Exhibit 10.4

SECURITY AGREEMENT
 
 
This SECURITY AGREEMENT (“Agreement”), is effective as of July 29, 2011 (this
“Agreement”), between Auxilio, Inc., a Nevada corporation (the “Company”), and
the Investors on the signature pages hereto, and their respective successors and
assigns (the “Investors”).
 
1. Purpose.  This Agreement is granted by the Company in favor of the Investors
under the Investment Unit Purchase Agreement, effective as of the date hereof
(the “Purchase Agreement”), and the convertible promissory notes issued to
Investors by the Company under the Purchase Agreement (as may be amended,
restated, modified or replaced from time to time, the “Notes”).  Under the
Purchase Agreement and the Notes, Investors may loan the Company up to the sum
of $2,500,000, with a 20% allowance for oversubscription.  The Company has
agreed to secure all debt of the Company to Investors in accordance with the
terms and conditions of this Agreement.  Capitalized terms not defined in this
Agreement have the meaning set forth under the Purchase Agreement.
 
2. Grant of Security Interest.  The Company hereby grants to Investors a
continuing security interest in and continuing lien on the “Collateral”
described in Section 3 below to secure the prompt and complete payment of all
amounts due under the Notes and all other loans and advances (including all
renewals, modifications and extensions thereof) from Investors to the Company,
the obligations under the Purchase Agreement, and all obligations of any and
every kind and nature, whether arising prior to, under or after this Agreement,
however incurred or evidenced, whether primary, secondary, contingent or
otherwise, whether arising under this Agreement, under any other security
agreements, mortgages, leases, instruments, documents, contracts, or similar
agreements, or by oral agreement or created by operation of law plus all
interest, costs, expenses, and reasonable attorneys’ fees, which may be made or
incurred by Investors in the disbursement, administration, and collection of
such amounts, and in the protection, maintenance, and liquidation of the
Collateral (collectively, “Liabilities”).  This Agreement shall be and become
effective when, and continue in effect, as long as any Liabilities of the
Company to Investors are outstanding and unpaid, and the Company will not sell,
assign, transfer, pledge or otherwise dispose of or encumber any Collateral to
any third party while this Agreement is in effect without the prior written
consent of Investors.
 
3. Collateral.  The “Collateral” covered by this Agreement is all of the
Company’s right, title and interest in, to and under all assets of the Company,
real and personal, tangible and intangible, which it now owns or shall hereafter
acquire or create, immediately upon the acquisition or creation thereof, and
includes, but is not limited to, the following:
 
3.1. Accounts.  Accounts, documents, money, instruments, policies and
certificates of insurance, chattel paper, rights to payment evidenced by chattel
paper, health-care insurance receivables, deposit accounts, commercial tort
claims, investment property, letter of credit rights, contract rights, general
intangibles, intellectual property (including, without limitation, all US and
foreign patents, patent applications, copyrights, trademarks, trademark
applications, service marks, inventions, and discoveries), chooses in action,
including any right to any refund of any taxes heretofore or hereafter paid to
any governmental authority (collectively, the “Accounts”).
 
 
 
 

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3.2. Inventory.  All inventory and goods, now owned or hereafter acquired,
including but not limited to, raw materials, work in process, finished goods,
leased goods, tangible property, stock in trade, wares, and merchandise used in
or sold in the ordinary course of business, including goods whose sale, lease or
other disposition by the Company has given rise to any Accounts and which goods
have been returned to, or repossessed by, or stopped in transit by the Company.
 
3.3. Equipment.  All equipment and fixtures, including all machinery, furniture,
furnishings, and vehicles, together with all accessions, parts, attachments,
accessories, tools and dies, or appurtenances thereto, or appertaining,
attached, kept, used, or intended for use in connection therewith, and all
substitutions, improvements and replacements thereof and additions thereto.
 
3.4. Fixtures.  All fixtures, whether now or to be hereafter attached, to any
real property in which the Company has an interest.
 
