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EX-32 - SECTION 1350 CERTIFICATIONS - ACTIVECARE, INC.acar10q20091231ex32.htm
EX-31 - RULE 13A?14(A)/15D?14(A) CERTIFICATIONS - ACTIVECARE, INC.acar10q20091231ex31.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended: December 31, 2009
 
or
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ____________ to _____________
 
Commission File Number: 0-53570
 
ActiveCare, Inc.

(Exact name of registrant as specified in its charter)

Delaware
 
87-0578125
(State or other jurisdiction of incorporation
or organization)
 
(I.R.S. Employer Identification No.)
     
5095 West 2100 South
West Valley City, Utah
 
 
84120
(Address of principal executive offices)
 
(Zip Code)

(801) 974-9474
 (Registrant's telephone number, including area code)

Volu-Sol Reagents Corporation
(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 ¨  No x
  
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ¨  No ¨

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 ¨
Accelerated filer ¨
Non-accelerated filer ¨
 Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)
Yes  ¨   No  x

As of February 10, 2010, the registrant had 11,822,639 shares of common stock outstanding.

 
1

 

ActiveCare, Inc.
(Formerly Volu-Sol Reagents Corporation)

Table of Contents

 
Page
   
PART I – FINANCIAL INFORMATION
3
Item 1. Financial Statements
3
Condensed Consolidated Balance Sheets (unaudited)
3
Condensed Consolidated Statements of Operations (unaudited)
4
Condensed Consolidated Statements of Cash Flows (unaudited)
5
Notes to Condensed Consolidated Financial Statements (unaudited)
6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of  Operations
15
Item 3. Quantitative and Qualitative Disclosures About Market Risk
22
Item 4.  Controls and Procedures
22
PART II – OTHER INFORMATION
23
Item 1. Legal Proceedings.
23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
23
Item 3. Defaults Upon Senior Securities
23
Item 4. Submission of Matters to a Vote of Security Holders
23
Item 5. Other Information.
23
Item 6. Exhibits
23
SIGNATURES
25
 

 
2

 

 PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements.
ActiveCare, Inc
(Formerly Volu-Sol Reagents Corporation)
Condensed Consolidated Balance Sheets
(unaudited)
 


   
December 31, 2009
   
September 30, 2009
 
Assets
 
 
   
 
 
Current assets:
           
Cash
  $ 243,828     $ 830,931  
Accounts receivable, net of allowance for
               
   doubtful accounts of $2,500 and $3,000, respectively
    82,254       63,469  
Inventories, net of reserve of $42,320  and $34,517, respectively
    39,712       48,965  
Prepaid expenses and other assets
    8,431       12,431  
   Total current assets
    374,225       955,796  
                 
Property and equipment, net of accumulated
               
   depreciation of $413,579 and $408,652, respectively
    85,062       71,967  
Deposit on inventory purchases
    20,000       65,000  
Domain Name, net of amortization of $179 and $0
   Respectively
    14,121       -  
Leased Equipment, net of amortization of $5,937 and $0,
   respectively
    65,303       -  
License agreement, net of amortization of $22,431 and $14,019,  respectively
    277,569       285,981  
Intangible asset – access to financing, net of amortization
   of $163,520 and $40,880, respectively
    572,320        694,960  
   Total assets
  $ 1,408,600     $ 2,073,704  
Liabilities and Stockholders’ Equity
 
Current liabilities:
               
Accounts payable
  $ 253,871     $ 248,552  
Derivative liability
    949,529       -  
Accrued expenses
    217,075       154,544  
Related party note payable
    75,000       -  
Accrued payable on license agreement
    300,000       300,000  
Series A convertible preferred stock, net of discount of
     $517,471and $615,829, respectively (aggregate
      liquidation preference of $1,000,000)
      482,529         384,171  
   Total current liabilities
    2,278,004       1,087,267  
   Total liabilities
    2,278,004       1,087,267  
Stockholders’ equity (deficit):
               
Preferred stock; .00001 par value, 10,000,000 shares
    authorized; 0 and 0 shares issued and outstanding,
    respectively
      -         -  
Common stock, .00001 par value, 50,000,000 shares
    authorized; 11,822,639 and 11,822,639 shares issued
    and outstanding, respectively
       118         118  
Additional paid in capital
    5,791,321       6,043,470  
Accumulated deficit
    (6,660,843 )     (5,057,151 )
     Total stockholders’ equity (deficit)
    (869,404 )     986,437  
     Total liabilities and stockholders’ equity (deficit)
  $ 1,408,600     $ 2,073,704  


See accompanying notes to condensed consolidated financial statements

 
3

 

ActiveCare, Inc.
(Formerly Volu-Sol Reagents Corporation)
Condensed Consolidated Statements of Operations
(unaudited)

 
   
Three Months Ended
December 31,
 
   
2009
   
2008
 
             
Revenues:
 
 
   
 
 
Care services
  $ 4,434     $ -  
Reagents
    108,421       104,307  
Total revenues
    112,855       104,307  
                 
Cost of revenue:
               
Care services
    60,621       -  
Reagents
    97,038       103,071  
Total cost of revenues
    157,659       103,071  
Gross margin
    (44,804 )     1,236  
                 
Operating expenses:
               
Research and development
    164,330       105,938  
Selling, general and administrative
    1,030,332       249,005  
                 
Loss from operations
    (1,239,466 )     (353,707 )
                 
Other income (expense):
               
Gain on derivative liability
    360,064       -  
Interest income
    -       7,623  
Interest expense
    (382,731 )     -  
Other income (expenses)
    57       (825 )
                 
Net loss
  $ (1,262,076 )   $ (346,909 )
                 
Net loss per common share – basic and diluted
  $ (0.11 )   $ (0.04 )
                 
Weighted average shares – basic and diluted
    11,822,639       8,983,000  



See accompanying notes to condensed consolidated financial statements

 
4

 
 
ActiveCare, Inc.
(Formerly Volu-Sol Reagents Corporation)
Condensed Consolidated Statements of Cash Flows
(unaudited)


 
   
Three Months Ended
December 31,
 
   
2009
   
2008
 
             
Cash flows from operating activities:
           
Net loss
  $ (1,262,076 )   $ (346,909 )
Adjustments to reconcile net loss to net cash used
               
In operating activities:
               
   Depreciation and amortization
    142,115       2,835  
   Amortization of deferred consulting
    47,500       -  
   Warrants issued for services
    413,170       -  
   Amortization of debt discount recorded as interest expense
    353,517          
   Gain on derivative liability
    (360,064 )     -  
   Changes in operating assets and liabilities:
               
      Accounts receivable
    (18,785 )     6,971  
      Interest receivable
    -       (7,152 )
      Inventories
    9,253       (4,714 )
      Prepaid expenses and other assets
    49,000       (39 )
      Accounts payable
    5,317       88,620  
      Accrued liabilities
    62,532       42,236  
         Net cash used in operating activities
    (558,521 )     (218,152 )
                 
Cash flows from investing activities:
               
Payments for property and equipment
    (18,021 )     (4,436 )
Disposal of leased equipment
    239       -  
Purchase of intangibles
    (14,300 )     -  
Purchase of leased equipment
    (71,500 )     -  
         Net cash used in investing activities
    (103,582 )     (4,436 )
                 
Cash flows from financing activities:
               
Proceeds from  related-party note
    75,000       79,001  
         Net cash provided by financing activities
    75,000       79,001  
                 
Net decrease in cash
    (587,103 )     (143,587 )
Cash, beginning of period
    830,931       474,146  
                 
Cash, end of period
  $ 243,828     $ 330,559  
                 
                 
Supplemental Cash Flow Information:
               
 
               
      Cash paid for income taxes
    -       -  
      Cash paid for interest
    -       -  



See accompanying notes to condensed consolidated financial statements

 
5

 

ActiveCare, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)


1.
Basis of Presentation

 
The unaudited interim consolidated financial information of ActiveCare, Inc. (the “Company” or “ActiveCare”) has been prepared in accordance with Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission.  Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations.  In the opinion of management, the accompanying interim consolidated financial information contains all adjustments, consisting only of normal recurring adjustments necessary to present fairly the Company’s financial position as of December 31, 2009, and results of its operations for the three months ended December 31, 2009 and 2008.  These financial statements should be read in conjunction with the annual consolidated financial statements and notes thereto that are included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2009.  The results of operations for the three months ended December 31, 2009 may not be indicative of the results for the fiscal year ending September 30, 2010.
 
