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EX-31.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - ACTIVECARE, INC.ex31-2.htm
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EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C.SECTION 1350 - ACTIVECARE, INC.ex32-1.htm


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

FORM 10-K

(Mark One)
 
þ
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2011
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, Salt Lake City, Utah 84120
(Address of principal executive offices, Zip Code)
 
(801) 974-9474
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act: None
 
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.00001 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  þ    No ¨
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

 
 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See 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 þ

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

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of March 31, 2011 was approximately $20 million, based on the average bid and asked price on that date.

There were 38,844,160 shares of the registrant’s common stock outstanding as of December 27, 2011.

Documents Incorporated by Reference

None.
 
Transitional Small Business Disclosure Format (Check one):  Yes  ¨    No  þ
 
 
 

 
 
ACTIVECARE, INC.
 
FORM 10-K
 
For the Fiscal Year Ended September 30, 2011
 
INDEX
 
   
Page
 
Part I
 
Item 1
Business
1
Item 1A
Risk Factors
7
Item 2
Properties
12
Item 3
Legal Proceedings
12
Item 4
(Removed and Reserved)
12
 
Part II
 
Item 5
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
13
Item 7
Management’s Discussion and Analysis of Financial Condition and Results of Operations
15
Item 8
Financial Statements and Supplementary Data
24
Item 9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
24
Item 9A
Controls and Procedures
24
Item 9B
Other Information
25
 
Part III
 
Item 10
Directors, Executive Officers and Corporate Governance
25
Item 11
Executive Compensation
28
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
30
Item 13
Certain Relationships and Related Transactions, and Director Independence
31
Item 14
Principal Accounting Fees and Services
33
 
Part IV
 
Item 15
Exhibits, Financial Statement Schedules
34
Signatures
36
 
 
 

 
 
PART I
 
The statements contained in this Report on Form 10-K that are not purely historical are considered to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  These statements represent our expectations, beliefs, anticipations, commitments, intentions, estimates, projections, and strategies regarding the future, and include, but are not limited to the risks and uncertainties outlined in Item 1A. “Risk Factors” and Item. 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”  Readers are cautioned that actual results could differ materially from the anticipated results or other expectations that are expressed in forward-looking statements within this Report.
 
Item 1.  Business
 
Background
 
ActiveCare, Inc. (the “Company” or “ActiveCare”) was formed March 5, 1998 as a wholly owned subsidiary of SecureAlert, Inc. [OTCBB:SCRA.OB], a Utah corporation, formerly known as RemoteMDx, Inc. (“SecureAlert”).  We were spun off from SecureAlert in February 2009, through the distribution of approximately 1,421,667 shares of our common stock to the shareholders.  Following the distribution of our shares, SecureAlert retained no ownership interest in ActiveCare.  Furthermore, effective July 15, 2009, we changed our name to ActiveCare, Inc., and our state of incorporation to Delaware.
 
General
 
Our original business involves the manufacture and distribution of medical diagnostic equipment and laboratory stains and solutions.  Over the past several years we have expanded our vision and business plan to incorporate products and services focused primarily on the elderly market.  We believe that we can improve the lives of the chronically ill and the elderly through the use of technology, while reducing the cost of care.  Central to these efforts is our state of the art “CareCenter.”  Our CareCenter is designed to monitor and track patients’ health conditions.  As part of these efforts we have established a sophisticated CareCenter with highly trained Specialists to assist the elderly in managing their daily lives 24 hours per day, seven days per week.  In order for the CareCenter to service our customers, we have developed and continue to develop numerous products designed to assist the elderly maintain a more active and mobile lifestyle.  The first product that we introduced is the ActiveOne™ device.  The ActiveOne™ is a patented mobile personal emergency response (“PERS”) device that allows the user to contact our CareCenter at the push of a button.  The ActiveOne™ communicates its location to the CareCenter by utilizing GPS technology.  This allows the CareCenter to constantly help and assist the elderly customer no matter where they may be.
 
With U.S. healthcare costs spiraling upward, we believe that cost containment is a primary issue facing the industry. These escalating costs will only intensify during the 21st century as the baby-boom generation ages.  As of 2000, 35 million Americans were 65 years of age or older, and this number is projected to increase to 55 million by the year 2020, according to a study by the U.S. Department of Health and Human Services.1  By that year, one in six Americans will be over the age of 65 and by the middle of the century, the number of elderly could reach more than 86 million people, more than double its present size.  With an aging population, and because approximately 80% of healthcare costs occur in the last two years of life, according to an article published in the National Review Online, the nation is in dire need of viable cost saving options.
 
Aside from the obvious problems associated with aging, approximately one in every four Americans suffers from a chronic illness, according to a 2004 presentation to the American Telemedicine Association, which typically becomes more severe and prominent with age.  The demographics of chronic illnesses include over 15 million people with diabetes and close to 14 million with coronary heart disease (according to reports published by the American Heart Association), and over 10 million with osteoporosis (according to a study by the University of Maryland Medical Center).  Various industry studies, including a study published in the IBM Systems Journal in 2007 and a study conducted by heart Specialists from Columbia Presbyterian Medical Center Cardiac Transplant Service, have been conducted showing the cost savings that can be realized by the daily monitoring of the chronically ill. 
 
Aging in Place – the ability to age in your own home with the proper care services and monitoring of health and wellness needs – will be a major contributor to the mitigation of health care costs for the elderly.  Through the technologies we are developing, we believe we can enhance the lives of the elderly and enable them to live more “normal” lifestyles by providing them mobility and peace of mind with the knowledge that their vital signs are being monitored and their locations are known at all times.  At the same time we can save millions of dollars to the health care sector as we identify problems and issues in advance.


1 Copies of this and other studies, reports, articles and presentations referenced in this section of our report on Form 10-K are on file with the Company.

 
1

 
 
Our business model focuses on seniors who are mobile and their caregivers, which often includes family members, all of whom want the “peace of mind” of recognizing that their location is known at all times and that they can request assistance at any time.  Our business plan is to sell or give customers a device and require payment of a monthly recurring subscription for services.  Different services which we provide range from requesting emergency services to receiving calls throughout the day from the CareCenter to remind our customers of specific events and ensuring their health and state of mind.  All of our clientele will have access to a CareCenter Specialist who can immediately contact emergency services and provide directions on how to reach the subscriber in the event of an emergency.
 
In the future, we plan to offer the capability to remotely monitor the vital signs of our clients and alert the patient, appropriate family members, and healthcare providers when abnormal vital signs are identified at the CareCenter.  We will also integrate third party bio-medical sensors to capture specific vital signs such as glucose, blood pressure, and oxygen saturation levels and to transmit the measurements to the CareCenter.
 
We believe that through the technologies we are developing, we can enhance the lives of not only the elderly, a growing segment of today’s population, but also other segments of the population such as those with chronic illnesses.  Our services enable these patients to live a more “normal” lifestyle and, most important, permit them to remain in their own homes longer.  The CareCenter is staffed around the clock with advisors that receive calls originating from the product.  Our services will enhance our clientele’s mobility and provide peace of mind knowing that their vital signs are being monitored and their locations are known at all times.  We can immediately communicate with the patient and emergency personnel in times of need and communicate the patient’s location and an abbreviated medical history.
 
Our Product Strategy
 
Like the products we have in development, the ActiveOne™ device incorporates GPS, cellular capability and fall detection, all of which are connected to our 24-hour CareCenter 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 CareCenter.  When the wearer of the device pushes the button, or if a fall is detected, a call to the CareCenter is initiated.  The staff at the CareCenter provides assistance with everyday living needs of our members, and in an emergency situation, the 911 trained CareSpecialist evaluates the situation, deciding whether to call emergency services or a designated friend or family member.
 
We are developing additional services, and end user products and CareCenter applications and infrastructure to interface with patients and health care providers.  In the future, we plan to offer the capability to remotely monitor the vital signs of our clients and alert the patient, appropriate family members, and healthcare providers when abnormal vital signs are identified at the CareCenter.  We are also integrating third party bio-medical sensors to capture specific vital signs such as glucose, blood pressure, pulse, and oxygen saturation levels and to transmit the measurements to the CareCenter.
 
Through the technologies development, we can improve the living quality of the elderly as well as those with chronic illnesses.  With our service, they can live a more “normal” lifestyle and they can remain in their own homes longer.  Our patients are not longer in fears of leaving their house and they are in peace of mind knowing that we are monitoring their vital signs and their locations at all times.  In any emergency situation, we can immediately communicate with the patient and emergency personnel, as well as their care givers with the patient’s location and an abbreviated medical history. The CareCenter is staffed 24x7 with fully trained advisors that receive calls from patients in times of need.
 
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 CareCenter.  When the wearer of the device pushes the button, the staff at the CareCenter evaluates the situation and decides whether to call emergency services or a designated friend or family member.
 
Currently, there are separate products on the market that provide service to the PERS industry and products that provide fall detection, geographical locations, and clinical health parameters.  However, we believe that no product on the market today has successfully integrated both of these technologies in a single effective device.  Further, none of the current solutions in the market focus on providing care services – assistance with everyday needs – as an alternative to costly assisted living or in-home care services as we do.  We feel that it is imperative to bring such a solution to the market.
 
With the prevalence of cellular phones with the senior population, our product can replace their existing cellular services and add the life saving features of fall detection, geo-tracking, and one button connectivity to our CareSpecialists.  We offer service plans ranging from basic emergency service to personal concierge services.  In the future, the Company is planning to offer these services via an application on a smart phone and through other devices.
 
 
2

 
 
ActiveOne™
 
We have launched a comprehensive in-home wellness solution that complements and integrates with our current CareCenter service and ActiveOne™ mobile health product. The ActiveHome™ solution integrates several in-home health and wellness monitoring and convenience products and services to ensure members’ well-being, safety and convenience.  The ActiveOne™ Monitoring System is a combination of smart home and monitoring technology, allowing members to turn all the lights out in their house and lock the door with the press of one button.  Sensors check for normal routines at home.  For example, if the refrigerator or cabinets haven’t been opened as expected, if a member has been sitting or sleeping for an unusual length of time, or if the stove is left on, there may be a problem and a CareSpecialist will immediately contact the member.  ActiveCare’s mobile technology, allows CareSpecialists to locate a member and provide needed assistance no matter where they may be.  This combination of mobile and in home technology provides a complete level of care, fulfilling the needs of the growing senior marketplace.
 