3.5. Software.  All computer programs and supporting information provided in
connection with a transaction relating to such program(s).
 
3.6. Intellectual Property.  All patents, patent applications, inventions,
disclosures, tradenames, registered trademarks or registered service marks,
applications for registrations therefore, and registered copyrights and
applications therefore, in which the Company has an interest.
 
3.7. Proceeds, Etc.  Proceeds, and proceeds of hazard insurance and eminent
domain or condemnation awards of all of the foregoing described properties or
interests in properties, including all products of, and accessions to, such
properties or interests in properties, and all cash or other property which were
proceeds and are received by a bankruptcy trustee or otherwise as a preferential
transfer to the Company.
 
3.8. Exceptions.  Notwithstanding the foregoing, the Investors agree to
subordinate their interest in the Collateral in the event the Company issues
Senior Debt. “Senior Debt” shall be any loan or debt extended by a commercial
bank, commercial finance company, other lending institution or any institutional
investor, and shall include lines of credit or similar financing facilities;
provided, however, that Senior Debt shall not include any Notes held by any
Investor that is a commercial bank, commercial finance company, other lending
institution or an institutional investor.  The security interest of the
Investors shall be subordinated to Senior Debt for the term of the Notes or New
Notes (as that term is defined in the Notes).
 
4. Perfection of Security Interest.  The Company shall execute and deliver to
Investors at the request of Investors, concurrently with the Company’s execution
of this Agreement and at any time or times hereafter (and pay the cost of filing
or recording same in all public offices deemed necessary by Investors), all
financing statements, assignments, certificates of title, applications for
vehicle titles, affidavits, reports, notices, schedules of Accounts,
designations of inventory, letters of authority and all other documents that
Investors may reasonably request, in form satisfactory to Investors, to perfect
and maintain perfected Investors’ security interests in the Collateral.  In
addition, the Company irrevocably authorizes Investors, their agents, attorneys,
and representatives, to file financing statements, and amendments thereto, at
the Company’s expense, necessary to establish and maintain Investors’ perfected
security interest in the Collateral. Any such financing statement to be filed
may describe the assets and property to be encumbered hereby in a generic
description such as “all assets of the debtor,” or words of similar effect. In
order to fully consummate all of the transactions contemplated hereunder, the
Company shall make appropriate entries on its books and records disclosing
Investors’ security interests in the Collateral.
 
 
 
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5. Warranties.  The Company warrants and agrees that, while any of the
Liabilities remain unperformed and unpaid:  (a) the Company is the owner of the
Collateral free and clear of all liens or security interests except Permitted
Liens and all chattel paper constituting Collateral evidences a perfected
security interest in the goods covered by it, free from all other liens and
security interests except for Permitted Liens, and no financing statement other
than that of Investors is on file covering the Collateral or any of it and if
Inventory is represented or covered by documents of title, the Company is the
owner of the documents, free of all liens and security interest other than
Investors’ security interest; (b) the Company’s exact legal name is as set forth
above; (c) the Company is an organization of the type and organized in the
jurisdiction set forth above, (d) the address of the Company’s principal office
is as set forth above, while the addresses of the Company’s other places of
business where Collateral is now or may in the future be located, and the
Company’s business locations shall not be changed without the prior written
consent of Investors, and the Company further warrants that the Collateral,
wherever located, is covered by this Agreement; (e) the Collateral will not be
used, nor will the Company permit the Collateral to be used, for any unlawful
purpose, whatever; (f) the Company shall at all times maintain the Collateral in
working condition and repair; and (g) the Company will indemnify and hold
Investors harmless against claims of any persons or entities not party to this
Agreement concerning disputes arising over the Collateral.
 