 
Going Concern
The Company incurred a net loss and has negative cash flows from operating activities for the years ended September 30, 2009 and 2008 and for the period ended December 31, 2009.  These factors raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 
In order for the Company to remove substantial doubt about its ability to continue as a going concern, the Company must generate positive cash flows from operations and obtain the necessary funding to meet its projected capital investment requirements.  Management’s plans with respect to this uncertainty include raising additional capital from the sale of the Company’s common stock or attempting to secure additional financing through traditional bank financing or a debt offering.  There can be no assurance that revenues will increase rapidly enough to offset operating losses and repay debts.  If the Company is unable to increase revenues or obtain additional financing, it will be unable to continue the development of its products and may have to cease operations.

Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. Actual results could differ from these estimates.

2.
Revenue Recognition

The Company’s revenue has historically been from three sources: (i) sales from care services; (ii) diagnostic equipment product sales; and (iii) sales of medical diagnostic stains.

Care Services

Care services include lease contracts in which the Company provides care services and leases devices to distributors or end users and the Company retains ownership of the leased device.

The Company typically leases its devices on a month-to-month contract with customers (members) that use the Company’s care services.  However, these contracts may be cancelled by either party at anytime with 30 days notice.  Under the Company’s standard contract, the leased device becomes billable on the date the customer (member) orders the product, and remains billable until the device is returned to the Company.  The Company recognizes revenue on leased devices at the end of each month that care services have been provided.  In those circumstances in which the Company receives payment in advance, the Company records these payments as deferred revenue.

 
6

 

Diagnostic Equipment Product Sales

Although not the focus of the Company’s new business model, the Company also sells diagnostic equipment devices in certain situations. The Company recognizes product sales revenue when persuasive evidence of an arrangement with the customer exists, title passes to the customer and the customer cannot return the devices, prices are fixed or determinable  and collection is reasonably assured.

Medical Diagnostic Stain Sales

The Company recognizes medical diagnostic stains revenue when persuasive evidence of an arrangement with the customer exists, title passes to the customer, prices and fixed or determinable and collection is reasonably assured.
Shipping and handling fees are included as part of net sales. The related freight costs and supplies directly associated with shipping products to customers are included as a component of cost of goods sold. Neither the sale of diagnostic equipment nor the sale of medical diagnostic stains contains multiple deliverables.

Customers order either of the Company’s product lines by purchase order.  The Company does not enter into long-term contracts.  Its diagnostic equipment sales were $2,525 for the three months ended December 31, 2009 and its medical diagnostic stain sales were $105,896 for the three months ended December 31, 2009.  All of the Company’s sales are made with net 30-day payment terms.

In connection with generally accepted accounting principles to qualify for the recognition of revenue at the time of sale, the Company notes the following:

 
·
The Company’s  price to the buyer is fixed or determinable at the date of sale.
 
·
The buyer has paid the Company, or the buyer is obligated to pay the Company within 30 days, and the obligation is not contingent on resale of the product.
 
·
The buyer's obligation to the Company would not be changed in the event of theft or physical destruction or damage of the product.
 
·
The buyer acquiring the product for resale has economic substance apart from that provided by the Company.
 
·
The Company does not have significant obligations for future performance to directly bring about resale of the product by the buyer.
 
·
The amount of future returns can be reasonably estimated and they are negligible.
 
·
Customers may return diagnostic equipment within 30 days of the purchase date. Customers may return the medical diagnostic stains within 30 days of the purchase date provided that the stain’s remaining life is at least 8 months. Customers must obtain prior authorization for a product return.


The Company’s products have not been modified significantly for several years.  There is significant history on which to base the Company’s estimates of sales returns.  These sales returns have been negligible.

The Company has 70 types of products based on the number of individual stock-keeping units (“SKUs”) in its inventory.  Most of these 70 SKUs are for medical diagnostic stain inventory.  For example, certain medical diagnostic stains are packaged in different sizes, and each packaged size (i.e. 16 oz., 32 oz., 48 oz.) has a unique SKU in inventory.  Paragraph 37 of SFAS No. 131 states that, “an enterprise shall report revenues from external customers for each product and service or each group of similar products and services unless it is impractical to do so.”  The vast majority of the Company’s sales are of medical diagnostic stains, with a minimal portion of sales being diagnostic equipment.   Because diagnostic equipment sales are not material to the financial statements, the Company discloses sales as one line item.

The Company’s revenue recognition policy for sales to distributors is the same as the policy for sales to end-users.

A customer qualifies as a distributor by completing a distributor application and proving its sales tax status.  Upon qualifying as a distributor, a customer receives a 35% discount from retail prices, and the distributor receives an additional 5% discount when product is purchased in case quantities.  The Company’s distributors are not required to maintain specified amounts of product on hand, and distributors are not required to make minimum purchases to maintain distributor status.  Distributors have no stock rotation rights or additional rights of return.  Sales to distributors are recorded net of discounts.

Sales returns have been negligible, and any and all discounts are known at the time of sale.  Sales are recorded net of sales returns and sales discounts.  There are no significant judgments or estimates associated with the recording of revenues.

 
7

 

3.             Net Loss per Common Share

Diluted net loss per common share ("Diluted EPS") is computed by dividing net loss by the sum of the weighted average number of common shares outstanding and the weighted-average dilutive common share equivalents then outstanding.  The computation of Diluted EPS does not assume exercise or conversion of securities that would have an anti-dilutive effect.

Common share equivalents consist of shares issuable upon the exercise of common stock warrants, and shares issuable upon conversion of preferred stock.  As of December 31, 2009 and 2008, there were 15,214,287 and 0 outstanding common share equivalents, respectively, that were not included in the computation of diluted net loss per common share as their effect would be anti-dilutive.

4.
Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) issued guidance which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.  It is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  In February 2008, the FASB extended the effective date to fiscal years beginning after November 15, 2008.    The Company adopted this guidance on October 1, 2009.  This guidance did not have a material impact on the financial statements.

In December 2007, the FASB issued guidance which requires an acquirer of a business to measure the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired.  It clarifies that a non-controlling interest in a subsidiary should be reported as equity in the financial statements, net income shall be adjusted to include the net income attributed to the non-controlling interest and comprehensive income shall be adjusted to include the comprehensive income attributed to the non-controlling interest.  The calculation of earnings per share will continue to be based on income amounts attributable to the parent.  This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008.  Early adoption is prohibited.  The Company adopted this guidance on October 1, 2009.  This guidance did not have a material impact on the financial statements.

In November 2008, the FASB provided guidance which clarifies the accounting for certain transactions and impairment considerations involving equity method investments. This guidance is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited.  The Company adopted this guidance on October 1, 2009.  This guidance did not have a material impact on the financial statements.

In June 2008, the FASB provided guidance which assists in determining whether an instrument (or embedded feature) is indexed to an entity’s own stock. This amendment is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early application is not permitted. A contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. This amendment provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the this exception. The Company adopted this guidance on October 1, 2009 see Note 5 for the accounting impact.

