt or damage Company’s business by soliciting, encouraging or attempting to hire any of Company’s employees or causing others to solicit or encourage any of Company’s employees to discontinue their employment with Company.

11. Injunctive Relief . Executive acknowledges that Executive’s breach of the covenants contained in paragraphs 8-10 (collectively “Covenants”) would cause irreparable injury to Company and agrees that in the event of any such breach, Company shall be entitled to seek temporary, preliminary and permanent injunctive relief without the necessity of proving actual damages or posting any bond or other security.

12. Agreement to Arbitrate . To the fullest extent permitted by law, Executive and Company agree to arbitrate any controversy, claim or dispute between them arising out of or in

any way related to this Agreement, the employment relationship between Company and Executive and any disputes upon termination of employment, including but not limited to breach of contract, tort, discrimination, harassment, wrongful termination, demotion, discipline, failure to accommodate, family and medical leave, compensation or benefits claims, constitutional claims; and any claims for violation of any local, state or federal law, statute, regulation or ordinance or common law. Claims for workers’ compensation, unemployment insurance benefits and Company’s right to obtain injunctive relief pursuant to paragraph 11 above are excluded. For the purpose of this agreement to arbitrate, references to “Company” include all parent, subsidiary or related entities and their employees, supervisors, officers, directors, agents, pension or benefit plans, pension or benefit plan sponsors, fiduciaries, administrators, affiliates and all successors and assigns of any of them, and this agreement shall apply to them to the extent Executive’s claims arise out of or relate to their actions on behalf of Company.

12.1 Consideration . The mutual promise by Company and Executive to arbitrate any and all disputes between them rather than litigate them before the courts or other bodies, provides the consideration for this agreement to arbitrate.

12.2 Initiation of Arbitration . Either party may exercise the right to arbitrate by providing the other party with written notice of any and all claims forming the basis of such right in sufficient detail to inform the other party of the substance of such claims. In no event shall the request for arbitration be made after the date when institution of legal or equitable proceedings based on such claims would be barred by the applicable statute of limitations.

12.3 Arbitration Procedure . The arbitration will be conducted in Irvine , California by a single neutral arbitrator and in accordance with the then current rules for resolution of employment disputes of the American Arbitration Association (“AAA”). The parties are entitled to representation by an attorney or other representative of their choosing. The arbitrator shall have the power to enter any award that could be entered by a judge of the trial court of the State of California, and only such power, and shall follow the law. In the event the arbitrator does not follow the law, the arbitrator will have exceeded the scope of his or her authority and the parties may, at their option, file a motion to vacate the award in court. The parties agree to abide by and perform any award rendered by the arbitrator. Judgment on the award may be entered in any court having jurisdiction thereof.

12.4 Costs of Arbitration . Each party shall bear one half the cost of the arbitration filing and hearing fees, and the cost of the arbitrator.

13. General Provisions .

13.1 Successors and Assigns . The rights and obligations of Company under this Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of Company. Executive shall not be entitled to assign any of Executive’s rights or obligations under this Agreement.

13.2 Waiver . Either party's failure to enforce any provision of this Agreement shall not in any way be construed as a waiver of any such provision, or prevent that party thereafter from enforcing each and every other provision of this Agreement.

13.3 Attorneys’ Fees . Each side will bear its own attorneys’ fees in any dispute unless a statutory section at issue, if any, authorizes the award of attorneys’ fees to the prevailing party.

13.4 Severability . In the event any provision of this Agreement is found to be unenforceable by an arbitrator or court of competent jurisdiction, such provision shall be deemed modified to the extent necessary to allow enforceability of the provision as so limited, it being intended that the parties shall receive the benefit contemplated herein to the fullest extent permitted by law. If a deemed modification is not satisfactory in the judgment of such arbitrator or court, the unenforceable provision shall be deemed deleted, and the validity and enforceability of the remaining provisions shall not be affected thereby.

13.5 Interpretation; Construction . The headings set forth in this Agreement are for convenience only and shall not be used in interpreting this Agreement. This Agreement has been drafted by legal counsel representing Company, but Executive has participated in the negotiation of its terms. Furthermore, Executive acknowledges that Executive has had an opportunity to review and revise the Agreement and have it reviewed by legal counsel, if desired, and, therefore, the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement.

13.6 Governing Law . This Agreement will be governed by and construed in accordance with the laws of the United States and the State of California. Each party consents to the jurisdiction and venue of the state or federal courts in Irvine , California, if applicable, in any action, suit, or proceeding arising out of or relating to this Agreement.