6. Covenants Concerning the Company’s Legal Status.  The Company covenants with
the Investors as follows: (a) without providing at least thirty (30) days prior
written notice to the Investors, the Company will not change its name, its place
of business or, if more than one, chief executive office, or its mailing address
or organizational identification number if it has one, (b) if the Company does
not have an organizational identification number and later obtains one, the
Company shall forthwith notify the Investors of such organizational
identification number, and (c) the Company will not change its type of
organization, jurisdiction of organization or other legal structure.  The
Company agrees that all documents, instruments and agreements demanded by
Investors in response to any of the changes described in this Section shall be
prepared, filed and recorded at the Company’s expense prior to the effective
date of such change.
 
7. Insurance, Taxes, Etc.  The Company shall (a) pay all taxes, levies,
assessments, judgments and charges of any kind upon or relating to the
Collateral, to the Company’s business, and to the Company’s ownership or use of
any of its assets, income or gross receipts; (b) at its own expense, keep and
maintain all of the Collateral insured against loss or damage by fire, theft,
explosion and other risks in such amounts, with such companies, under such
policies and in such form as determined by the Company’s Board of Directors; (c)
maintain at its own expense public liability and property damage insurance in
such amounts with such companies, under such policies and in such form as
determined by the Company’s Board of Directors; and, upon Investors’ request,
shall furnish Investors with such policies and evidence of payment of premiums
thereon.  If the Company at any time hereafter should fail to obtain or maintain
any of the policies required above or pay any premium in whole or in part
relating thereto, or shall fail to pay any such tax, assessment, levy, or charge
or to discharge any such lien or encumbrance, then Investors, without waiving or
releasing any obligation or default of the Company hereunder, may at any time
hereafter (but shall be under no obligation to do so) make such payment or
obtain such discharge or obtain and maintain such policies of insurance and pay
such premiums, and take such action with respect thereto as Investors deems
advisable.  All sums so disbursed by Investors, including reasonable attorneys’
fees, court costs, expenses, and other charges relating thereto, shall be part
of the Company’s Liabilities, secured hereby, and payable on demand.
 
 
 
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8. Sale, Collections, Etc.
 
8.1. Until an Event of Default (as that term is defined below), each Investor
authorizes and permits the Company to collect Accounts from Account
debtors.  This privilege may be terminated by Investors at any time upon the
occurrence of an Event of Default as set forth in this Agreement, and Investors
thereupon shall be entitled to and have all of the ownership, title, rights,
securities and guarantees of the Company in respect of Accounts, and in respect
to the property evidenced thereby, including the right of stoppage in transit,
and Investors may notify any Account debtor of the assignment of Accounts and
collect the same; thereafter the Company will receive all payments on Account as
agent of and for Investors and will transmit to Investors, on the day of receipt
thereof, all original checks, drafts, acceptances, notes and other evidence of
payment received in payment of or on account of Accounts, including all cash
monies, similarly received by the Company.  Until such delivery, the Company
shall keep all such remittances separate and apart from the Company’s own funds,
capable of identification as the property of Investors, and shall hold the same
in trust for Investors.
 
8.2. Until an Event of Default and until such time as Investors have notified
the Company of the revocation of such power and authority the Company may (i)
only in the ordinary course of its business, at its own expense, sell, lease or
furnish under contracts of service any of the Inventory normally held by the
Company for such purpose; (ii) use and consume any raw materials, work in
process or materials, the use and consumption of which is necessary in order to
carry on the Company’s business; and the Company shall, at its own expense,
endeavor to collect, as and when due all amounts due with respect to any of the
Collateral, including the taking of such action with respect to such collection
as Investors may reasonably request or, in the absence of such request, as the
Company may deem advisable.  A sale in the ordinary course of business does not
include a transfer in partial or total satisfaction of a debt.
 
9. Waiver.  The Company waives all defenses and setoffs which could hinder or
reduce the obligations of the Company under this Agreement. In addition, except
as expressly prohibited by law, the Company waives any right it has to require
Investors to give notice of the details of any public or private sale of
personal property security held from the Company or pursue any remedy available
to Investors.
 