In June 2009, the FASB issued accounting guidance on the consolidation of variable interest entities (VIEs). This new guidance revises previous guidance by eliminating the exemption for qualifying special purpose entities, by establishing a new approach for determining who should consolidate a variable-interest entity and by changing when it is necessary to reassess who should consolidate a variable-interest entity.  This guidance will be effective at the beginning of the first fiscal year beginning after November 15, 2009. Early application is not permitted.  The Company adopted this guidance during the quarter ended December 31, 2009.  This guidance did not have a material impact on the financial statements.

 
8

 

In September 2009, the FASB issued guidance that changes the existing multiple-element revenue arrangements guidance currently included under its Revenue Arrangements with Multiple Deliverables codification. The revised guidance primarily provides two significant changes: 1) eliminates the need for objective and reliable evidence of the fair value for the undelivered element in order for a delivered item to be treated as a separate unit of accounting, and 2) eliminates the residual method to allocate the arrangement consideration. In addition, the guidance also expands the disclosure requirements for revenue recognition. This will be effective for the first annual reporting period beginning on or after June 15, 2010, with early adoption permitted provided that the revised guidance is retroactively applied to the beginning of the year of adoption. The Company is currently assessing the future impact of this new accounting update to its financial statements.

In October 2009, the FASB issued guidance on share-lending arrangements entered into on an entity's own shares in contemplation of a convertible debt offering or other financing.  This new guidance is effective for fiscal years beginning on or after December 15, 2009, and fiscal years within those fiscal years for arrangements outstanding as of the beginning of those years. Retrospective application is required for such arrangements and early application is not permitted.  The adoption of this guidance is not expected to significantly impact the Company’s results of operations and financial position.

In January 2010, the FASB issued guidance which requires an entity to disclose the following:

 
·
Separately disclose the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe reasons for the transfers.

 
·
Present separately information about purchases, sales, issuances and settlements, on a gross basis, rather than on one net number, in the reconciliation for fair value measurements using significant unobservable inputs (Level 3).

 
·
Provide fair value measurement disclosures for each class of assets and liabilities.

 
·
Provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for fair value measurements that fall in either Level 2 or level 3.

This guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements.  Those disclosures are effective for fiscal years beginning after December 15, 2010.  The Company adopted this guidance during the quarter ended December 31, 2009.  This guidance did not have a material impact on the financial statements.

5.
Change in Accounting Principle

Beginning October 1, 2009, the Company recognized the fair value of the Class A and Class B warrants along with the embedded conversion features of the Series A Preferred Stock as derivative liabilities on its consolidated balance sheet. This was as a result of the adoption of new guidance as found in ASC Topic 815-10, effective for the Company at the beginning of this fiscal year.  Accordingly, changes in the fair value of these liabilities at each reporting period are required to be recognized as non-cash expense or income in the consolidated statement of operations.  Future movements in the Company’s stock price alone can materially affect both its results of operations and financial position in the future.  Substantial movements in the Company’s stock price could result in material volatility in the Company's results of operations and financial position.

Upon adoption, a cumulative effect adjustment was recorded, based on amounts that would have been recognized if this guidance had been applied from the issuance date of the affected instruments.  The following table illustrates the changes to the Company’s consolidated balance sheet resulting from the implementation of this guidance:

 
9

 
 
   
Balance at
eptember 30,
2009
   
Cumulative
Effect
Adjustment
   
Balance at
October 1,
2009
 
Series A convertible preferred stock, net
(liability)
  $ (384,171 )   $ 255,159     $ (129,012 )
Derivative liability
  $ -     $ (1,309,593 )   $ (1,309,593 )
Additional paid in capital
  $ (6,043,470 )   $ 712,818     $ (5,330,652 )
Accumulated deficit
  $ 5,057,151     $ 341,616     $ 5,398,767  

The fair value of the warrants and beneficial conversion feature on the Preferred stock of $712,818 was included in additional paid-in capital on the issuance date of the Preferred stock and warrants (September 10, 2009).  As a result of the reclassification to derivative liabilities, the cumulative effect of these adjustments on October 1, 2009 was an increase in the discount on the Preferred stock of $255,159, an increase in derivative liability of $1,309,593, a reduction of additional paid-in capital of $712,818 and a corresponding increase in the Company’s accumulated deficit of $341,616.

As of December 31, 2009, the Company determined that, using the Black Scholes model, the fair value of the warrant obligations had decreased by $360,064.  Accordingly, for the three months ended December 31, 2009, the Company recorded a “Gain on derivative liability” to its statement of operations.

6.
Inventory

Inventories are recorded at the lower of cost or market, cost being determined on a first-in, first-out ("FIFO") method. Inventories consisted of raw materials, work-in-process, and finished goods.  Inventories as of December 31, 2009 and September 30, 2009 were as follows:

   
December 31,
   
September 30,
 
   
2009
   
2009
 
             
Raw materials
  $ 32,058     $ 38,851  
Work in process
    4,044       5,422  
Finished goods
    45,930       39,209  
Reserve for inventory obsolescence
    (42,320 )     (34,517 )
     Total inventory
  $ 39,712     $ 48,965  

 
Provisions, when required, are made to reduce excess and obsolete inventories to their estimated net realizable values. Due to competitive pressures and technological innovation, it is possible that estimates of the net realizable value could change in the near term.

 
7.
Property and Equipment

 
Property and equipment consisted of the following as of December 31, 2009 and September 30, 2009:

   
Dec. 31
   
Sept. 30
 
Equipment
  $ 182,770     $ 171,577  
Software
    19,259       15,498  
Leasehold improvements
    269,448       269,448  
Furniture and fixtures
    27,164       24,096  
      498,641       480,619  
Accumulated depreciation
    (413,579 )     (408,652 )
Property and equipment, net of accumulated depreciation
  $ 85,062     $ 71,967  

 
Depreciation expense for the three months ended December 31, 2009 the year ended September 30, 2009 was $4,926, and $2,835, respectively.

 
10

 

8.
 
Leased Equipment

Leased equipment consisted of the following as of December 31, 2009 and September 30, 2009:

   
Dec. 31
   
Sept. 30
 
Leased equipment
  $ 71,240     $ -  
Accumulated depreciation
    (5,937 )     -  
Leased equipment, net of accumulated depreciation
  $ 65,303     $ -  

Depreciation expense for the three months ended December 31, 2009 the year ended September 30, 2009 was $5,958, and $0, respectively.

9.            Patent License Agreement

During the year ended September 30, 2009, the Company licensed the use of certain patents from a third party.  This license agreement will aid the Company as it furthers its business plan.  The Company is required to pay $300,000 plus a 5% royalty on the net sales of all licensed products and it has the right to purchase the underlying patents for 4,000,000 shares of common stock. The Company has capitalized the patents and is amortizing them over the remaining estimated useful life of 9 years.  The Company has recognized $8,591 and $14,019 of amortization expense for the three months ended December 31, 2009 and the year ended September 30, 2009, respectively.  The Company has not paid the $300,000 as of December 31, 2009.

10.
Related-Party Note Receivable

During the quarter ended December 31, 2009, the Company borrowed $75,000 from an officer of the Company.  This note has an annual interest rate of 12% and is due on demand.  Accrued interest on this note totaled $395 for the quarter ended December 31, 2009.

11.
Series A Convertible Preferred Stock

Concurrent with the closing of the acquisition of HG on September 10, 2009 (see Note 17), the Company issued 571,428 shares of Series A Convertible Preferred Stock (Series A) for $1.75 per share, or a total of $1,000,000.  The purchasers received one Class A warrant and one Class B warrant for each share of Series A purchased.  The Series A par value is $.00001 per share and the stated value is $1.75 per share.