CareCenter
 
The central point of our product offerings in our state of the art CareCenter.  Our CareCenter is staffed 24x7 with Specialists who are 911 certified and trained.  In addition, we have nurses on duty and on call that are available to assist with medical issues or questions.  Our center provides services ranging from responding to fall alerts from our devices to full service concierge services provided by our Specialists.  The staff at the CareCenter provides assistance with everyday living needs of our members, and in an emergency situation, the 911 trained CareSpecialist evaluates the situation, deciding whether to call emergency services or a designated friend or family member.
 
In contrast to a typical monitoring center, our CareCenter is equipped with hardware and software that pinpoints the location of the incoming caller by utilizing GPS and/or cellular triangulation technology.  This capability is referred to as telemetric.  The operator (or CareSpecialist) will be able to locate the caller’s precise location on a detailed map.  In addition the CareCenter software will identify the caller, call up the individual’s medical information, and provide location services, emergency dispatch, and medical history to emergency responders.  We believe the CareCenter is and will be the cornerstone of our business and will support current technology as well as evolve to support the integration of future technologies.
 
ProActiveCare
 
Through the unique offerings of our CareCenter, we are expanding our market to include discharge planning, customized disease management programs, and follow-up care.  Our products and services allow us to provide a unique coordination role with the patients, their healthcare providers, and their families.  In this arena, the Company believes that we can help reduce the cost of care by minimizing hospital readmissions for those recently released from a hospital and help avoid hospitalizations from those with chronic illnesses.
 
Reductions in hospital readmissions (also referred to as rehospitalizations) have been identified as a source for reducing Medicare spending.  The Medicare Payment Advisory Commission (MedPAC) reported that in 2005, 17.6% of hospital admissions resulted in readmissions within 30 days of discharge, 11.3% within 15 days, and 6.2% within 7 days.  In addition, variation in readmission rates by hospital and geographic region suggests that some hospitals and geographic areas are better than others at containing readmission rates.  People who are readmitted to the hospital tend, among other things, to be older and have multiple chronic illnesses.  Yet much is unknown about which patient characteristics result in a higher probability of a hospital readmission.  Some policy researchers and health care practitioners assert that the relatively high readmission rates for patients with chronic illness and others may be due to various factors, such as (1) an inadequate relay of information by hospital discharge planners to patients, caregivers, and post-acute care providers; (2) poor patient compliance with care instructions; (3) inadequate follow-up care from post-acute and long-term care providers; (4) variation in hospital bed supply; (5) insufficient reliance on family caregivers; (6) the deterioration of a patient’s clinical condition; and (7) medical errors.
 
We are currently testing our Guardian Angel Discharge support program where the CareCenter and the ActiveOne™ provide two-way communications between the patient and the caregiver or healthcare providers.  The service provides detailed patient health surveys based on medically derived protocols, the collection of biometric data, and wellness checks.
 
Our Growth Strategy
 
Our plan is to continue to invest monies into research, development and patents as we broaden the services offered by our CareCenter.  Eventually we intend to add to the functionality of the ActiveOne™ to allow for vital sign monitoring for the chronically ill and additional services to assist both the mobile and homebound seniors, including those who may require a personal assistant to check on them during the day to ensure their safety and well being and know where they are at all times.
 
 
3

 
 
Marketing
 
We market our products through a number of distribution channels including direct to consumer, medical device and equipment distributors, channel partners, and health care providers and other caregivers.
 
Direct-to-Consumer
 
We sell our products and services through a variety of direct to consumer methods including on-line sales, direct mail and direct response advertising –– and have limited outbound telemarketing initiatives.  With the exception of web sales, direct to consumer sales tend to be expensive, with a high acquisition cost per subscriber.  We are focusing our efforts on utilizing other distribution channels to drive new sales at the most efficient cost.
 
Medical Equipment/Device Distributors
 
Our sales team has established a distributor network in some parts of the country, and we are growing this distributor network as we build relationships across the United States.  We are targeting distributors that serve the Medicare and Medicaid markets, distributors that target home medical equipment and supplies, and distributors that service healthcare providers.
 
Distributor relationships provide access to established markets and potential customers in a variety of settings.  We leverage their existing relationships and investments in marketing to support our products.
 
Channel Partners
 
We are partnering with brokers and agents of insurance products targeted to the aging and elderly, including Medicare, Medicare Supplemental and Life Insurance.  We provide a valuable solution to the insurance brokers’ agents and customers as a value-added service that opens the door for the agent to begin a dialogue with the potential customer.
 
In July 2010, we entered into a “Distribution Agreement” with Amerilife LLC (“Amerilife”) for the distribution of our services to the insurance and financial services customers of Amerilife.  Under the terms of the Distribution Agreement, Amerilife is granted the exclusive right to distribute our services to the insurance and financial services market within the United States and Puerto Rico.  The exclusive grant is conditioned upon Amerilife obtaining minimum distribution levels in each year.
 
Additionally, we have been in talks with Medicare Advantage insurance carriers to offer ActiveCare as a value-added service to Medicare policyholders.  The insurance carriers believe they can effectively mitigate claims costs through proactive monitoring of policyholders by using our products and services.  ActiveCare services would be provided wholesale to the insurance carrier, and included in the Medicare policy at no additional out-of-pocket cost to the policyholder.  This product will support discharge planning for Medicare patients, accelerating the patients release from the hospital and minimizing the opportunities for readmissions.
 
Healthcare Providers/Caregivers
 
We believe that caregivers will be an important outlet for our products.  Caregivers include home health agencies, hospice organizations, skilled nursing facilities, hospitals and physician offices.  Often the patient is reluctant to purchase the product on their own volition.  With the counseling of the caregiver, the patient and or the family member may be more accepting of the product and their condition.
 
We are initiating tests with healthcare providers in the skilled nursing and hospice categories.
 
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.
 
 
4

 
 
During the year ended September 30, 2011, we spent approximately $321,000 compared to $458,000 in 2010 on research and development (“R&D”).  R&D involved the ActiveOne™, a one button actuated GPS/Cellular communications device (“Companion Device”) that links to our CareCenter.  This device includes fall detection, Geo Fencing, automatic calls to the CareCenter, text messaging, hands free speakerphone and other features.  Also in development is the ActiveOne+™ (ActiveOnePlus) which will communicate through Bluetooth with the Companion Device.  The wrist device is water resistant, includes fall detection, speakerphone, vibration alerts, audible alerts, and LED’s for status monitoring.  Our goal is to develop a wristwatch-size monitoring device for senior citizens.  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 Quectel Wireless Solutions, Ltd. (“Quectel”), to assist us in development of the ActiveOne™ and the next generation device, the ActiveOne+™.
 
Quectel’s focus is on the wireless machine-to-machine (“M2M”) market sector; Quectel designs and manufactures a variety of wireless modules to fulfill many industrial standards and requirements.  Quectel products have been developed for the wireless M2M sectors such as smart metering, automotive, sales and payment, security, tracking and tracing, remote control and monitoring, and mobile computing.
 
The core team members of Quectel are the pioneers of the wireless module industry in China. Quectel’s R&D team is dedicated to quality and reliability, and realizes that these are the key factors to continued success in the wireless M2M business.  The team far exceeds the typical industrial standards and rules, to manage the R&D and manufacturing processes. Quectel products are capable of maintaining reliable performance, even in extreme environments.
 
Competition
 
Our products incorporate technologies and services also found in devices sold in several diverse markets.  The major markets in which we compete or plan to compete may be referred to as the “Telehealth” and the Personal Emergency Response or “PERS” markets. We have identified the entities listed below that appear to compete directly in one or more of these markets.  These entities mostly focus on specific needs and do not offer a personal assistant as we do in our CareCenter.  In addition, the entities operating in the PERS market target the senior who is confined to the home, as opposed to our intended customer who is typically more mobile.
 
The Telehealth competitive set includes: (1) companies that manufacture devices that record and transmit biometric information such as weight, blood pressure, glucose, weight and blood oxygen levels; (2) companies that monitor patient’s health such as disease; (3) and companies that integrate and monitor the data from a variety of difference devices.  In addition, there are telehealth companies have access to physicians and nurses for health consultations.
 
Competitors in the Telehealth Market
 
 
·
BodyTel Europe GmbH – uses glucose meter to transmit glucose information via cell phone to BodyTel’s database, where users can log on to view results
 
 
·
CardioNet, Inc. – specializing in monitoring the heart for detection of arrhythmia, utilizing a monitoring center and two way communication with patient’s physician
 
 
·
LifeWatch, Inc. and its subsidiary, CardGuard Scientific Survival, Ltd. – monitors heartbeat data for arrhythmia detection and transmits data through the patients mobile phone to LifeWatch’s Monitoring center
 
 
·
Diabetech LP – monitors glucose for diabetic patients, and sends text or e-mail to patient and doctors
 
 
·
GE Healthcare’s Living Independently – uses motion detectors in the home to monitor a seniors movements in order to detect patterns and inform caregivers when there may be an emergency, also monitors medication and sends alerts
 
 
·
GrandCare Systems LLC – monitors motion in the home through motion detectors and other sensors to monitor well being of seniors, blood pressure cuff, glucometer and weight scale to monitor health
 
 
·
HealthPia USA – glucose meter that attaches to certain mobile phones, results uploaded and sent to caregivers via wireless network
 
 
·
Philips Remote Cardiac Services/Raytel Imaging Network – records up to 30-days worth of heart data and transmits via Internet connectivity, not yet wireless 
 
 
5

 
 
  Competitors in Personal Emergency Response System (PERS) Market
 
The current PERS market is based on technology that has not changed significantly in 30 years.  The hardware given to a PERS customer generally includes a base unit that is connected to the customer’s home phone line and a pendant that is worn on the person which activates a call for help.  The base unit serves as a call-forwarding device that dials the number to the call center when the button on the pendant is pressed.  The pendant can only operate within a limited distance (usually 200 to 600 feet) of the base unit.  Since there is no voice communication through the pendant the customer must be within earshot of the base unit for the system to work correctly.  This effectively tethers a customer to their home if they do not want to risk being out of range of this emergency service.  Recently PERS providers have began adopting cellular and GPS products allowing the user the freedom to leave their home without being tethered to a base unit.  We have invested extensively in a mobile GPS platform, a robust portfolio of intellectual properties as well as increased service offerings and capabilities of the CareCenter.
 