13.7 Notices. Any notice required or permitted by this Agreement shall be in writing and shall be delivered as follows with notice deemed given as indicated: (a) by personal delivery when delivered personally; (b) by overnight courier upon written verification of receipt; (c ) by telecopy or facsimile transmission upon acknowledgment of receipt of electronic transmission; or (d) by certified or registered mail, return receipt requested, upon verification of receipt. Notice shall be sent to the addresses set forth below, or such other address as either party may specify in writing.

13.8 Survival . Sections 8 (“No Conflict of Interest”), 9 (“Confidentiality and Proprietary Rights”), 10 (Nonsolicitation), 11 (“Injunctive Relief”), 12 (“Agreement to Arbitrate”), 13 (“General Provisions”) and 14 (“Entire Agreement”) of this Agreement shall survive Executive’s employment by Company.

all prior or simultaneous representations, discussions, negotiations, and agreements, whether written or oral. This Agreement may be amended or modified only with the written consent of Executive and the Board of Directors of Company. No oral waiver, amendment or modification will be effective under any circumstances whatsoever.

THE PARTIES TO THIS AGREEMENT HAVE READ THE FOREGOING AGREEMENT AND FULLY UNDERSTAND EACH AND EVERY PROVISION CONTAINED HEREIN. WHEREFORE, THE PARTIES HAVE EXECUTED THIS AGREEMENT ON THE DATES SHOWN BELOW.

Dated: ________________________	________________________________________________________ Joseph Flynn President & Chief Executive Officer
Dated: ________________________	By:______________________________________________________ John D. Pace Chairman of the Board of Directors AUXILIO, Inc. 27401 Los Altos, Suite 100 Mission Viejo, CA 92691

EXHIBIT A

INCENTIVE COMPENSATION PLAN

Incentive Compensation:

The Executive will be entitled to a Bonus Plan totaling up to $125,000 per year. Payout is equal to the percentage achievement of target multiplied by the target compensation. A minimum achievement of 80% is required for any bonus payout and a maximum payout of 120% of target.

80% of bonus potential tied to Ebitda target of $4M for the year subject to change by the Board based on future strategic initiatives currently being investigated.

20% of bonus potential tied to Service revenue run rate at the end of 2013 of $48M.

Equity Compensation

Revise vesting schedule for warrants granted in January 2013 tied to 2014 and 2015 performance. New vesting schedule for these options:

Shares	Vesting Date	Performance Target
100,000	January 1, 2015	Adjusted EBITDA of $4 million for FY 2014
100,000	January 1, 2016	Adjusted EBITDA target for FY 2015 of $6.3 million.
100,000	January 1, 2017	Adjusted EBITDA target for FY 2016 of $9.3 million.

Exhibit 10.3

EXECUTIVE EMPLOYMENT AGREEMENT

The parties agree as follows:

1. Employment . Company hereby employs Executive, and Executive hereby accepts such employment, upon the terms and conditions set forth herein.

2. Duties .

2.1 Position . Executive is employed as Executive Vice President and Chief Financial Officer and shall have the duties and responsibilities assigned by the Company’s Chief Executive Officer, as may be reasonably assigned from time to time. Executive shall perform faithfully and diligently all duties assigned to Executive. Company reserves the right to modify Executive’s duties at any time in its sole and absolute discretion.

3. Term .

4. Compensation .

4.1 Base Salary . As compensation for Executive’s performance of Executive’s duties hereunder, Company shall pay to Executive an initial Base Salary of $225,000 for the first year, payable in accordance with the normal payroll practices of Company, less

4.2 Incentive Compensation . Executive will be eligible to earn incentive compensation in accordance with the provisions set forth in Exhibit A.

7. Termination of Executive’s Employment .

7.2 Termination Without Cause by Company/Severance; Change of Control .

(iii) in the event of the termination of Executive without Cause following a “Change of Control” (as defined in Section 7.2(b) below), Executive will receive the Base Salary then in effect, prorated to the date of termination, and a “Severance Payment” equivalent to (a) payment of compensation for an additional twelve months, payable in accordance with Company’s regular payroll cycle or lump sum, (b) upon Officers death, any expiration provisions for all options or warrants occur at the end of the original term or expiration date of the option or warrant and not subject to shorter limitations related to termination of Optionee’s Continuous Service provisions, and (c) an additional provision of accelerating all unvested stock options and warrants provided that Executive : (i) complies with all surviving provisions of this Agreement as specified in subparagraph 13.8 below; and (ii) executes a full general release, releasing all claims, known or unknown, that Executive may have against Company arising out of or any way related to Executive’s employment or termination of employment with Company. Notwithstanding the foregoing, in the event the Company’s securities are publicly traded on the date of Executive’s termination of employment, any portion of the aggregate salary continuation payments described in clause (ii)(a) of this Section 7.2, and any acceleration of unvested stock options and warrants pursuant to clause (ii)(b) of this Section 7.2 which, if paid, would exceed the Section 409A Safe Harbor Limit (as defined in Section 7.2(c) below), such excess portion shall be paid to Executive in a lump sum on the first day of the seventh calendar month immediately following the date of Executive’s termination.