The Series A is mandatorily redeemable at 125% of the stated value plus any accrued but unpaid dividends and liquidated damages at the earlier of September 4, 2010 or at the option of the holder upon the Company’s failure to keep certain obligations under the stock purchase agreement.

At any time, or from time to time, the Company may redeem all or a portion of the Series A outstanding upon twenty business days prior written notice at a price per share of preferred stock equal to 120% of the stated value plus any accrued but unpaid dividends and liquidated damages.

The Series A is convertible at any time at the holder’s option at $1.75 per share.  The conversion rate is adjusted for stock splits, combinations, dividends and distributions, reclassifications, exchanges, substitutions, reorganizations, mergers, consolidations or sales of assets. The conversion rate is also adjusted when the Company issues or sells any additional shares of common stock or equivalents, at a price per share less than the conversion rate then in effect.

Cumulative dividends of 8% of the stated value per share per annum accrue daily and are payable quarterly commencing on December 31, 2009.  Dividends are payable at the Company’s option in cash or, in certain circumstances, in registered shares of the Company’s common stock.  As of December 31, 2009, the Company had recorded approximately $24,500 of accrued dividends recorded as part of accrued expenses in the financial statements.

 
11

 
 
If the Company elects to pay any dividend in shares of common stock, the number of shares of common stock to be issued shall be an amount equal to the greater of (x) the quotient of (i) the dividend payment divided by (ii) $1.00 (as adjusted for any stock dividend, stock split, stock combination, reclassification or similar transaction) or (y) the quotient of (i) the dividend payment divided by (ii) ninety percent (90%) of the average of the Volume Weighted Average Price (VWAP, and as further defined in the certificate of designation) for the five trading days immediately preceding the date the dividend payment is due; provided, however, in the event that ninety percent (90%) of the average of the VWAP for the five trading days immediately preceding the date the dividend payment is due shall be less than $1.00 (as adjusted for appropriate adjustments for any stock dividend, stock split, stock combination, reclassification or similar transaction), at the option of at least 75% of the holders of the preferred stock, the dividend payment shall be payable only in cash.

Series A shareholders are entitled to the number of votes equal to the number of shares of common stock into which the Series A could be converted.

In the event of the liquidation, dissolution or winding up of the affairs of the Company, the Series A shareholders shall be entitled to receive a liquidation preference amount equal to the stated value per share plus any accrued and unpaid dividends.

Effective October 1, 2009, certain conversion features on the Series A Preferred Stock, along with the warrants were required to be classified as derivatives. See Notes 5 and 12 for further discussion.

12.
Derivative Liability

The Company does not hold or issue derivative instruments for trading purposes.  However, the Company has warrants and Series A convertible preferred stocks that contain embedded derivative features that require separate valuation from the convertible preferred stock.  The Company recognizes these derivatives as liabilities in its balance sheet, measures them at their estimated fair value, and recognizes changes in their estimated fair value in earnings (losses) in the period of change.  As of December 31, 2009, the derivative instruments had a fair value of $949,529 resulting in a derivative valuation gain of $360,064 for the period.

13.
Preferred Stock

The Company is authorized to issue 10,000,000 shares of undesignated preferred stock, with a par value of $0.00001 per share.  Pursuant to the Company's Certificate of Incorporation, the Company's board of directors has the authority to amend the Company's Certificate of Incorporation, without further shareholder approval, to designate and determine, in whole or in part, the preferences, limitations and relative rights of the preferred stock before any issuance of the preferred stock and to create one or more series of preferred stock and fix the number of shares of each such series and determine the preferences, limitations and relative rights of each series of preferred stock, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, and liquidation preferences.   On September 10, 2009, the Company designated a Series A Convertible Preferred Stock.  See Note 11 for details.

14.
Warrants

During the year ended September 30, 2009, the Company issued warrants to members of the board of directors of the Company for the purchase of an aggregate of 13,500,000 shares of common stock at prices ranging from $0.25 to $1.25 per share.  All of these warrants are subject to the following vesting schedule.

Number of Warrants
                   Vesting Criteria
1,060,000
When the Company’s stock is trading or sold
2,060,000
$5,000,000 in annualized revenue
2,060,000
$10,000,000 in annualized revenue
2,080,000
$15,000,000 in annualized revenue
2,080,000
$20,000,000 in annualized revenue
2,080,000
$25,000,000 in annualized revenue
2,080,000
When the Company achieves profitability

As of December 31, 2009, these warrants have not vested and they will only vest in future periods upon completion of specific performance criteria.

 
12

 

The fair value of each warrant granted was estimated on the date of grant using the Black-Scholes valuation model and assumes that the performance goals will be achieved using the following inputs: Exercise price ranging from $0.25 to $1.25; Risk free interest rate of between 2.02% - 2.71%; Expected life of 5 years; Expected dividend of 0%; and a volatility factor of 141%.  If such performance goals are not met, no compensation cost is recognized and any recognized compensation cost is reversed.  Expected volatilities are based on historical volatility of a peer company’s common stock among other factors. The Company uses historical data to estimate option exercise and employee termination within the valuation model.  The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
 
On September 4, 2009, the Company issued 571,428 shares of Series A Convertible Preferred Stock (Series A) for $1.75 per share, or a total of $1,000,000.  The purchasers received one Class A warrant and one Class B warrant for each share of Series A purchased.  The Class A and B warrants have identical terms, other than the exercise price.  The exercise price of the Class A warrants is $1.75, and the exercise price of the Class B warrants is $2.25.  The warrants are immediately exercisable into shares of the Company’s common stock through September 4, 2014.

The warrants have a cashless exercise feature commencing upon the earlier of 6 months following September 4, 2009 and the date the shares of common stock subject to the warrants become eligible for resale pursuant to Rule 144 under the Securities Act, if (i) the per share market value of one share of common stock is greater than the warrants’ exercise price and (ii) a registration statement under the Securities Act providing for the resale of the shares of common stock subject to the warrants is not then in effect or not effective at any time.

The warrants’ exercise price will be adjusted downward if the Company issues any additional shares of common stock (excluding certain issuances), at a price per share less than the warrants’ exercise price then in effect or without consideration (in which case such additional shares of common stock shall be deemed to have been issued at a price per share of $.00001).  If this occurs, then the warrants’ exercise price upon each such issuance shall be adjusted to the price equal to the consideration per share paid for such additional shares of common stock, and the number of shares of common stock for which the warrants are exercisable shall be increased such that the aggregate warrant exercise price payable hereunder, after taking into account the decrease in the exercise price, shall be equal to the aggregate exercise price prior to such adjustment.

The total expense associated with these warrants is $3,452,921, of which $665,201 was recognized in prior periods and $413,170 is being recognized as non-cash consulting expense during the quarter ended December 31, 2009.  The balance of $2,374,550 will be expensed in future periods.

15.
Segment Information

The Company is organized into two business segments based primarily on the nature of the Company's products. The Stains and Reagents segment is engaged in the business of manufacturing and marketing medical diagnostic stains, solutions and related equipment to hospitals and medical testing labs. The ActiveCare segment is engaged in the business of developing, distributing and marketing mobile emergency and concierge services to distributors and consumers.  The care services part of the Company’s business started during quarter ended December 31, 2009.   Prior to that time the company did not allocate any expenses or assets between the segments.