Competitors in this market include:
 
 
·
Life Alert Emergency Response, Inc. – offers a pendant/home communications device.
 
 
·
Philips Lifeline – is the largest provider in the industry with over 750,000 subscribers.  Philips Lifeline offers a pendant device/home communications station.  It also sends out messages to family members or caregivers when the monitoring center receives an alarm. 
 
 
·
LifeStation, Inc. – offers a wristband, belt clip, pendant devices / home communications station. 
 
 
·
Rescue Alert – offers a pendant/home communications station and claims to have the best panic button range of 600 feet to the home communication device.  Its monitoring center is staffed with certified EMD advisors.
 
 
·
MobileHelp – offers a pendant/home communications station as well as a mobile GPS device.
 
 
·
GreatCall – Made famous by the JitterBug brand, offers the emergency 5 star mobile device.
 
Information necessary to determine or reasonably estimate our market share or that of any competitor in any of these markets is not readily available.
 
 Dependence on Major Customers
 
During the fiscal year ended September 30, 2011, revenue from one customer of Care Services represents 25% of the Company’s consolidated revenue and revenue from one customer of Reagents represents 10% of the total revenue.
 
During the fiscal year ended September 30, 2010, revenue from one customer of Reagents represents 26% of the Company’s consolidated revenue.
 
Intellectual Property
 
Trademarks.  We have registered certain of our trademarks with the United States Patent and Trademark Office, including ActiveCare™, ActiveOne™, and ActiveOne+™.  We also use certain trademarks, trade names, and logos that have not been registered.  We claim common law rights to these unregistered trademarks, trade names and logos.  We also own domain names, including www.activecare.com and www.activecaresys.com, for our primary trademarks and we claim ownership of certain unregistered copyright rights in our website content.  We rely as well on a variety of property rights that we license from third parties as described below.
 
Patents.  At the time of our spin-off from SecureAlert, we owned the exclusive, irrevocable, perpetual, worldwide, transferable, sublicensable license of all rights conferred by the patents, patent applications, and provisional patent applications listed in the table below for the healthcare and personal safety industries/markets.
 
Patent or
Application No.
Country
Issue/Filing Date
Title of Patent
 
11/486,989
 
United States
 
Pending/
7/14/2006
 
Remote Tracking Device and System and Method for Two-Way Voice Communication Between Device and a Monitoring Center
       
11/486,991
United States
Pending/
7/14/2006
Remote Tracking System and Device with Variable Sampling
       
11/830,398
United States
Pending/
7/30/2007
Methods for Establishing Emergency Communications Between a Communications Device and a Response Center
       
12/614,242
United States
Pending/
11/6/2009
Systems and Devices for Emergency Tracking and Health Monitoring
 
 
6

 
 
Also in 2009, we obtained worldwide and exclusive rights to the patents and patent applications listed in the table below under a license agreement dated May 25, 2009 (“Patent Agreement”).
 
Patent or
Application No.
Country
Issue Date
Title of Patent
 
6,044,257
 
United States
 
March 28, 2000
 
Panic Button Phone
       
6,636,732
United States
October 21, 2003
Emergency Phone with Single Button Activation
       
6,226,510
United States
May 1, 2001
Emergency Phone for Automatically Summoning Multiple Emergency Response Services
       
7,092,695
United States
August 15, 2006
Emergency Phone with Alternate Number Calling Capability
       
7,251,471
United States
July 31, 2007
Emergency Phone with Single Button Activation
       

In May 2010, we were granted worldwide, non-exclusive rights to patents and patent applications listed in the table below under a license agreement.

Patent or Application No.
Country
Issue Date
Title of Patent
       
10/588.833
United States
Pending 08/09/06
Nanostructures Containing Metal-Semiconductor Compounds
PCT/US2007/008540
International
Pending 04/06/07
Nanoscale Wires Methods and Devices
PCT/US2007/024222
International
Pending 11/20/06
Millimeter-Long Nanowires
PCT/US2007/021602
International
Pending 10/10/07
Liquid Films Containing Nanostructured Materials
 
Trade Secrets.  We own certain intellectual property, including trade secrets that we seek to protect, in part, through confidentiality agreements with employees and other parties, although some employees who are involved in research and development activities have not entered into these agreements. Even where these agreements exist, there can be no assurance that these agreements will not be breached, that we would have adequate remedies for any breach, or that our trade secrets will not otherwise become known to or independently developed by competitors.
 
Employees
 
As of September 30, 2011, we had 24 full time employees and 4 part-time employees.  None of these employees are represented by a labor union or subject to a collective bargaining agreement.  We have never experienced a work stoppage and our management believes that our relations with employees are good.
 
Additional Available Information
 
We maintain executive offices and principal facilities at 5095 West 2100 South, Salt Lake City, Utah 84120.  Our telephone number is (801) 974-9474. We maintain a World Wide Website at www.activecare.com. The information on our website should not be considered part of this report on Form 10-K.  We make available, free of charge at our corporate website, copies of our annual reports filed under the Exchange Act with the United States Securities and Exchange Commission (“SEC”) on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and all amendments to these reports, as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act.  We also provide copies of our Forms 8-K, 10-K, 10-Q, proxy and annual report at no charge to investors upon request.
 
All reports filed with the SEC are available free of charge through the SEC website at www.sec.gov.  In addition, the public may read and copy materials we have filed with the SEC at the SEC’s public reference room located at 450 Fifth St., N.W., Washington, D.C. 20549.  
 
Item 1A.  Risk Factors  
 
We have identified the following important factors that could cause actual results to differ materially from those projected in any forward looking statements we may make from time to time.  We operate in a continually changing business environment in which new risk factors emerge from time to time.  We can neither predict these new risk factors, nor can we assess the impact, if any, of these new risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those projected in any forward looking statement.  If any of these risks, or combination of risks, actually occurs, our business, financial condition and results of operations could be seriously and materially harmed, and the trading price of our common stock could decline.
 
 
7

 
 
We have not achieved profitable operations and continue to operate at a loss.
 
From incorporation to date, we have not achieved profitable operations and continue to operate at a loss.  Our present business strategy is to improve cash flow by adding to our existing product line and expanding our sales and marketing efforts, including the addition of in-house sales personnel.  There can be no assurance that we will ever be able to achieve profitable operations or that we will not require additional financing to fulfill our business plan.
 
Because of our history of accumulated deficits and recurring cash flow losses, we must improve profitability and may be required to obtain additional funding if we are to continue as a “Going Concern.”
 
We have a history of accumulated deficits.  As of September 30, 2011, and September 30, 2010, our accumulated deficit was $24,936,275 and $17,037,562, respectively.  Our financial statements have been prepared on the assumption that we will continue as a going concern.  Our independent registered public accounting firm has issued their report dated December 23, 2011, that includes an explanatory paragraph stating that our recurring losses raise substantial doubt about our ability to continue as a going concern.  Our product line is limited and it has been necessary to rely upon loans and capital contributions and the sale of our equity securities to sustain operations.  In addition, we have recently begun to emphasize a new product line and business plan, which will require additional investment in research and development and marketing.  Our management anticipates that we may require approximately $3,000,000 in additional capital over the next twelve months to implement this business plan and to fund ongoing operations, although this is only an estimate.  There can be no guarantee that we will be able to obtain such funds fully or on satisfactory terms and such funds would be sufficient.  If such additional funding is needed and cannot be obtained, we may be required to scale back or discontinue operations.
 
Our profitability depends upon achieving success in our future operations through implementing our business plan, increasing sales, and expanding our customer and distribution bases, for which there can be no assurance given.
 
Profitability depends upon many factors, including the success of our marketing program, our ability to identify and obtain the rights to additional products to add to our existing product line, expansion of distribution and customer base, maintenance or reduction of expense levels and the success of our business activities.  For a discussion of risks related to our accumulated deficits, please see the preceding risk factor. We anticipate that we will continue to incur operating losses in the future.  Our ability to achieve profitable operations will also depend on our success in developing and maintaining an adequate marketing and distribution system.  There can be no assurance that we will be able to develop and maintain adequate marketing and distribution resources.  If adequate funds are not available, we may be required to materially curtail or cease operations.
 
Our products are not based entirely on technology that is proprietary to us, which means that we do not have a technological advantage over our competitors, and that we must rely on the owners of the proprietary technology that is the basis for our products to protect that technology.  We have no control over such protection.
 
We are currently preparing to bring a new personal health monitoring product to market and recently launched our first product, ActiveOne™.  This new product utilizes technology based in part on patents that have been licensed to us for use within our markets.  Our success in adding to our existing product line will depend on our ability to acquire or otherwise license competitive technologies and products and to operate without infringing the proprietary rights of others, both in the United States and internationally.  No assurance can be given that any licenses required from third parties will be made available on terms acceptable to us, or at all.  If we do not obtain such licenses, we could encounter delays in product introductions while we attempt to adopt alternate measures.  We could also find that the manufacture or sale of products requiring such licenses is not possible.  Litigation may be necessary to defend against claims of infringement, to protect trade secrets or know-how owned by us, or to determine the scope and validity of the proprietary rights of others.  Such litigation could have an adverse and material impact on us and on our operations.
 
Our future products could be based on patents derived in part from a patent agreement that is currently in default.
 
In May 2009, we entered into a patent agreement.  Under the patent agreement, we were required to make an upfront royalty payment of $300,000 and to make future payments of royalties equal to 5% of net sales revenues for licensed products.  During the year ended September 30, 2011, we have accrued the $300,000 payment and $20,408 of royalty expense.  Subsequent to September 30, 2011, we settled this obligation by agreeing to issue 600,000 shares of common stock and 480,000 shares of Series C preferred stock.
 
 
8

 
 
Our industry is fragmented, and we experience intense competition from a variety of sources, some of which are better financed and better managed than we are.
 
The medical diagnostic supply and biochemical industries, including those segments devoted to manufacturing and distributing laboratory equipment, stain solutions and chemical reagents, are characterized by intense competition.  We face, and will continue to face, competition in the stain solution, reagent and related equipment fields.  In addition, competition in the PERS market is also significant.  Many, if not most, of our competitors and potential competitors are much larger and consequently have greater access to capital as well as mature and highly sophisticated distribution channels.  Some of our larger competitors are able to manufacture chemical products on a much larger scale and therefore presumably would be able to take advantage of economies of scale that we do not presently enjoy.  Moreover, many of our competitors have far greater name recognition and experience in the medical diagnostic supply industry.  There can be no assurance that competition from other companies will not render our products noncompetitive.
 