and excise taxes, determined on a fully “grossed-up” basis, imposed on the benefits payments provided. The Company shall be entitled to withhold from the payment required hereunder such taxes as it may be required to withhold under applicable tax law, and any such withheld taxes shall be treated as paid to you hereunder.

7.3 Voluntary Resignation by Executive for Good Reason/Severance . Executive may voluntarily resign Executive’s position with Company for Good Reason, at any time on thirty (30) days’ advance written notice. In the event of Executive’s resignation for Good Reason, Executive will be entitled to receive the Base Salary then in effect, prorated to the date of termination, and the Severance described in subparagraph 7.2. above, provided Executive complies with all of the conditions in subparagraph 7.2. above. All other Company obligations to Executive pursuant to this Agreement will become automatically terminated and completely extinguished. Executive will be deemed to have resigned for Good Reason in the following circumstances: (a) Company’s material breach of this Agreement; (b) Executive’s Base Salary is reduced by more than 10% below Executive’s salary in effect at any time during the preceding twelve months, unless the reduction is made as part of, and is generally consistent with, a general reduction of senior executive salaries; (c) Executive’s position and/or duties are modified so that Executive’s duties are no longer consistent with the position of a Chief Financial Officer, or Executive no longer reports to the Company’s Chief Executive Officer; and (d) Company relocates Executive’s principal place of work to a location more than sixty (60) miles from Executive’s current location, without Executive’s prior written approval. Notwithstanding the foregoing, in the event the Company’s securities are publicly traded on the date of Executive’s termination of employment, any portion of the aggregate salary continuation payments described in clause (ii)(a) of Section 7.2 above and any acceleration of unvested stock options and warrants pursuant to clause (ii)(b) of this Section 7.3, which, if paid, would exceed the Section 409A Safe Harbor Limit (as defined in Section 7.2(c) above), such excess portion shall be paid to Executive in a lump sum on the first day of the seventh calendar month immediately following the date of Executive’s termination.

8. No Conflict of Interest . During the term of Executive’s employment with Company and during any period Executive is receiving payments from Company, Executive must not engage in any work, paid or unpaid, that creates an actual or potential conflict of interest with Company. Such work shall include, but is not limited to, directly or indirectly competing with Company in any way, or acting as an officer, director, employee, consultant, stockholder, volunteer, lender, or agent of any business enterprise of the same nature as, or which is in direct competition with, the business in which Company is now engaged or in which Company becomes engaged during the term of Executive’s employment with Company, as may be determined by the Board of Directors in its sole discretion. If the Board of Directors believes such a conflict exists during the term of this Agreement, the Board of Directors may ask Executive to choose to discontinue the other work or resign employment with Company. If the Board of Directors believes such a conflict exists during any period in which Executive is receiving payments pursuant to this Agreement, the Board of Directors may ask Executive to choose to discontinue the other work or forfeit the remaining severance payments. In addition, Executive agrees not to refer any client or potential client of Company to competitors of Company, without obtaining Company’s prior written consent, during the term of Executive’s employment and during any period in which Executive is receiving payments from Company pursuant to this Agreement.

10. Non-Solicitation .

seek temporary, preliminary and permanent injunctive relief without the necessity of proving actual damages or posting any bond or other security.

12. Agreement to Arbitrate . To the fullest extent permitted by law, Executive and Company agree to arbitrate any controversy, claim or dispute between them arising out of or in any way related to this Agreement, the employment relationship between Company and Executive and any disputes upon termination of employment, including but not limited to breach of contract, tort, discrimination, harassment, wrongful termination, demotion, discipline, failure to accommodate, family and medical leave, compensation or benefits claims, constitutional claims; and any claims for violation of any local, state or federal law, statute, regulation or ordinance or common law. Claims for workers’ compensation, unemployment insurance benefits and Company’s right to obtain injunctive relief pursuant to paragraph 11 above are excluded. For the purpose of this agreement to arbitrate, references to “Company” include all parent, subsidiary or related entities and their employees, supervisors, officers, directors, agents, pension or benefit plans, pension or benefit plan sponsors, fiduciaries, administrators, affiliates and all successors and assigns of any of them, and this agreement shall apply to them to the extent Executive’s claims arise out of or relate to their actions on behalf of Company.