The following table reflects certain financial information relating to each reportable segment for the three-month periods ended December 31, 2009 and 2008:
 
   
ActiveCare
   
Stains and
Reagents
   
Total
 
Three Months Ending December 31, 2009
                 
Sales to external customers
  $ 4,434     $ 108,421     $ 112,855  
Segment income (loss)
  $ (812,550 )   $ (449,526 )   $ (1,262,076 )
Segment assets
  $ 1,207,071     $ 201,529     $ 1,408,600  
Depreciation and amortization
  $ 138,568     $ 3,547     $ 142,115  
 
Three Months Ending December 31, 2008
                 
Sales to external customers
  $ -     $ 104,307     $ 104,307  
Segment income (loss)
  $ -     $ (346,909   $ (346,909
Segment assets
  $ -     $ 1,059,361     $ 1,059,361  
Depreciation and amortization
  $ -     $ 2,835     $ 2,835  
 
 
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16.
Commitments and Contingencies
 
The Company leases a facility under a non-cancelable operating lease that expires in November 2010.  Future minimum rental payments under the non-cancelable operating lease as of September 30, 2009 are approximately as follows:


Lease Obligations
 
     
Year Ending September 30:
     
     2010
  $ 87,006  
     2011
    32,146  
     2012
    20,633  
     2013
    17,600  
        Total
  $ 157,385  

Rent expense related to this non-cancelable operating lease was approximately $22,500 for the quarters ending December 31, 2008 and December 31, 2009.

17.
Acquisition

On September 4, 2009, the Company completed the acquisition of HG Partners, Inc. (HG) by acquiring 100% of HG’s common stock.  Consideration consisted of 840,000 shares of the Company’s common stock valued at $735,840.  The Company acquired HG to gain access to future financing sources, including HG’s shareholders.

No assets and liabilities were acquired from HG, and no operations were acquired.  The purchase price of $735,840 was allocated to an intangible asset (access to financing sources).  The Company has capitalized the intangible asset and is amortizing it on a straight-line basis over the remaining useful life of 18 months.  The Company has recognized $40,880 of amortization expense for the year ended September 30, 2009 and $122,640 for the quarter ended December 31, 2009.

18.           Subsequent Events

The Company has evaluated for subsequent events through February 16, 2010, the date these financial statements were issued. There are no material events that warrant further disclosure.
 
 
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

 
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader better understand ActiveCare, our operations and our present business environment.  This MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements for the fiscal years ended September 30, 2009 and 2008 and the accompanying notes thereto contained in those reports. Unless otherwise indicated, the terms “AcitveCare,” the “Company,” “we,” our” refer to ActiveCare, Inc., a Delaware corporation, formerly Volu-Sol Reagents Corporation, a Utah corporation.
 
Overview
 
Historically, our core business has been the manufacture, distribution and sale of medical diagnostic stains and solutions.  In February 2009, we were spun off from our former parent, SecureAlert, Inc., formerly known as RemoteMDx, Inc. (“SecureAlert”).  In connection with the spin-off, we acquired from SecureAlert the exclusive license rights to certain technology, including patent rights utilizing GPS and cellular communication and monitoring technologies for use in the healthcare and personal security markets.  We subsequently acquired by license the exclusive rights to certain patents owned by a third-party for technologies that are complementary to the patented technology we acquired from SecureAlert.  We are currently in default under our agreement and we are currently negotiating to cure this default.  Our business plan is to develop and market a new product line for monitoring and providing assistance to mobile and homebound seniors and the chronically ill, including those who may require a personal assistant to check up on them during the day to ensure their safety and well being and know where they are at all times. 
 
Recent Developments
 
We have financed operations exclusively through the sale of equity securities sales and short-term debt.  Accordingly, if our revenues continue to be insufficient to meet our needs, we will attempt to secure additional financing through traditional bank financing or a debt or equity offering. However, because of the development stage nature of our business and the potential of a future poor financial condition, we may be unsuccessful in obtaining such financing or the amount of the financing may be minimal and therefore inadequate to implement our continuing plan of operations. There can be no assurance that we will be able to obtain financing on satisfactory terms or at all, or raise funds through a debt or equity offering. In addition, if we only have nominal funds with which to conduct our business activities, this will negatively impact our results of operations and financial condition.
 
In May 2009, we entered into a license and distribution agreement (“License Agreement”) with euromicron AG, a German corporation.  The euromicron Group is a solution provider of communication systems and security networks with production expertise in the field of fiber optics technology.  Its range of services covers the planning, implementation and maintenance of communication and security networks and the development, production and distribution of network components based on copper, optical fiber and wireless technology.  The product portfolio includes smaller active network components, connectors and connection technology for optical fiber networks, pre-assembled fiber optic cable and assembly and measuring equipment.  These are integrated components of WANs and LANs used for data communication at data centers, and in the field of medical and security technology.  Under the License Agreement, we granted to euromicron an exclusive license to manufacture, market and distribute our products in the healthcare and personal security markets and to provide related services in the countries of Albania, Austria, Bosnia & Herzegovina, Bulgaria, Croatia, Czech Republic, Germany, Greece, Hungary, Italy, Kosovo, Macedonia, Poland, Serbia, Slovakia, Slovenia, Switzerland, and Turkey.  We are required to maintain the applicable patents and use our best efforts to extend the patents and register them in the jurisdictions that are included within the territory. In addition, we will transfer to euromicron all know how, intellectual property (including software) and technology that are related to our products and provide support, training and service to euromicron and its customers during the term of the License Agreement either directly or through one or more contracted service providers, including our former parent corporation, SecureAlert. We also agreed to supply products and to provide monitoring services until such time as euromicron has established a monitoring center dedicated to the territory.

In May 2009, we entered into the patent agreement with a third-party (the “Patent Agreement”).  Under the Patent Agreement, we were granted the exclusive, irrevocable, worldwide, transferable, sublicensable license of all rights conferred by the underlying patents.  We were also granted the exclusive right to grant and authorize, from time to time and in our sole and absolute discretion, one or more sublicenses.  The Patent Agreement required an upfront royalty payment of $300,000 and ongoing royalty payment equal to 5% of net sales revenues for licensed products.  The upfront royalty payment has not been paid and the Patent Agreement is in default.  We are currently negotiating to cure this default.

In September 2009, our board of directors designated 1,000,000 shares of preferred stock as Series A preferred stock.  We sold an aggregate of 571,428 shares of these securities to two investment funds, Gemini Master Fund, Ltd. and Harborview Master Fund, L.P. for gross proceeds of $1,000,000.  These investors also received Class A and Class B Warrants for the purchase of common stock of the Company at exercise prices of $1.75 and $2.25 per share, respectively, exercisable over a five-year term.  In a related transaction, we acquired from these two investors all of the issued and outstanding shares of a Nevada corporation, HG Partners, Inc., formerly Solutions Mechanical, Inc., for 840,000 shares of our common stock.

 
15

 

ActiveOne™
 
Under the trademark ActiveOne™ we have developed a product that incorporates GPS, cellular capability, and fall detection, all of which are connected to a 24 hour care center with the push of a button. The transmitter can be worn on a neck pendant or carried in a purse, and it sends a cellular signal to our care center. When the wearer of the device pushes the button, the staff at the care center evaluates the situation and decides whether to call emergency services or a designated friend or family member.
 
Marketing
 
We have begun selling the ActiveOneTM service through a direct mail and direct telephone campaign. Our sales team has already established a distributor network in different parts of the country and we intend to grow this distributor network as we build relationships across the U.S.  It is also our intention to place print ads in news papers and periodicals that reach the general public and specifically those that target seniors.  There are also plans for television ads that convey our message to seniors and others that have monitoring needs.
 
Research and Development Program
 
General Information
 
GPS technology utilizes highly accurate clocks on 24 satellites orbiting the earth owned and operated by the U.S. Department of Defense.  These satellites are designed to transmit their identity, orbital parameters and the correct time to earthbound GPS receivers at all times.  Supporting the satellites are several radar-ranging stations maintaining exact orbital parameters for each satellite and transmitting that information to the satellites for rebroadcast at frequencies between 1500 and 1600 MHz. 
 