We are highly dependent on our executive officers and certain of our scientific, technical and operations employees.
 
Our current revenues are derived primarily from our current core products, medical diagnostic stains and solutions and other biochemical products, as well as the Definitive slide stainer.  The Definitive slide stainer is medical equipment designed to stain and high light abnormal cells.  We depend heavily on our executive officers and certain scientific, technical, and operations employees, including David Boone (Chief Executive Officer), Christine Kilpack (General Manager), and Michael Acton (Chief Financial Officer).  As of the date of this report, we do not have employment agreements with Christine Kilpack and Michael Acton.  The loss of services of any of these individuals could impede the achievement of our objectives.  There can be no assurance that we will be able to attract and retain qualified executive, scientific, or technical personnel on acceptable terms.
 
We rely on third parties to manufacture some of our product line.
 
Our manufacturing experience and capabilities are limited to the manufacture of staining solution, reagent and certain related chemical compounds.  With respect to the manufacturing of devices and equipment related to the staining solution products, including without limitation the Definitive slide stainer, we have in the past used, and intend to continue to use, third-party manufacturing resources.  We also use and intend to continue using third-party manufacturers for our new ActiveOne+TM and other devices.  Consequently, we are dependent on contract manufacturers for the production of existing products and will depend on third-party manufacturing resources to manufacture equipment and devices we may add to our product line in the future.  In the event we are unable to obtain or retain third-party manufacturing, we will not be able to continue operations as they relate to the sale of equipment and devices.
 
Our medical solutions business is subject to certain environmental risks and the requirement that we comply with regulations which increases the cost of doing business.
 
Our chemical manufacturing processes involve the controlled use of hazardous materials.  We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of such materials and certain waste products.  We carry limited product liability insurance relating to the use of potentially hazardous materials, with coverage amounts of $2,000,000 per claim and per accident, and $2,000,000 in the aggregate.  The premium for such insurance coverage is $20,000.  Although we believe that our activities currently comply with the standards prescribed by such laws and regulations, the risk of accidental contamination or injury from these materials cannot be eliminated.  In the event of such an accident, we could be held liable for any damages that result and any such liability could exceed our resources.  In addition, there can be no assurance that we will not be required to incur significant costs to comply with environmental laws and regulations in the future.
 
We market and sell our medical stains and solutions products through independent distributors who are free to sell other, and at times competing, products. We therefore have no direct control over our sales force.
 
We sell our legacy staining products to approximately 74 independent distributors who are free to resell the products.  In order to achieve profitable operations, we must maintain its current base of sales staff and must expand that base in the future.  There can be no assurance that we will be able to enter into arrangements with qualified sales staff if and when such additional staff is required.  Our sales staff will compete with other companies that currently have experienced and well funded marketing and sales operations.  To the extent that we enter into co promotion or other marketing and sales arrangements with other companies, any revenues to be received by us will be dependent on the efforts of others, and there can be no assurance that such efforts will be successful.
 
 
9

 
 
From time to time, we may be subject to expensive claims relating to product liability law; our ability to insure against this risk is limited.
 
The use of any of our existing or potential products in laboratory or clinical settings may expose us to liability claims. These claims could be made directly by persons who assert that inaccuracies or deficiencies in their test results were caused by defects in our products.  Alternatively, we could be exposed to liability indirectly by being named as a third-party defendant in actions brought against companies or persons who have purchased our products.  We have obtained limited product liability insurance coverage and we intend to expand our insurance coverage on an as needed basis as sales revenue increases.  However, insurance coverage is becoming increasingly expensive, and no assurance can be given that we will be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability.  There can also be no assurance that we will be able to obtain commercially reasonable product liability insurance for any products added to our product line in the future.  A successful product liability claim or series of claims brought against us could have a material adverse effect on our business, financial condition and results of operations.
 
The uncertainty of health care litigation and regulatory measures in our primary markets can have an adverse effect on our business.
 
Political, economic and regulatory influences are likely to lead to fundamental change in the health care industry in the United States.  A significant national health care bill was signed into law in the United States in 2010.  The impact of this legislation is expected to be far-reaching, but at this time it is not possible to predict how it will affect our business.  In addition, certain states are considering various health care reform proposals.  We anticipate that Congress and state legislatures will continue to review and assess alternative health care delivery systems and payment methodologies.  Due to uncertainties regarding the ultimate features of reform initiatives and their enactment and implementation, we cannot predict which, if and when any additional reforms will be adopted, or what impact they may have on us.  Our ability to earn sufficient returns on our products may also depend in part on the extent to which reimbursement for the costs of such products will be available from government health administration authorities, private health insurers and other organizations.  Third-party payers are increasingly challenging the price and cost effectiveness of medical products and services, including medical diagnostic procedures.  There can be no assurance that adequate reimbursement will be available or sufficient to allow us to sell products on a competitive basis.
 
Risks Related to Ownership of Our Common Stock
 
Concentration of ownership among our existing executive officers, directors and principal stockholders may prevent new investors from influencing significant corporate decisions.
 
Our executive officers, directors and principal stockholders own, in the aggregate, approximately 39.80% of our outstanding common stock.  In addition, certain of our officers and all of our directors have been granted warrants to purchase common stock, all of which are exercisable as of the date of this report.  The exercise of such warrants might also result in substantial dilution to our existing stockholders.  As a result of the ownership of the shares currently held, their ownership and potential exercise of these options and warrants, these stockholders may be able to exercise significant control over matters requiring stockholder approval, including the election of directors, amendment of our certificate of incorporation and approval of significant corporate transactions and will have significant control over our management and policies.  The interests of these stockholders may not be consistent with the interests of stockholders.
 
This control or the potential for such control may have the effect of deterring hostile takeovers, delaying or preventing changes in control or changes in management, or limiting the ability of our other stockholders to approve transactions that they may deem to be in the best interests of our company.
 
Penny stock regulations may impose certain restrictions on marketability of our securities.
 
The SEC has adopted regulations which generally define a “penny stock” to be any equity security that has a market price (as defined) of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions.  As a result, our common stock is subject to rules that impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together with their spouse).  For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of such securities and have received the purchaser’s written consent to the transaction prior to the purchase.  Additionally, for any transaction involving a penny stock, unless exempt, the rules require the delivery, prior to the transaction, of a risk disclosure document mandated by the SEC relating to the penny stock market.  The broker-dealer must also disclose the commission payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market.  Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.  Consequently, the “penny stock” rules may restrict the ability of broker-dealers to sell our securities and may affect the ability of investors to sell our securities in the secondary market and the price at which such purchasers can sell any such securities. 
 
 

 
10

 

Investors should be aware that, according to the SEC, the market for penny stocks has suffered in recent years from patterns of fraud and abuse.  Such patterns include:
 
Control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer
 
·      Manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases
 
 
·
“Boiler room” practices involving high pressure sales tactics and unrealistic price projections by inexperienced sales persons
 
 
·
Excessive and undisclosed bid-ask differentials and markups by selling broker-dealers, and
 
 
·
The wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses.
 
Our management is aware of the abuses that have occurred historically in the penny stock market.
 
Our stock price may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the price you paid for them.
 
The market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot control, including:
 
 
Market conditions or trends in our industry or the economy as a whole and, in particular, in the retail sales environment;
 
 
Timing of promotional events;
 
 
Changes in key personnel;
 
 
Entry into new markets;
 
 
Announcements by us or our competitors of new product offerings or significant acquisitions;
 
 
Actions by competitors;
 
 
The level of expenses associated with new product development and marketing;
 
 
Changes in operating performance and stock market valuations of competitors;
 
 
The public’s response to press releases or other public announcements by us or third parties, including our filings with the SEC;
 
 
The financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;
 
 
Changes in financial estimates by any securities analysts who follow our common stock, our failure to meet these estimates or failure of those analysts to initiate or maintain coverage of our common stock;
 
 
Ratings downgrades by any securities analysts who follow our common stock;
 
 
The development and sustainability of an active trading market for our common stock;
 
 
Future sales of our common stock by our officers, directors and significant stockholders;
 
 
Other events or factors, including those resulting from war, acts of terrorism, natural disasters or responses to these events; and
 
 
Changes in accounting principles.
 
In addition, the stock markets have recently experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many retail companies.  In the past, stockholders in some companies have instituted securities class action litigation following periods of market volatility.  If we were involved in securities litigation, we could incur substantial costs and our resources, and the attention of management could be diverted from our business.
 
 
11

 
 
Anti-takeover provisions in our charter documents and Delaware law might discourage or delay acquisition attempts.
 
Our certificate of incorporation and bylaws contain provisions that may make the acquisition of our company more difficult without the approval of our Board of Directors. These provisions:
 
·      Authorize the issuance of undesignated preferred stock, the terms of which may be established and the shares of which may be issued without stockholder approval, and which may include super voting, special approval, dividend, or other rights or preferences superior to the rights of the holders of common stock; and
 
·
  Establish advance notice requirements for nominations for elections to our Board of Directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.
 
These anti-takeover provisions and other provisions under Delaware law could discourage, delay, or prevent a transaction involving a change in control of our company, even if doing so would benefit our stockholders. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and to cause us to take other corporate actions you desire.
 
If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research, about our business, our stock price and trading volume could decline.
 
Any future trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business.  We do not currently have and may never obtain research coverage by securities and industry analysts.  If no securities or industry analysts commence coverage of our company, the trading price for our common stock would be negatively impacted.  If we obtain securities or industry analyst coverage and if one or more of the analysts who covers us downgrades our common stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline.  If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our common stock could decrease, which could cause our stock price and trading volume to decline.  
 
We do not expect to pay any cash dividends on our common stock for the foreseeable future.
 
The continued operation and expansion of our business will require substantial funding.  Accordingly, we do not anticipate that we will pay any cash dividends on shares of our common stock for the foreseeable future.  Any determination to pay dividends on the common stock in the future will be at the discretion of our Board of Directors and will depend upon results of operations, financial condition, contractual restrictions, including our senior secured credit facility and other indebtedness we may incur, restrictions imposed by applicable law and other factors our Board of Directors deems relevant.  No dividends may be paid on the common stock unless and until all accrued and unpaid dividends are paid on the preferred stock.  Accordingly, if you purchase or own shares of our common stock, realization of a gain on your investment will depend on the appreciation of the price of our common stock, which may never occur. Investors seeking cash dividends in the foreseeable future should not purchase our common stock.
 