10. Information.  The Company shall permit Investors or their agents upon
reasonable request to have access to and to inspect all the Collateral and from
time to time verify Accounts and chattel paper, inspect, check, make copies of
or extracts from the books, records and files of the Company, and the Company
will make same available at any time for such purposes.  In addition, the
Company shall promptly supply Investors with financial and such other
information concerning its affairs and assets as Investors may request from time
to time.
 
 
 
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11. Event of Default.
 
11.1. An Event of Default shall exist as and when provided under the Notes.
 
11.2. Upon the occurrence of an Event of Default, the Notes and all other
Liabilities may (notwithstanding any provisions thereof) at the option of the
Investor holding the Notes with the largest aggregate principal (the “Lead Note
Holder”) and without demand or notice of any kind, be declared, and thereupon
immediately shall become due and payable, and the Lead Note Holder may exercise
from time to time any rights and remedies, including the right to immediate
possession of the Collateral, available to the Investors under applicable law.
Notwithstanding the foregoing, the Lead Note Holder may not be an Affiliate of
the Company or Cambria, as defined in the Purchase Agreement.  Should such be
the case, the Investor holding the Notes with the next largest aggregate
principal shall be deemed to be the Lead Note Holder.  The Company agrees, in
case of an Event of Default, to assemble, at its expense, all the Collateral at
a convenient place acceptable to the Lead Note Holder and to pay all costs of
Investors of collection of the Notes and all other Liabilities, and enforcement
of rights hereunder, including reasonable attorneys’ fees and legal expenses,
including participation in bankruptcy proceedings, and expense of locating the
Collateral and expenses of any repairs to any realty or other property to which
any of the Collateral may be affixed or be a part.  If any notification of
intended disposition of any of the Collateral is required by law, such
notification, if mailed, shall be deemed reasonably and properly given if sent
at least seven days before such disposition, postage prepaid, addressed to the
undersigned either at the address shown below, or at any other address of the
undersigned appearing on the records of the Lead Note Holder.  Notwithstanding
the foregoing, the Lead Note Holder shall not be obligated to declare the Notes
and other Liabilities due or, having done so, to take any action authorized
hereunder or by law with respect to the collateral.  If the Lead Note Holder
fails to take any action pursuant to this Section 11.2 within sixty (60) days of
being notified in writing of an Event of Default, any Investor may, at its
option, exercise the rights granted to the Lead Note Holder under this Section
11.2 or by law. Provided, however, that any amounts realized, whether by the
efforts of the Lead Note Holder or the efforts any other Investor, from the sale
of Collateral or otherwise hereunder shall first be distributed to reimburse the
costs and expenses, including but not limited to legal expenses and commissions,
of the Lead Note Holder and the Investors in enforcing the rights hereunder and,
second, to all Investors pro-rata based upon the amount owed to each Investor
pursuant to the Notes held by the Investor.  Except as provided in the
immediately preceding sentence with respect to proceeds of sale, the Lead Note
Holder and any Investor exercising rights pursuant to this Section 11.2 shall
not be liable to the Company or other Investors for any action taken or not
taken with respect to the Collateral other than willful misconduct.
 
11.3. THE COMPANY AGREES THAT INVESTORS SHALL, IN THE EVENT OF ANY DEFAULT, HAVE
THE RIGHT TO PEACEFULLY TAKE POSSESSION OF ANY OF THE COLLATERAL. THE COMPANY
WAIVES ANY RIGHT IT MAY HAVE, IN SUCH INSTANCE, TO A JUDICIAL HEARING PRIOR TO
SUCH RETAKING.
 
 
 
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12. Appointment of Attorney-in-Fact.  Upon an Event of Default, the Company
hereby irrevocably appoints the Investors as the Company’s attorney-in-fact,
with full authority in the place and stead of the Company and in the name of the
Company, the Investors, from time to time in the Investors’ discretion to take
any action and to execute any instrument that the Investors may deem reasonably
necessary or advisable to accomplish the purposes of this Agreement.
 