A GPS receiver (or engine) scans the frequency range for GPS satellite transmissions. If the receiver can detect three satellite transmissions, algorithms within the engine deduce its location, usually in terms of longitude and latitude, on the surface of the earth as well as the correct time. If the receiver can detect four or more GPS satellite transmissions, it can also deduce its own elevation above sea level.  The effectiveness of GPS technology is limited by obstructions between the device and the satellites and, therefore, service can be interrupted or may not be available at all if the user is located in the lower floors of high-rise buildings or underground.
 
Research and development (“R&D”) has taken place on a GPS/Cellular communications device and on a water resistant wrist device that will detect falls and include a speaker and microphone. Our goal is to develop a wristwatch-size PERS device.  The watch will be universal for women and men with an adjustable strap.  The expanded CareCenter and the related products will be developed by our team.  We have identified and are working with several vendors for services that will further our objectives.  
 
An important part of this R&D program is our relationship with SIM Technology Group Limited (“SIM Technology”).  In December 2009, we entered into an agreement with Quectel Wireless Solutions, Ltd. (“Quectel”), a subsidiary of SIM Technology, to assist us in development of the ActiveOne™ and its companion device, the ActiveOne+™.  According to its 2008 Annual Report and 2009 Interim Report (www.sim.com/english/investor/Reports), SIM Technology was founded in 2002 and has been listed on the Main Board of the Hong Kong Stock Exchange since 2005 [2000.HK]. SIM Technology is an investments holding company. In addition to Quectel, SIM Technology’s subsidiaries include Shanghai Simcom, Shanghai Sunrise Simcom and several other companies that are leading mobile handset and wireless communication developers in China. Over the past few years, SIM Technology Group has been a leader of the Chinese mobile phone design industry in revenue, profit and stock market.  SIM Technology employs approximately 2,500 people with about 1,100 in research and development.
 
SIM Technology was listed as one of the “Deloitte Technology Fast 50 China” and “Deloitte Technology Fast 500 Asia Pacific” for three consecutive years (2005, 2006, and 2007).  SIM Technology also was recognized as one of “The BCG 50 Local Dynamos” by Boston Consulting Group, a leading global consulting firm.  Quectel is a professional supplier of high quality wireless modules and trackers in GSM/GPRS and GPS and related technologies. Its module products are used for automotive, smart metering, control and monitoring, tracking and tracing, payment, security, and many other Machine-to-Machine (M2M) products.
 
 
16

 
 
CareCenter
 
In concert with the development of our products, we also created the CareCenter.  In contrast with a typical monitoring center, our CareCenter is equipped with hardware and software that pinpoints the location of the incoming caller by utilizing GPS technology.  This capability is referred to as telematic.  The operator’s computer screen can identify the caller as well as locate the caller’s precise location on a detailed map.  We believe the CareCenter is and will be the cornerstone of our business. 
 
Critical Accounting Policies  
 
We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based on the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the periods presented. There can be no assurance that actual results will not differ from those estimates. We believe the following represent our most critical accounting policies. 
 
Management considers an accounting estimate to be critical if:
 
 
·
It requires assumptions to be made that were uncertain at the time the estimate was made, and
 
 
·
Changes in the estimate or different estimates that could have been selected could have a material impact on our consolidated results of operations or financial condition.
 
Use of Estimates in the Preparation of Financial Statements
 
The preparation of financial statements requires management to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses during the reporting period.  By their nature, these estimates and judgments are subject to an inherent degree of uncertainty.  On an on-going basis, we evaluate our estimates, including those related to bad debts, inventories, intangible assets, warranty obligations, product liability, revenue recognition, and income taxes.  We base our estimates on historical experience and other facts and circumstances that are believed to be reasonable and the results provide a basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions, and these differences may be material.
 
With respect to concentration of credit risk, allowances for doubtful accounts receivable, inventories, impairment of assets, revenue recognition, and research and development, those material accounting policies that we believe are critical to an understanding of our financial results and condition are as follows:
 
Concentration of Credit Risk
 
We have cash in bank accounts that, at times, may exceed federally insured limits.  We have not experienced any losses in such accounts.
 
In the normal course of business, we provide credit terms to our customers. Accordingly, we perform ongoing credit evaluations of  customers' financial condition and require no collateral from customers.  We maintain an allowance for uncollectable accounts receivable based upon the expected collectability of all accounts receivable.
 
Accounts Receivable
 
Accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis.  Specific reserves are estimated by management based on certain assumptions and variables, including the customer’s financial condition, age of the customer’s receivables and changes in payment histories.  Trade receivables are written off when deemed uncollectible.  Recoveries of trade receivables previously written off are recorded when received.  A trade receivable is considered to be past due if any portion of the receivable balance has not been received by the contractual pay date.  Interest is not charged on trade receivables that are past due.
 
Inventories
 
Inventories are recorded at the lower of cost or market, cost being determined on a first-in, first-out ("FIFO") method. Inventories consist of raw materials, work-in-process, and finished goods.  Provisions, when required, are made to reduce excess and obsolete inventories to their estimated net realizable values. Due to competitive pressures and technological innovation, it is possible that estimates of the net realizable value could change in the near term. 

 
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Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation and amortization.  Depreciation and amortization are determined using the straight-line method over the estimated useful lives of the assets, typically three to seven years.  Leasehold improvements are amortized over the shorter of the estimated useful lives of the asset or the term of the lease.  Expenditures for maintenance and repairs are expensed while renewals and improvements over $500 are capitalized.  When property and equipment are disposed, any gains or losses are included in the results of operations.
 
Revenue Recognition
 
The Company’s revenue has historically been from three sources: (i) sales from care services; (ii) diagnostic equipment product sales; and (iii) sales of medical diagnostic stains.

Care Services

Care services include lease contracts in which the Company provides care services and leases devices to distributors or end users and the Company retains ownership of the leased device.

The Company typically leases its devices on a month-to-month contract with customers (members) that use the Company’s care services.  However, these contracts may be cancelled by either party at anytime with 30 days notice.  Under the Company’s standard contract, the leased device becomes billable on the date the customer (member) orders the product, and remains billable until the device is returned to the Company.  The Company recognizes revenue on leased devices at the end of each month that care services have been provided.  In those circumstances in which the Company receives payment in advance, the Company records these payments as deferred revenue.
 
Diagnostic Equipment Product Sales
 
Although not the focus of our new business model, we sell diagnostic equipment devices in certain situations. We recognize product sales revenue when persuasive evidence of an arrangement with the customer exists, title passes to the customer, prices are fixed or determinable, and collection is reasonably assured.
 
Medical Diagnostic Stain Sales
 
We recognize medical diagnostic stains revenue when persuasive evidence of an arrangement with the customer exists, title passes to the customer, prices are fixed or determinable, and collection is reasonably assured.
 
Shipping and handling fees are included as part of net sales. The related freight costs and supplies directly associated with shipping products to customers are included as a component of cost of goods sold.

We have no sales that contain multiple deliverables.  All of our revenues consist of sales of products, either (1) diagnostic equipment or (2) medical diagnostic stains.  The diagnostic equipment does not require installation or customization.

Historically and consistently all of our sales are made with net 30-day payment terms.  We have not changed our payment terms in the recent past (at least for five years).  We have no plans to change our payment terms in the future.

Our products have not been modified significantly for several years.  There is significant history on which to base our estimates of sales returns.  These sales returns have been negligible.  Customers may return diagnostic equipment within 30 days of the purchase date.  Customers may return the medical diagnostic stains within 30 days of the purchase date provided that the stain’s remaining life is at least 8 months.  Customers must obtain prior authorization for a product return.