Item 2.  Properties
 
We lease premises consisting of approximately 11,500 square feet of laboratory and office facilities located at 5095 West 2100 South, West Valley City, Utah.  These premises also serve as our manufacturing, warehouse and shipping facilities.  This lease expires in November 2015 and the monthly base rent is $7,104, subject to annual adjustments according to changes in the Consumer Price Index.
 
We also lease space at 4897 Lake Park Blvd., Building A, Suite #140, Salt Lake City, Utah for our CareCenter and sales department.  The lease is for a three-year term, and is cancelable after the 13th months and the 28th months with 60 days notice.  Monthly lease payments begin at $3,162 and increase to approximately $3,458 over the life of the lease.
 
Management believes the facilities described above are adequate to accommodate presently expected growth and needs of our operations.  As we continue to grow, additional facilities or the expansion of existing facilities likely will be required.
 
Item 3.  Legal Proceedings
 
We are not involved directly in any legal proceedings which would have a material effect upon our business or financial condition, 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 4.  (Removed and Reserved)
 
 
12

 
 
PART II
 
 
Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Market Information
 
Since February 26, 2010, our common stock has traded on the OTC Bulletin Board under the symbol “ACAR.OB.” Prior to that date there was no public market for our common stock.
 
The following table sets forth the range of high and low market prices of our common stock as reported for the periods indicated.  The information is available online at http://finance.yahoo.com.
 
Fiscal Year
Ended September 30, 2011
 
High
   
Low
 
First Quarter
 
$
1.48
   
$
0.80
 
Second Quarter
 
$
1.14
   
$
0.49
 
Third Quarter
 
$
0.95
   
$
0.36
 
Fourth Quarter
 
$
0.68
   
$
0.47
 
 
Holders
 
As of December 23, 2011, there were approximately 2,460 holders of record of our common stock and 38,844,160 shares of common stock outstanding. We also have granted options and warrants for the purchase of approximately 16,504,000 shares of common stock.
 
Dividends
 
Since incorporation, we have not declared any cash dividends on our common stock.  We do not anticipate declaring cash dividends on our common stock for the foreseeable future.  
 
Dilution
 
The Board of Directors determines when and under what conditions and at what prices to issue stock.  In addition, a significant number of shares of common stock are reserved for issuance upon exercise of purchase or conversion rights.  The issuance of any shares of common stock for any reason will result in dilution of the equity and voting interests of existing stockholders. 
 
Transfer Agent and Registrar
 
The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company, 59 Maiden Lane, Plaza Level, New York, NY 11219.
 
Equity Compensation Plans
 
We currently do not have any equity compensation plans covering our employees.  Under a management agreement in fiscal year 2009 and 2011 we granted our Chief Executive Officer equity compensation in the form of restricted stock and warrants for the purchase of common stock.  We have also granted warrants for the purchase of common stock to our directors.  The following table summarizes certain information concerning equity plan awards outstanding as of September 30, 2011.
 
 
13

 
 
Equity Compensation Plan Information
 
Plan Category(1)
Number of
securities to
be issued upon
 exercise
of outstanding
 options,
warrants, and
 rights
(#)
   
Weighted-
average
exercise price of
outstanding
 options,
warrants,
and right
($)
 
Number of
securities
remaining
available for
future issuance
under
equity
compensation
plans (excluding
securities
 reflected in
the first column)
(#)
 
                     
Equity compensation plans approved by security holders
   0     $ 0     0  
 
                   
Equity compensation plans not approved by security holders
 
7,322,000
   
$
0.41
   
0
 
Totals
 
7,322,000
 (1)  
$
0.41
   
0
 
 
(1)  
Includes 320,000 shares of common stock issuable upon exercise of outstanding warrants granted to directors and 7,002,000 shares of common stock issuable upon exercise of outstanding warrants granted under a personal compensation plan to our chief executive officer.
 
Recent Sales of Unregistered Securities
 
During the past three fiscal years, we have sold shares of our common stock and other equity securities without registration of the offer and sale of such securities under the Securities Act of 1933 (the “Securities Act”) in reliance upon exemptions from registration pursuant to rules and regulations promulgated under the Securities Act as summarized below.
 
Fiscal Year 2009.  During the fiscal year ended September 30, 2009, we issued 840,000 restricted shares of common stock valued at $735,840 in connection with an acquisition.  The recipients of these shares represented in the original acquisition agreements that they were accredited investors as defined in Rule 501 under the Securities Act.  Each of these entities also purchased from us shares of our Series A preferred stock, which is convertible into common stock under certain circumstances and subject to certain limitations.  These shares of common and preferred stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder, including Regulation D and Rule 506.  There were no non-accredited investors involved in this issuance.  We filed a Form D in connection with the issuance of these securities.
 
Fiscal Year 2010.  During the year ended September 30, 2010, we issued 13,270,964 shares of common stock without registration under the Securities Act as follows:
 
 
·
3,484,000 shares were issued to accredited investors in a private placement for cash with net proceeds of $2,101,700.
 
 
·
1,200,000 shares were issued to accredited investors on the conversion of shares of Series A preferred stock.
 
 
·
720,000 shares were issued to accredited investors on the conversion of Series B preferred stock.
 
 
·
2,750,000 shares were issued for current and future consulting services valued at $2,912,500.
 
 
·
70,000 shares were issued for services performed in the sales and marketing area for a value of $76,100.
 
 
·
51,000 shares were issued for services performed in the research and development areas valued at $69,870.
 
 
·
777,750 shares were issued to employees, officers, and directors for services performed for a value of $991,303.
 
 
·
77,500 shares were issued in connection with origination fees for loans to the Company for a value of 73,958.
 
 
·
44,714 shares were issued in connection with preferred stock dividends hold by investor valued at $45,161.
 
 
·
2,528,000 shares were issued upon the exercise of options for cash proceeds of $632,000.
 
 
·
1,568,000 shares were issued upon the exercise of options/warrants for accrued and current services valued at $560,000.
 
 
14

 

 
 In each of the transactions described above, the securities were issued without registration under the Securities Act in reliance upon exemptions from registration under Section 4(2) of the Securities Act, as well as Regulation D, promulgated under the Securities Act.  The recipients of the securities were accredited investors or employees or affiliates of the Company.
 
Fiscal Year 2011.  During the year ended September 30, 2011, we issued 13,092,000 shares of common stock without registration under the Securities Act as follows:
 
 
·
1,962,500 shares to accredited investors on June 7th, 2011 for cash proceeds of $456,500;
 
 
·
70,000 shares to accredited investors on August 19th, 2011 for cash proceeds of $28,000;
 
 
·
4,770,000 shares on October 27, 2010, March 7, 2011, April 7, 2011, May 18, 2011, and September 1, 2011 respectively, under warrants exercised by an officer at $0.25 per share for cash proceeds of $1,192,500;
 
 
·
12,000 shares on March 31, 2011 upon the cashless exercise of warrants at $1.25 per share for accrued director fees of $15,000, and 150,000 shares on June 22, 2011 for accrued director fees of $75,000;
 
 
·
225,000 shares on May 6, 2011 as a loan origination fee to an unrelated party with value of $93,103;
 
 
·
300,000 shares on September 30, 2011 upon the cashless exercise of warrants at $0.25 per share for accrued service fee through a third party with marketing and product branding services valued at $75,000;
 
 
·
652,500 shares issued under several service agreements with third parties in connection with marketing and product branding services valued at $580,650;
 
 
·
950,000 shares on June 22, 2011 to employees for services valued at $437,000;
 
 
·
4,000,000 shares were issued on June 22, 2011 under a new employment contract to our Chief Executive Officer for services to be rendered during the term of the agreement from October 1, 2010 through September 2014.  The value of these shares of common stock on the date of grant totaled $1,840,000.
 
The shares of common stock issued in the above transactions were not registered under the Securities Act in reliance upon exemptions from registration under Section 4(2) of the Securities Act, promulgated under the Securities Act.
 
Item 7.  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, 2011 and 2010 and the accompanying notes thereto contained in this report.
 
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. (“SecureAlert”), a Utah corporation.  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.  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. 
 
Our emphasis in fiscal year 2011 was to bring out an increased product and brand awareness creating a platform for future development of sales and business.  During the fiscal year, we received valuable feed back through sales and focus groups reaching thousands of seniors.  We launched an additional product line focused on technology for the home branded as the ActiveOne™.  We also relocated our CareCenter operations and sales force to a new facility, greatly increasing its’ capacity as well as its’ abilities to include telehealth and other monitoring services.
 
Recent Developments
 
We have financed operations exclusively through equity security 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 such funds 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 the results of operations and our financial condition.
 
 
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On October 10, 2011, the Company, entered into a written agreement (the “Agreement”) with Sapinda Deutschland GmbH (“Sapinda”), pursuant to the terms of which Sapinda has agreed to advise and assist the Company in establishing an equity line of credit (the “Equity Line”) to provide up to $10 million in equity financing to the Company.
 
Pursuant to the terms of the Agreement, the Company has the right to issue and sell to Sapinda or to investors introduced to the Company through Sapinda’s services (collectively, “Investors”), and Investors shall be obligated to purchase up to $10,000,000 of Common Stock of the Company (the “Commitment Amount”) subject to the terms and conditions set forth in the Agreement.  Sales under the Equity Line will be made by Company pursuant to stock purchase agreements entered into with the Investors.  Draws on the Equity Line will be entirely within the sole discretion and upon request of the Company, pursuant to written notices (“Draw Down Notices”).
 
The material terms of the Equity Line and the related commitment include the following:
 
 
·
The Company, may, in its sole discretion, make draw downs against the Commitment Amount (each a “Draw Down”) during the period commencing with the effective date of the Agreement (August 10, 2011) through September 30, 2014, which Draw Downs the Investors are obligated to accept, subject to the terms and conditions of the Agreement.
 
 
·
The first $5 million of financing available under the Commitment Amount was to be paid to the Company on or before November 15, 2011.  Thereafter, future Draw Downs will be as initiated by the Company under the Agreement, subject to the accomplishment of certain milestones related to the business activity of the Company.  The Company received $900,000 prior to the execution of the Agreement, which was credited against the first financing under the Equity Line.  No shares of Common Stock have been issued in connection with this initial subscription amount.  Sapainda did not provide the balance of the first $5 million on or before November 15, 2011 and has not done so as of the date hereof.
 