Time shall be deemed of the very essence of this Agreement.  Except as otherwise
defined in this Agreement, all terms in this Agreement shall have the meanings
provided by the Nevada UCC, as amended, revised or replaced or any successor
laws hereafter enacted (“Nevada Uniform Commercial Code”).  Investors shall be
deemed to have exercised reasonable care in the custody and preservation of any
Collateral in their possession if they take such action for that purpose as the
Company requests in writing, but failure of Investors to comply with any such
request shall not of itself be deemed a failure to exercise reasonable care, and
failure of Investors to preserve or protect any rights with respect to such
Collateral against any prior parties or to do any act with respect to the
preservation of such Collateral not so requested by the Company shall not be
deemed a failure to exercise reasonable care in the custody and preservation of
such Collateral.  Any delay on the part of Investors in exercising any power,
privilege or right hereunder, or under any other instrument executed by the
Company to Investors in connection herewith shall not operate as a waiver
thereof, and no single or partial exercise thereof, or the exercise of any other
power, privilege or right shall preclude other or further exercise thereof, or
the exercise of any other power, privilege or right.  The waiver by Investors of
any Event of Default by the Company shall not constitute a waiver of any
subsequent Events of Default, but shall be restricted to the Event of Default so
waived.  All rights, remedies and powers of Investors hereunder are irrevocable
and cumulative, and not alternative or exclusive, and shall be in addition to
all rights, remedies and powers given hereunder or in or by any other
instruments or by the Nevada Uniform Commercial Code, or any laws now existing
or hereafter enacted.
 
This Agreement shall be construed in accordance with the laws of the State of
California without giving effect to any applicable principles of conflicts of
laws.  Whenever possible each provision of this Agreement shall be interpreted
in such manner as to be effective and valid under applicable law, but if any
provision of this Agreement shall be prohibited by or invalid under applicable
law, such provision shall be ineffective to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Agreement.  The rights and privileges of Investors
hereunder shall inure to the benefit of their successors and assigns and this
Agreement shall be binding on all heirs, executors, administrators, assigns and
successors of the Company.
 
Any notice required or permitted by this Agreement shall be in writing and shall
be deemed sufficient if given in accordance with section 9.4 of the Purchase
Agreement.
 
 
 
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This Agreement constitutes the entire understanding of the parties with respect
to the subject matter hereof and supersedes all prior written and oral
communications or understandings.  This Agreement may be amended or supplemented
only by a writing signed by each of the Company and the Investors holding a
majority of the aggregate principal amount then outstanding under the
Notes.  The Company acknowledges receipt of a true and complete copy of this
Agreement.  This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original and all of which together shall constitute one
instrument.
 
INVESTORS AND THE COMPANY ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A
CONSTITUTIONAL RIGHT, BUT ONE THAT MAY BE WAIVED. AFTER CONSULTING (OR HAVING
HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF THEIR CHOICE, KNOWINGLY AND
VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT, PURCHASER AND THE COMPANY WAIVE ANY
RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION REGARDING THE PERFORMANCE OR
ENFORCEMENT OF, OR IN ANY WAY RELATED TO, THIS AGREEMENT.
 
[Signature Page Follows]
 

 
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The parties have executed this Security Agreement as of the date first written
above.
 

Company:

AUXILIO, INC.

By: _______________________________________          
Name:           Paul T. Anthony
Title:           Chief Financial Officer

Company Signature Page to Security Agreement

4834-2458-6761.1
 
 

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THE INVESTORS:

Dated: ___________________, ____
 
 
 
 

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Signature
 
 

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Individual or Entity Name (and Title, if applicable)
 
 

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Address

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Signature of Spouse/Partner
 
 

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Name
 

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Address

Investor Signature Page to Security Agreement

4834-2458-6761.1
 
 

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