In connection with SFAS No. 48 criteria to qualify for the recognition of revenue at the time of sale, we note the following:

 
·
The price to the buyer is fixed or determinable at the date of sale.
 
 
·
The buyer has paid us, or the buyer is obligated to pay us within 30 days, and the obligation is not contingent on resale of the product.

 
·
The buyer's obligation to us would not be changed in the event of theft or physical destruction or damage of the product.
 
 
·
The buyer acquiring the product for resale has economic substance apart from that provided by us.
 
 
·
We do not have significant obligations for future performance to directly bring about resale of the product by the buyer.
 
 
·
The amount of future returns can be reasonably estimated and they are negligible.
 
 
18

 

We have 70 types of products based on the number of individual stock-keeping unit (“SKUs”) in our inventory.  Most of these 70 SKUs are for medical diagnostic stain inventory.  For example, certain medical diagnostic stains are packaged in different sizes, and each packaged size (i.e. 16 oz., 32 oz., 48 oz.) has a unique SKU in inventory.  Paragraph 37 of SFAS No. 131 states that, “an enterprise shall report revenues from external customers for each product and service or each group of similar products and services unless it is impractical to do so.”  The vast majority of our sales are of medical diagnostic stains, with a minimal portion of sales being diagnostic equipment.   Because diagnostic equipment sales are not material to the financial statements, we disclose sales as one line item.

Our revenue recognition policy for sales to distributors is the same as the policy for sales to end-users.

A customer qualifies as a distributor by completing a distributor application and proving its sales tax status.  Upon qualifying as a distributor, a customer receives a 35% discount from retail prices, and the distributor receives an additional 5% discount when product is purchased in case quantities.  Our distributors are not required to maintain specified amounts of product on hand, and distributors are not required to make minimum purchases to maintain distributor status.  
Distributors have no stock rotation rights or additional rights of return.  Sales to distributors are recorded net of discounts.

Sales returns have been negligible, and any and all discounts are known at the time of sale.  Sales are recorded net of sales returns and sales discounts.  There are no significant judgments or estimates associated with the recording of revenues.

Results of Operations

Three Months Ended December 31, 2009 and 2008

Net Sales

Our fiscal year ends on September 30.  During the first fiscal quarter ended December 31, 2009, we had net sales of $112,855 compared to $104,307 in the fiscal quarter ended December 31, 2008.  Stains and reagent revenue accounted for $108,421 and our Care Services, including revenue for the ActiveOne™ Service accounted for $4,434 of the total revenue.

Cost of Revenue
 
Cost of revenue totaled $157,659 in the first fiscal quarter ended December 31, 2009, compared to $103,071 for the quarter ended December 31, 2008.  Of the total cost of revenues, stains and reagents accounted for $97,038 and Care Services accounted for $60,621.  The increase between the comparable quarters is due to the operation of our 24 hour a day, 7 days a week and 52 weeks a year CareCenter.

Research and Development Expenses

During the quarter ended December 31, 2009, we incurred research and development expenses of $164,330 compared to $105,938 in research and development expense incurred during the fiscal quarter ended December 31, 2008. The research and development expenses in the quarter ended December 31, 2009 has increased due to expenses related to the development of the ActiveOne+™ product.

Selling, General and Administrative Expenses

During the three months ended December 31, 2009, selling, general and administrative expenses totaled $1,030,332, compared to the same period one year ago, which totaled $249,005.  The increase in 2009 is the result of the following:

 
·
Other general and administration expenses including salaries of $112,800.
 
·
Advertising expense associated with the ActiveONE product of $76,575
 
·
Non cash expense associated with the issuance of stock and warrants of $460,670
 
·
Non cash amortization of patents and other intangible assets of $131,230

 
19

 

Other Income and Expense

During the quarter ended December 31, 2009, interest income was $0, compared to $7,623 in the quarter ended December 31, 2008.  The decrease in interest income was due to the repayment of the related-party note with SecureAlert.

Net Loss

We had a net loss for the three months ended December 31, 2009 totaling $1,262,076, compared to a net loss of $346,909 for the same period one year ago.  This increase in net loss is due to the items described above.

Liquidity and Capital Resources

Three Months ended December 31, 2009

We have not historically financed operations entirely from cash flows from operating activities.  During the year ended September 30, 2009, we supplemented cash flows with funding from the sale of equity securities.

At December 31, 2009, we had unrestricted cash of $243,828, compared to cash of $830,931 at September 30, 2009. At September 30, 2009, we had a working capital deficit of $131,471, compared to a working capital deficit of $2,421,251 at December 31, 2009.

During the quarter ended December 31, 2009, operating activities used cash of $558,521.

Investing activities for the quarter ended December 31, 2009 used cash of $103,582.

Financing activities for the quarter ended December 31, 2009, provided $75,000 of net cash.

During quarter ended December 31, 2009, we incurred a net loss of $1,262,076 and had negative cash flows from operating activities totaling $558,521, compared to a net loss of $2,416,000 and negative cash flows from operating activities of $1,122,000 for the year ended September 30, 2009.  As of September 30, 2009, our working capital deficit was $131,471 compared to a working capital deficit of $2,421,251 at December 31, 2009.  As of December 31, 2009, we had an accumulated deficit of $6,660,843 compared to $5,057,151 at September 30, 2009, and total stockholders’ equity at December 31, 2009 was $869,404 compared to $986,437 at September 30, 2009.
 
Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) issued guidance which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.  It is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  In February 2008, the FASB extended the effective date to fiscal years beginning after November 15, 2008.    We adopted this guidance on October 1, 2009.  This guidance did not have a material impact on our financial statements.

In December 2007, the FASB issued guidance which requires an acquirer of a business to measure the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired.  It clarifies that a non-controlling interest in a subsidiary should be reported as equity in the financial statements, net income shall be adjusted to include the net income attributed to the non-controlling interest and comprehensive income shall be adjusted to include the comprehensive income attributed to the non-controlling interest.  The calculation of earnings per share will continue to be based on income amounts attributable to the parent.  This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008.  Early adoption is prohibited.  We adopted this guidance on October 1, 2009.  This guidance did not have a material impact on our financial statements.

 
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In November 2008, the FASB provided guidance which clarifies the accounting for certain transactions and impairment considerations involving equity method investments. This guidance is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited.  We adopted this guidance on October 1, 2009.  This guidance did not have a material impact on our financial statements.

In June 2008, the FASB provided guidance which assists in determining whether an instrument (or embedded feature) is indexed to an entity’s own stock. This amendment is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early application is not permitted. A contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. This amendment provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the this exception. We adopted this guidance on October 1, 2009. The adoption was considered a change in accounting principle, and the cumulative effect from the adjustment was applied to the opening balance of accumulated deficit. See Note 5 of the financial statement for further discussion.

In June 2009, the FASB issued accounting guidance on the consolidation of variable interest entities (VIEs). This new guidance revises previous guidance by eliminating the exemption for qualifying special purpose entities, by establishing a new approach for determining who should consolidate a variable-interest entity and by changing when it is necessary to reassess who should consolidate a variable-interest entity.  This guidance will be effective at the beginning of the first fiscal year beginning after November 15, 2009. Early application is not permitted.   The Company adopted this guidance during the quarter ended December 31, 2009.  This guidance did not have a material impact on the financial statements.