 
·
The delivery of a Draw Down Notice by the Company triggers a pricing period (“Pricing Period”) of 60 consecutive trading days.  The Draw Down Notice indicates the dollar amount of the Draw Down (the “Investment Amount”) the Company wishes to exercise and the minimum price per share that it will accept for the securities to be sold under the notice (the “Safety Net Price”).  The Company is not required to sell any securities under the Draw Down Notice at a price below the Safety Net Price.  Under no circumstances will the Company be required to sell any securities under the Equity Line at a price that is less than $0.50 per share.
 
 
·
Only one Draw Down is allowed in each Draw Down Pricing Period.  Subject to the Safety Net Price indicated in the Draw Down Notice and the minimum price of $0.50 per share, the number of shares of Common Stock purchased by Investors with respect to each Draw Down is to be determined by dividing the Draw Down Amount by the applicable Subscription Price (equal to 70% of the volume weighted average price reported by Bloomberg during the Pricing Period.
 
 
·
Funding under each Draw Down Notice is to occur on the first trading day following the 60-trading day Pricing Period covered by the notice.
 
 
·
The shares of Common Stock issuable pursuant to the Equity Line will be issued pursuant to an exemption from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”) and or other rules and regulations promulgated thereunder.
 
As consideration for its assistance in establishing the Equity Line and for the other services to be provided by Sapinda under the Agreement, the Company has agreed to appoint up to two director nominees of Sapinda to the Company’s Board of Directors.  Sapinda will also be paid a fee of up to $2 million (if the full Commitment Amount is drawn under the Equity Line, or 20 percent of the amount actually drawn if less than $10 million is drawn by Company).
 
Additionally, On October 17, 2011, Company and David S. Boone entered into a written Employment Agreement containing compensation and other terms related to Boone’s appointment as Chief Executive Officer of the Company. The term of the Employment Agreement is two years. The term and the employment of Boone will continue for successive two-year periods unless terminated prior to the expiration of the current term by either Company or Boone.
 
The compensation payable to Boone under the Employment Agreement includes a base salary of $325,000 per year, a bonus, in the discretion of the Compensation Committee of the Company’s Board of Directors, which, if declared, will not exceed 60% of the base salary.  The Employment Agreement also includes the grant of an option to purchase 3,000,000 shares of the Company’s common stock at an exercise price of $0.44 per share. One-third of the option vests upon grant and 55,000 shares will vest monthly during the term of the agreement until the maximum of 3,000,000 shares is vested.  The option is exercisable for a three-year period.  The executive also participates in medical and other benefit plans offered generally by the Company to its employees.
 
 
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In the event of a change of control (as defined in the Employment Agreement), unvested options held by Boone will immediately vest and be exercisable.  In addition, in the event of a termination of Boone within 12 months following a change of control, Company is required to pay Boone a lump sum payment equal to 12 months of his base salary.
 
In the event of a termination resulting from disability or illness or without cause, or in the event of a voluntary termination of employment by Boone for good reason as defined in the Employment Agreement, Company is to pay monthly payments equal to his base compensation and benefits for a period of 12 months following termination.
 
The executive is prohibited from competing with Company for 24 months following any termination of his employment.
 
Subsequent to September 30, 2011, the Company granted to Mr. Dalton warrants to purchase 3,600,000 shares of common stock at $0.40 per share.
 
Subsequent to September 30, 2011, the Company’s board of directors approved the issuance of two different preferred stocks.
 
Series C Convertible Preferred Stock
 
The material rights and preferences of the Series C preferred stock is as follows:
 
 
·
Each share of Series C Preferred stock is convertible into 10 shares of common stock.
 
 
·
The Series C preferred stock is not entitled to dividends.
 
 
·
The Series C preferred stock is not entitled to vote.
 
 
·
The Series C preferred stock is entitled to a liquidation preference of $1.00 per share.
 
 
·
The Series C preferred stock can only convert when our quarterly revenue reaches $1,250,000.
 
Series D Convertible Preferred Stock
 
The material rights and preferences of the Series D preferred stock is as follows:
 
 
·
Each share of Series D Preferred stock is convertible into 10 shares of common stock.
 
 
·
The Series D preferred stock is not entitled to dividends.
 
 
·
The Series D preferred stock is entitled to vote.
 
 
·
The Series D preferred stock is entitled to a liquidation preference of $1.00 per share.
 
Key Business Indicators
 
In assessing the performance of our business, we consider a variety of performance and financial measures.  The key measures for determining how our business is performing are net sales, comparable store and non-comparable store sales, gross profit margin and selling, general and administrative expense.
 
Net Sales
 
Net sales constitute gross sales net of any returns and merchandise discounts.
 
Gross Profit
 
Gross profit is equal to our net sales minus our cost of goods sold. Gross margin measures gross profit as a percentage of our net sales.  Cost of goods sold includes the direct cost of purchased merchandise, commissions, distribution costs, all freight costs and purchasing costs.
 
Our cost of goods sold is substantially higher in higher volume quarters because cost of goods sold generally increases as net sales increase.  Changes in the mix of our products, such as changes in the proportion of accessories, may also impact our overall cost of goods sold.
 
Selling, General and Administrative Expense
 
Selling, general and administrative expense includes administration, share-based compensation (discussed below) and occupancy costs.  These expenses do not generally vary proportionally with net sales.  As a result, selling, general and administrative expense as a percentage of net sales is usually higher in lower volume quarters and lower in higher volume quarters.
 
 
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Share-based Compensation Expense
 
During the year ended September 30, 2011, we granted 4,000,000 shares of common stock and 3,000,000 shares of common stock purchase warrants to our chief executive officer at an expense of $657,859.  These and any future stock warrant grants increased our compensation expense in fiscal year 2011 and will increase our share-based compensation expense in future fiscal years compared to fiscal year 2011. See “Critical Accounting Policies” below.
 
Fiscal Year 2011 Compared to Fiscal Year 2010
 
Revenues
 
During the fiscal year ended September 30, 2011, we had net revenues of $771,000 compared to net revenues of $548,000 for the fiscal year ended September 30, 2010, an increase of $223,000 or 41%.  Revenues from monitoring services for the fiscal year ended September 30, 2011 totaled $334,000, compared to $74,000 for the prior fiscal year.  This increase is due to the introduction of the ActiveOne™ device and the monitoring revenues associated with it.  Revenues from stains and reagents for the fiscal year ended September 30, 2011 were $437,000, compared to $474,000 for the fiscal year 2010, resulting in an decrease of $37,000.  This decrease of $37,000 is primarily due to a decrease of diagnostic equipment sales and freight income.
 
Cost of Revenues
 
During the fiscal year ended September 30, 2011, cost of revenues totaled $1,055,000, compared to cost of revenues during the fiscal year ended September 30, 2010 of $670,000, an increase of $385,000.  The increase in cost of revenues resulted primarily from expenses related to the CareCenter for the monitoring of the ActiveOne™ product.  Monitoring costs of revenue were $686,000 and stains and reagents costs of revenues were $369,000.
 
Research and Development Expenses
 
Research and development expenses decreased to $321,000 in fiscal year 2011, from $458,000 in the year ended September 30, 2010.  The decrease in research and development expenses in 2011 was primarily due to less expense related to the development of our ActiveOne+™ devices.
 
Selling, General and Administrative Expenses
 
During the fiscal year ended September 30, 2011, selling, general and administrative expenses decreased to $6,959,000, compared to $9,327,000 in the prior fiscal year.  The most significant components of the decrease were tied directly to the following:
 
 
Decrease in amortization expense related to the completion of the acquisition of HG Partners, Inc. of approximately $654,000 during fiscal year 2010;
 
 
Decrease in noncash bonus expense of approximately $347,000, which was used for exercising outstanding stock purchase warrants during the prior fiscal year;
 
 
Decrease in consulting expense of approximately $813,000 compared to the prior fiscal year, all of which was due to noncash expense related to accelerated vesting of warrants to officers and Board of Directors during fiscal year 2010; and
 
 
Decrease in investment relations expense of approximately $766,000, all of which was non-cash expense, paid with issuance of common stock.
 
All of these decreases, which total $2,580,000, were offset by an increase in advertising and marketing expense of $178,000 and an increase in depreciation expense of $41,000.
 
Other Income and Expense
 
Derivative gain was $0 and $444,000 in fiscal years 2011 and 2010, respectively.  There were no convertible debt instruments that are recorded as derivative liabilities during fiscal year ended September 2011.  Interest expense was $335,000 and $1,420,000 in the fiscal year ended September 30, 2011 and 2010, respectively.  The decrease in fiscal year 2011 was due to non-cash expense related to the amortization of Series A and Series B preferred stock discount incurred during the fiscal year ended September 30, 2010.  Other income during fiscal year 2011 was $5,000 compared to other expense of $343 for the fiscal year ended September 30, 2010.  The other income was increased due to the gain on payable forgiveness of $55,000, and was offset by impairment of the investment in Vista Therapeutics of $50,000 during the fiscal year ended September 30, 2011.  Loss on disposal was $6,000 and $425 in the fiscal year ended September 30, 2011 and 2010, respectively.  The increase was due to obsolete asset disposal during the fiscal year 2011.
 
 
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Net Loss
 
Net loss for the year ended September 30, 2011 decreased to $7,899,000 from a net loss of $11,639,000 in fiscal year 2010, due primarily to the items described above.
 
Liquidity and Capital Resources
 
Our primary sources of liquidity are the proceeds from the sale of our equity securities and from borrowing.  We have not historically financed operations from cash flows from operating activities.  We anticipate that we will continue to seek funding to supplement revenues from the sale of our products and services through the sale of selling securities until we begin to have positive cash flows from operating activities under our new business plan.
 
As of September 30, 2011, we had unrestricted cash of $178,000, compared to cash of $1,714,000 as of September 30, 2010.  As of September 30, 2011, we had a working capital deficit of $1,149,000, compared to working capital of $855,000 as of September 30, 2010.  The decrease of cash and working capital was due to less cash proceeds from financing activities during the fiscal year ended September 30, 2011 compared to the year ended September 30, 2010.
 
Operating activities used cash of $3,082,000 in fiscal year 2011, compared to $2,150,000 in fiscal year 2010.  The increased cash used in operating activities was due to increased marketing and distribution of our products and services and decreased non-cash expenses during the year ended September 30, 2011 compared to the year ended September 30, 2010.
 