12.4 Costs of Arbitration . Each party shall bear one half the cost of the arbitration filing and hearing fees, and the cost of the arbitrator.

13. General Provisions .

13.1 Successors and Assigns . The rights and obligations of Company under this Agreement shall inure to the benefit of and shall be binding upon the successors and

assigns of Company. Executive shall not be entitled to assign any of Executive’s rights or obligations under this Agreement.

13.3 Attorneys’ Fees . Each side will bear its own attorneys’ fees in any dispute unless a statutory section at issue, if any, authorizes the award of attorneys’ fees to the prevailing party.

14. Entire Agreement . This Agreement, including the Employee Innovations and Proprietary Rights Assignment Agreement incorporated herein by reference and Company’s stock option plan and related option documents described in paragraph 4.3 of this Agreement, constitutes the entire agreement between the parties relating to this subject matter and supersedes all prior or simultaneous representations, discussions, negotiations, and agreements, whether written or oral. This Agreement may be amended or modified only with the written consent of Executive and the Board of Directors of Company. No oral waiver, amendment or modification will be effective under any circumstances whatsoever.

Dated: ________________________	________________________________________________________ Paul T. Anthony Executive Vice President & Chief Financial Officer
Dated: ________________________	By:______________________________________________________ Joseph Flynn President and Chief Executive Officer AUXILIO, Inc. 27401 Los Altos, Suite 100 Mission Viejo, CA 92691

EXHIBIT A

INCENTIVE COMPENSATION PLAN

Incentive Compensation:

The Executive will be entitled to a Bonus Plan totaling up to $90,000 per year. Payout is equal to the percentage achievement of target multiplied by the target compensation. A minimum achievement of 80% is required for any bonus payout and a maximum payout of 120% of target.

50% of bonus potential tied to Ebitda target of $4M for the year subject to change by the Board based on future strategic initiatives currently being investigated.

10% of bonus potential tied to completion of financial business plans for new initiatives currently beinginvestigated.*

20% of bonus potential tied to completion of a deep dive in to the three major non-toner expense categories and providing support/strategy to Operations in addressing areas of concern identified by the findings. These categories include headcount costs, lease pass thru and 3rd party services. .*

20% of bonus potential tied to Service revenue run rate at the end of 2013 of $48M.

*These items will be measured on a scale from 1-3. Payouts in excess of 100% may not exceed performance achieved on the gross margin target.

1 does not meet expectations (80%)

2 meets expectations (100%)

3 exceeds expectations (120%)

Equity Compensation

Revise vesting schedule for warrants granted in January 2013 tied to 2014 and 2015 performance. New vesting schedule for these options:

Shares	Vesting Date	Performance Target
66,667	January 1, 2015	Adjusted EBITDA of $4 million for FY 2014
66,667	January 1, 2016	Adjusted EBITDA target for FY 2015 of $6.3 million.

66,666

January 1, 2017

Adjusted EBITDA target for FY 2016 of $9.3 million.

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13A-14(A) AND RULE 15D-14(A) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

I, Joseph J. Flynn, certify that:

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

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

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

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

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

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

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

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

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

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

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

/s/ Joseph J. Flynn

Joseph J. Flynn,

President and Chief Executive Officer

(Principal Executive Officer)

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13A-14(A) AND RULE 15D-14(A) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

I, Paul T. Anthony, certify that:

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

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

/s/ Paul T. Anthony

Paul Anthony,

Chief Financial Officer

(Principal Financial Officer)

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

In connection with the Quarterly Report of Auxilio, Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Joseph J. Flynn, Chief Executive Officer and Paul T. Anthony, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of our knowledge:

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

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


By:	/s/ Joseph J. Flynn
	Joseph Flynn, President and Chief Executive Officer


By:	/s/ Paul T. Anthony
	Paul Anthony, Chief Financial Officer

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

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


PART I - FINANCIAL INFORMATION
		Page
Item 1	Financial Statements:

	Condensed Consolidated Balance Sheets as of March 31, 2014 (unaudited) and December 31, 2013	3

	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2014 and 2013 (unaudited)	4

	Condensed Consolidated Statement of Stockholders’ (Deficit) Equity for the Three Months Ended March 31, 2014 (unaudited)	5

	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2014 and 2013 (unaudited)	6

	Notes to Unaudited Condensed Consolidated Financial Statements	8

Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3	Quantitative and Qualitative Disclosures about Market Risk	18

Item 4	Controls and Procedures	18

PART II - OTHER INFORMATION

Item 1A	Risk Factors	19

Item 6	Exhibits	19

Signatures		20