In September 2009, the FASB issued guidance that changes the existing multiple-element revenue arrangements guidance currently included under its Revenue Arrangements with Multiple Deliverables codification. The revised guidance primarily provides two significant changes: 1) eliminates the need for objective and reliable evidence of the fair value for the undelivered element in order for a delivered item to be treated as a separate unit of accounting, and 2) eliminates the residual method to allocate the arrangement consideration. In addition, the guidance also expands the disclosure requirements for revenue recognition. This will be effective for the first annual reporting period beginning on or after June 15, 2010, with early adoption permitted provided that the revised guidance is retroactively applied to the beginning of the year of adoption. We are currently assessing the future impact of this new accounting update to its financial statements.

In October 2009, the FASB issued guidance on share-lending arrangements entered into on an entity's own shares in contemplation of a convertible debt offering or other financing.  This new guidance is effective for fiscal years beginning on or after December 15, 2009, and fiscal years within those fiscal years for arrangements outstanding as of the beginning of those years. Retrospective application is required for such arrangements and early application is not permitted.  The adoption of this guidance is not expected to significantly impact we’s results of operations and financial position.

In January 2010, the FASB issued guidance which requires an entity to disclose the following:

 
·
Separately disclose the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe reasons for the transfers.

 
·
Present separately information about purchases, sales, issuances and settlements, on a gross basis, rather than on one net number, in the reconciliation for fair value measurements using significant unobservable inputs (Level 3).

 
·
Provide fair value measurement disclosures for each class of assets and liabilities.

 
·
Provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for fair value measurements that fall in either Level 2 or level 3.

This guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for he disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements.  Those disclosures are effective for fiscal years beginning after December 15, 2010. The Company adopted this guidance during the quarter ended December 31, 2009.  This guidance did not have a material impact on the financial statements.

 
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Going Concern
 
The significant accumulated deficits and negative cash flows of the Company raise substantial doubt about our ability to continue as a going concern. The financial statements included in this report do not include any adjustments that might result from the outcome of this uncertainty.  Our plan with respect to this uncertainty is to focus on sales of our reagent products and our Care Services, to complete strategic acquisitions and business combinations, and to raise capital through the offer and sale of our equity securities.  There can be no assurance that revenues will increase rapidly enough to offset operating losses and repay debts.  Likewise, there can be no assurance that we will be successful in raising additional capital from the sale of equity or debt securities.  If we are unable to increase revenues or obtain additional financing, we will be unable to continue the development of its products and would likely cease operations.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

None.

Item 4.  Controls and Procedures.

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective.  We and our auditors identified a material weakness discussed below in the management’s report on internal control over financial reporting.

Report of Management on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:

 
(i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
 
 
(ii)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

 
(iii)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement to the Company's annual or interim financial statements will not be prevented or detected.

In the course of the management's assessment, it has identified the following material weakness in internal control over financial reporting:
 
Because of the small size of the Company, in terms of the number of employees, the Company lacks segregation of duties and that is a material weakness.  As the Company grows, this weakness will be mitigated.

We are in the process of improving our internal control over financial reporting in an effort to eliminate these material weaknesses through improved supervision and training of our staff, but additional effort is needed to fully remedy these deficiencies. Our management, audit committee, and directors will continue to work with our auditors and outside advisors to ensure that our controls and procedures are adequate and effective.

 
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PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

We are not involved in any legal proceedings which management believes will have a material effect upon the financial condition of the Company, nor are any such material legal proceedings anticipated.

We are not aware of any contemplated legal or regulatory proceeding by a governmental authority in which we may be involved.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3.  Defaults Upon Senior Securities.

None.
 
Item 4. Submission of Matters to a Vote of Security Holders.

None.
 
Item 5. Other Information.

Subsequent to December 31, 2009, on January 27, 2010, the common stock of ActiveCare began trading on the over-the-counter bulletin board (“OTC”) market under the symbol “ACAR.OB.”

Item 6. Exhibits.
 
   Exhibit Number   Description  

 
(3)(i)
 
Articles of Incorporation of Registrant (previously filed as an exhibit to the Company’s Registration Statement on Form S-1 and incorporated herein by reference).
       
 
(3)(i)
 
Articles of Amendment to Articles of Incorporation of Registrant (previously filed as an exhibit to the Company’s Registration Statement on Form S-1 and incorporated herein by reference).
       
 
(3)(ii)
 
Bylaws of Registrant (previously filed as an exhibit to the Company’s Registration Statement on Form S-1 and incorporated herein by reference).
       
 
(3)(iii)
 
Designation of Rights and Preferences of Series A Convertible Preferred Stock, September 10, 2009 (previously filed as exhibit to Current Report on Form 8-K, filed September 11, 2009, incorporated by reference).
       
 
(3)(iv)
 
Articles of Amendment to Articles of Incorporation changing name to ActiveCare, Inc. (incorporated by reference from the Company’s 10-K for the year ended September 30, 2009) from the Company’s 10-K for the year ended September 30, 2009)
       
 
(3)(v)
 
Certificate of Incorporation in Delaware, July 15, 2009, (incorporated by reference to exhibit filed with the Company’s 10-K for the year ended September 30, 2009)
       
 
(3)(vi)
 
By Laws of Company reflecting name change (incorporated by reference to exhibit filed with the Company’s annual report on Form 10-K for the year ended September 30, 2009).
 
 
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(4)
 
Specimen of common stock certificate (previously filed as an exhibit to the Company’s Registration Statement on Form S-1 and incorporated herein by reference).
       
 
(10)(i)
 
Lease Agreement between RJF Company Ltd., and the Company, dated as of August 1, 2005 (previously filed as an exhibit to the Company’s Registration Statement on Form S-1 and incorporated herein by reference).
       
 
(10)(ii)
 
Loan Agreement between the Company and SecureAlert (previously filed as in exhibit to the Company’s Registration Statement on Form S-1 and incorporated herein by reference).
       
 
(10)(iii)
 
Promissory Note dated as of October 1, 2008 (previously filed as an exhibit to the Company’s Registration Statement on Form S-1 and incorporated herein by reference).
       
 
(10)(iv)
 
Professional Services Contract between the Company, and VPI Engineering, dated as of September 27, 2007, together with addenda (previously filed as an exhibit to the Company’s Registration Statement on Form S-1 and incorporated herein by reference).
       
 
(10)(v)
 
Securities Purchase Agreement between the Company, and ADP Management, dated as of November 15, 2007 (previously filed as an exhibit to the Company’s Registration Statement on Form S-1 and incorporated herein by reference).
       
 
(10)(vi)
 
License Agreement between the Company and SecureAlert (incorporated by reference to exhibit filed with the Company’s report on Form 10-Q for the period ended June 30, 2009).
 
 
   
 
(10)(vii)
 
License Agreement between the Company and Futuristic Medical Devices, LLC (incorporated by reference to exhibit filed with the Company’s report on Form 10-Q for the period ended June 30, 3009).
       
 
(10)(viii)
 
License Agreement between the Company and euromicron (incorporated by reference to exhibit filed with the Company’s report on Form 10-Q for the period ended June 30, 2009).
       
 
(10)(ix)
 
Statement of Work between Company and Quectel Wireless Solutions, Ltd. (incorporated by reference to exhibit to Company’s report on Form 10-K for the year ended September 30, 2009).
       
 
(11)
 
Computation of Statement of Earnings (included in financial statements filed herewith)
       
 
(31)(i)
 
Rule 13a–14(a)/15d–14(a) Certifications
       
 
(32)
 
Section 1350 Certifications


 
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SIGNATURES

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

     
 
ActiveCare, Inc.
   
     
   
/s/  James Dalton
   
James Dalton
Chairman of the Board of Directors
and Chief Executive Officer (Principal
Executive Officer)
 
Date: February 16, 2010
 
     
   
/s/  Michael G. Acton
   
Michael G. Acton
Chief Financial Officer (Principal
Financial and Accounting Officer)
 
Date: February 16, 2010
 
 
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