Investing activities for the year ended September 30, 2011 used cash of $336,000, compared to $356,000 of cash used by investing activities in the year ended September 30, 2010.  The decreased use of cash in investing activities was due to the addition of leased equipment and investment purchased during the fiscal year ended September 30, 2010.
 
Financing activities in fiscal year 2011 provided $1,882,000 of net cash, compared to $3,389,000 of net cash provided by financing activities in the year ended September 30, 2010.  The decrease cash provided is due to less capital raised during fiscal year 2011.
 
As of September 30, 2011, we had an accumulated deficit of $24,936,000 compared to $17,038,000 at September 30, 2010.  Stockholders’ equity at September 30, 2011 was a deficit of $541,000, compared to stockholder’s equity of $1,485,000 at September 30, 2010.  These changes were due to continued negative cash flow from operating activities during the fiscal year ended September 30, 2011.
 
Fiscal Year 2010 Compared to Fiscal Year 2009
 
Revenues
 
During the fiscal year ended September 30, 2010, we had net revenues of $548,000 compared to net revenues of $452,000 for the fiscal year ended September 30, 2009, an increase of $96,000 or 21%.  Revenues from monitoring services for the fiscal year ended September 30, 2010 totaled $74,000, compared to $0 for the prior fiscal year.  This increase is due to the introduction of the ActiveOne™ device and the monitoring revenues associated with it. Revenues from stains and reagents for the fiscal year ended September 30, 2010 were $474,000, compared to $452,000 for the fiscal year 2009, resulting in an increase of $22,000.  This increase of $22,000 is primarily due to an increase in the sale of hematology stains and reagents.
 
Cost of Revenues
 
During the fiscal year ended September 30, 2010, cost of revenues totaled $670,000, compared to cost of revenues during the fiscal year ended September 30, 2009 of $396,000, an increase of $274,000.  The increase in cost of revenues resulted primarily from expenses related to the CareCenter for the monitoring of the ActiveOne™ product.  Monitoring costs of revenue were $305,000 and stains and reagents costs of revenues were $365,000.
 
Research and Development Expenses
 
Research and development expenses increased to $458,000 in fiscal year 2010, from $375,000 in the year ended September 30, 2009.  The increase in research and development expenses in 2010 was primarily related to the development of our ActiveOne+™ devices and payments required under our agreement with Vista.
 
Selling, General and Administrative Expenses
 
Fiscal year 2010 was a significant year of development for us.  Among other important accomplishments, our common stock began trading in the over-the-counter market, we launched our ActiveOne™ product and CareCenter services, and we entered into key agreements for research and development as well as marketing and distribution of our products and services.  The primary emphasis was to establish a platform for building brand awareness and introducing our product to the market, which we believe will lead to increased sales and revenues in future periods.
 
 
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As a result of the emphasis on bringing our products, services, and brand to the market, selling, general and administrative expenses increased during fiscal year 2010 from the amounts expended in fiscal year 2009.  Selling, general and administrative expense in the year ended September 30, 2010, totaled $9,327,000, compared to $2,032,000 of expense in fiscal year 2009.  The most significant components of these expenses were tied directly to the efforts described above in bringing our products and services to market and included the following increases:
 
 
Increase in advertising and marketing expense of approximately $375,000 due to the cost of advertising and marketing of the ActiveOne+™ device;
 
 
Increase in amortization expense related to the completion of the acquisition of HG Partners, Inc. of approximately $654,000;
 
 
Increase in bonus expense of approximately $355,000, $350,000 of which was paid by the cashless exercise of outstanding stock purchase warrants;
 
 
Increase in consulting expense of approximately $3,901,000, all of which was non-cash, paid with issuance of common stock and warrants, and the amortization of warrant expense.  This includes the accelerated vesting of warrants to officers and board of directors;
 
 
Increase in board fees of approximately $20,000;
 
 
Increase in insurance expense of approximately $43,000;
 
 
Increase in investment relations expense of approximately $1,015,000, all of which was non-cash expense, paid with issuance of common stock;
 
 
Increase in payroll of approximately $698,000 for services paid by issuance of common stock and warrants to employees;
 
 
Increase in telephone expenses of $25,000 due to business expansion; and
 
 
Increase in travel expenses of $140,000 due to development and marketing of ActiveOne+™ device.
 
Other Income and Expense
 
Derivative gain was $443,735 and $0 in fiscal years 2010 and 2009, respectively.  Expense related to refinancing and vesting of warrants, and interest expense increased to $1,420,000 for the fiscal year 2010 compared to $100,000 of interest expense in fiscal year 2009.  These expenses were incurred in 2010 due to the loss on conversion of preferred stock and warrants, as well as dividends paid for preferred stock and non-cash expense related to shares issued in payment of loan origination fees.
 
Net Loss
 
Net loss for the year ended September 30, 2010 increased to $11,639,000 from a net loss of $2,416,000 in fiscal year 2009, due primarily to the higher selling, general and administrative expenses incurred in 2010 as described above.  
 
Off Balance Sheet Arrangements
 
We are not a party to any off balance sheet arrangements.
 
Impact of Inflation
 
Our results of operations and financial condition are presented based on historical cost.  While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we believe the effects of inflation, if any, on our results of operations and financial condition have been immaterial.
 
Recent Accounting Pronouncements
 
In June 2009, the FASB issued accounting guidance on the consolidation of variable interest entities (“VIEs”). This guidance revised 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 was effective at the beginning of the first fiscal year beginning after November 15, 2009.  We adopted this guidance on October 1, 2010.  The application of this guidance did not have a material impact on our 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 was 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 adopted this guidance effective October 1, 2010 and recognized $25,456 of deferred revenue.
 
 
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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 guidance was effective for fiscal years beginning on or after December 15, 2009, and interim periods within those fiscal years for arrangements outstanding as of the beginning of those years.  We adopted this guidance on October 1, 2010.  The application of this guidance did not have a material impact on our financial statements.
 
Critical Accounting Policies
 
The following summary includes accounting policies that we deem to be most critical to our business.  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 its 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.
 
We believe our accounting policies in  respect to concentration of credit risk, allowances for doubtful accounts receivable, inventories, impairment of assets, and revenue recognition are critical to an understanding of our financial results and condition as described below.
 
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. Reagent inventories consist of raw materials, work-in-process, and finished goods.  Care Services inventory consist of ActiveOne™  inventories.  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.
 
Leased Equipment
 
Our leased equipment is stated at cost less accumulated depreciation and amortization.  We amortize the cost of leased equipment on the straight line method over thirty six months, which is the estimated useful life of the equipment.  Amortization of leased equipment is recorded as cost of sales.
 
Revenue Recognition
 
Our revenue has historically been from two sources: (i) sales from Care Services; (ii) sales of medical diagnostic stains from reagents.
 
Care Services
 
“Care Services” include lease contracts in which we provide Care Services and lease devices to distributors or end users and retain ownership of the leased device.  We typically lease devices on a month-to-month contract with customers (members) that use our Care Services.  However, these contracts may be cancelled by either party at anytime with 30 days notice.  Under our standard contract, the leased device becomes billable on the date the member orders the product, and remains billable until the device is returned.  We recognize revenue on leased devices at the end of each month that Care Services have been provided.  In those circumstances in which we receive payment in advance, these payments are recorded as deferred revenue.
 
Customers order our products by phone or website.  We do not enter into long-term contracts.
 
In connection with GAAP, 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 or the buyer is obligated to pay within 30 days, and the obligation is not contingent on resale of the product.
 
 
·
The buyer’s obligation 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.
 
 
·
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.
 
Accounting standards state 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.”  In the Care Services revenue line, the vast majority of our sales are Care Service revenues.  Because Care Service 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 discount from retail prices or receives commission per sale according to the contract.  Our distributors are not required to maintain specified amounts of inventory 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.
 
The majority of our revenue transactions do not have multiple elements.  On occasion, we have revenue transactions that have multiple elements (such as device sales to distributors).  In these situations, we provide the distributor with the ActiveOne™ device and a monthly monitoring service, which are both included in the contracted pricing. In these multiple element revenue arrangements, we consider whether: (i) the deliverables have value on a standalone basis to the distributors, and (ii) the distributors have a general right of return.  We have determined that these elements do have standalone value to distributors and that the performance of undelivered items is probable and substantially within our control.  Therefore, in accordance with accounting standards, we have determined that these revenue elements should be considered as separate units of accounting.  Accounting standards state that arrangement consideration shall be allocated at the inception of the arrangement to all deliverables on the basis of their relative selling price.  When applying the relative selling price method, the selling price for each deliverable shall be determined using vendor-specific objective evidence of selling price, if it exists; otherwise, third-party evidence will be used to determine the selling price.  If neither vendor-specific objective evidence nor third-party evidence of selling price exists for a deliverable, the vendor shall use its best estimate of the selling price for that deliverable.
 
 
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We do not currently sell, nor do we have intentions to sell the ActiveOne™ device separately from the monthly monitoring service, therefore we are not able to determine vendor-specific objective evidence of selling price.  We are unable to determine third-party evidence of selling price, because there is not a similar product in the market.  The ActiveOne™ device is the only device in the market with fall detection technology.  We are therefore required to determine our best estimate of selling price in order to determine the relative selling price of the separate deliverables in our revenue arrangements.  In order to determine the best estimate of selling price of the ActiveOne™ device, we included the following cost components in its estimate: production costs, development costs, PTCRB certification costs, and estimated gross margin.  In order to determine the best estimate of the monthly monitoring service, we included the following components in its estimate: monthly communication cost, monitoring labor costs, PSAP database and monthly maintenance costs, and estimated gross margin. We allocate the arrangement costs based on these best estimates of selling price.  The relative selling price allocated to the sale of the ActiveOne™ device is recognized when the device is delivered to the distributor.  The relative selling price of the monitoring service is recognized monthly when the services have been provided.
 
Reagents
 
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.  Neither the sale of diagnostic equipment nor the sale of medical diagnostic stains contains multiple deliverables.
 
Customers order the diagnostic stain product lines by purchase order.  We do not enter into long-term contracts.  The medical diagnostic stain sales were $437,489 for the fiscal year ended September 30, 2011.  All of these sales were made with net 30-day payment terms.
 
Under GAAP we recognize revenue from our diagnostic stain products at the time of sale by applying the following principles:
 
 
·
The price to the buyer is fixed or determinable at the date of sale.
 
 
·
The buyer has paid or the buyer is obligated to pay within 30 days, and the obligation is not contingent on resale of the product.
 
 
·
The buyer’s obligation 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.
 
 
·
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.
 
 
·
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 eight months. Customers must obtain prior authorization for a product return.
 
Our diagnostic stain 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.
 
We have approximately 70 types of products based on the number of individual stock-keeping units (“SKUs”) in the 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., and 48 oz.) has a unique SKU in inventory.
 
 
23

 
 
Accounting standards state 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.  
 
Although not the focus of our new business model, we also sell diagnostic devices in certain situations.  We recognize device 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.  Because diagnostic equipment sales are not material to the financial statements, we disclose the sales as one line item for reagents in the statement of operation.
 
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.  The 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.
 
Item 8.  Financial Statements and Supplementary Data
 
The financial statements and supplemental data required by this item are included in Part IV, Item 15.
 
Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
None.
 
Item 9A.  Controls and Procedures
 
Evaluation of Disclosure 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.  During the audit process, we identified material weaknesses discussed below in the Report of Management 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) or 15d-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 our annual or interim financial statements will not be prevented or detected.

 
24

 
 
 In the course of the management's assessment, it has identified the following material weaknesses in internal control over financial reporting:
 
Control Environment
 
We did not maintain an effective control environment for internal control over financial reporting. Specifically, we concluded that we did not have appropriate controls in the following areas:
 
·
Ineffective controls over period end financial disclosure and reporting processes.
 
·
Ineffective controls over communication of material transactions between management and accounting personnel.
 
Financial Reporting Process 
 
We did not maintain an effective financial reporting process to prepare financial statements in accordance with generally accepted accounting principles. Specifically, we initially failed to appropriately account for and disclose the valuation and recording of certain equity and financing arrangements.
 
 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 and staffing 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.
 
Item 9B.  Other Information
 
None.
 
PART III
 
 
Item 10.  Directors, Executive Officers and Corporate Governance
 
Set forth below are the name, age, position and a description of the business experience of each of our executive officers, directors and other key employees as of September 30, 2011.
 
Name
 
Age
 
Position
         
James J. Dalton
   69  
Chairman (Director) and Chief Executive Officer
James G. Carter
   72  
Director
William K. Martin
   68  
Director
Jack J. Johnson
   69  
Director
Robert J. Welgos
   73  
Director
Michael G. Acton
   48  
Chief Financial Officer, Secretary-Treasurer

 
James J. Dalton – Chief Executive Officer and Chairman
 
Mr. Dalton joined us as a director on October 1, 2004.  He was our Chief Executive Officer and Chairman from June 16, 2008 until October 17, 2011.  Mr. Dalton was a director and President of SecureAlert from August 2003 until June 2008.  Prior to joining SecureAlert, Mr. Dalton was the owner and President of Dalton Development, a real estate development company.  He served as the President and coordinated the development of The Pinnacle, an 86-unit condominium project located at Deer Valley Resort in Park City, Utah.  Mr. Dalton also served as the president of Club Rio Mar in Puerto Rico, a 680-acre beach front property that includes 500 condominiums, beach club, numerous restaurants, pools and a Fazio-designed golf course.  He was also a founder and owner of the Deer Valley Club, where he oversaw the development of 25 high-end condominiums with a “ski-in and ski-out” feature.  We believe that Mr. Dalton’s prior experience as a president and director of a public company, and in particular, of our former parent, SecureAlert, provides him with unique understanding of and experience with our business development and objectives.  This background qualifies him to serve on our board and provides him with insight into the specific challenges facing smaller public companies.  We believe that his experience helps him as he directs our response to meet the needs of our business, including our need to access capital markets and sources of financing.  Mr. Dalton’s real estate development and sales experience also prepared him to advise us in the development and marketing of our ActiveOne™ solutions and products and related services.
 
James G. Carter - Director
 
Mr. Carter joined our board in September 2008.  He is the founder and principal of J. Carter Wine & Spirits, Inc. (1989-2002) and is a director and former president of White Beeches Golf & Country Club since 1990.  Mr. Carter’s business experience includes Vice President of Sales & Marketing (North America and Caribbean) for Suntory International Corp. (1981-1989), National Sales Director Wines for Austin Nichols & Company, Inc. (1975-1980).  He is a former Councilman and Council President for the Township of Washington (Bergen County, New Jersey).  He retired in 2000.  Mr. Carter attended Villanova University. Mr. Carter has a very strong sales and marketing background with Suntory International Corp and Austin Nichols & Company.  We believe that Mr. Carter’s experiences in starting, owning, and operating his own business and his extensive sales experience, qualify him to serve as a member of our Board of Directors as we continue to develop our distribution networks and design our marketing and sales programs.

 
25

 
 
William K. Martin - Director
 
Mr. Martin joined our board in September 2008.  He is a founder/partner/broker of Commerce CRG, and has served as its managing director from 1993 through the present, as well as acting as the Associate Broker in the firm’s Park City, Utah, office since 2007.  Commerce CRG is a commercial real estate and management business, and is an independently owned and operated member of the Cushman & Wakefield Alliance, which focuses on commercial real estate and management. Mr. Martin has also been a board member of a number of national and international real estate service firms.  Mr. Martin has also been active in industry organizations and is currently a member of the Economic Development Corporation of Utah and sits on that organization’s executive board.  Mr. Martin has a Bachelor of Science degree from Utah State University in Applied Statistical and Computer Science and has earned the rank of Captain in the United States Air Force (retired).  Mr. Martin has a very strong sales and marketing background with Commerce CRG and Cushman Wakefield.  Mr. Martin’s qualifications to serve on our board include his past experience as a member of the State of Utah’s Economic Development board which give him insight into governmental affairs and government relations, and his sales experience, assisting as we begin to bring our products and services to market and establish our distribution channels.
 
Jack J. Johnson – Director
 
Mr. Johnson joined our board in October 2008.  In 1976, he founded the Jack Johnson Company, a land planning, civil engineering and architectural company specializing in residential and resort communities.  He has served as President of that company since its inception.  He also formed Land Equity Partners, a residential subdivision development company, and Resort Development Services, a company focusing on development of hotels and condominiums.  He received a degree in Civil Engineering from the University of Illinois in the late 1960s, and is a licensed civil engineer in several states.  His qualifications to serve on our board include his engineering background, which will help as we enter into research and development contracts related to our products and service solutions.  He is also well qualified as a result of his extensive business experience and sales expertise.
 
Robert J. Welgos – Director
 
Mr. Welgos joined our Board of Directors in June 2009.  He has a BS in engineering from the Newark College of Engineering (1962), and worked for 38 years with Allied Signal Corp (now Honeywell International), in various technical department management positions, including being responsible for operations of Customer Technical Service Dept., Design Engineering, Testing Laboratories, and Process Laboratories.  He also served as the Manager, North American Distributor Sales and Director of International Operations, where he established distribution networks throughout Pacific Rim and South America.  During this period, he was instrumental in the creation of joint ventures with Lucky Goldstar in Korea and Japan Synthetic Rubber in Japan.  Mr. Welgos retired from Allied Signal Corp in 2000.  Mr. Welgos is the Chairman of our board’s Audit Committee.  Among other things, Mr. Welgos’ education and extensive experience in the industries described above qualify him to advise our company in our research and development agenda and customer service solutions.  In addition, his experience in Asia is important as we source our products and manufacturing.
 
Michael G. Acton Secretary, Treasurer and Chief Financial Officer
 
Mr. Acton joined us as Secretary-Treasurer at the time of our incorporation.  He has been our Chief Financial Officer since June 2008.  From 1999 until June 2008, Mr. Acton was the Secretary-Treasurer of SecureAlert.  He also served as that company’s Chief Financial Officer from March 2001 until June 2008.  Mr. Acton is a Certified Public Accountant in the State of Utah.
 
New Chief Executive Officer
 
On October 17, 2011, we engaged David S. Boone as our new Chief Executive Officer.  Mr. Boone assumed the post previously occupied by James J. Dalton, whose resignation took effect with the appointment of Boone.  Mr. Dalton continues to serve as the Chairman of our Board of Directors.  Mr. Boone’s appointment and the change in Mr. Dalton’s role were approved by the Board of Directors on October 4, 2011, contingent upon the execution of Mr. Boone’s employment agreement and acceptance, which occurred on October 17, 2011.
 
Mr. Boone, age 47, graduated from the University of Illinois, cum laude, in 1983 majoring in accounting.  He received his master’s degree in business administration from Harvard in 1989.  From 1990-1991 he worked for the Director of Channel Strategy and Finance for Kraft General Foods.  From 1991-1992 he worked as the Director of Business Development and Strategy for Sears Specialty Merchandising.  From 1992-1999 he worked for Frito-Lay in various positions, including: Area CFO Frito Lay SOCAL, Finance Director/CFO Direct Division, and Vice President of Business Development.  From 1999-2000 he was the Chief Financial Officer and Vice President for Intira Corporation.  From 2000-2001 he served as the Vice President of Corporate Development for Safeway Corporation.  From 2001-2005 he was the Sr. Vice President of Finance for Belo Corporation.  Most recently, Mr. Boone was CEO, President and Director of American CareSource Holdings from 2005 to 2011.

 
26

 
 
Compensatory Arrangement with New Principal Executive Officer
 
On October 17, 2011, we entered into a written Employment Agreement containing compensation and other terms related to Mr. Boone’s appointment as our Chief Executive Officer.  The term of the Employment Agreement is two years. The term and the employment of Mr. Boone will continue for successive two-year periods unless terminated prior to the expiration of the current term by either the Company or Mr. Boone.
 
The compensation payable to Mr. Boone under the Employment Agreement includes a base salary of $325,000 per year, a bonus, in the discretion of the Compensation Committee of the Board of Directors, which, if declared, will not exceed 60% of the base salary.  The Employment Agreement also includes the grant of an option to purchase 3,000,000 shares common stock at an exercise price of $0.44 per share.  One-third of the option vested upon grant, and 55,000 shares vest monthly during the term of the agreement until the maximum of 3,000,000 shares is vested.  The option is exercisable for a three-year period.  The executive also participates in medical and other benefit plans offered generally by the Company to our employees.
 
In the event of a change of control (as defined in the Employment Agreement), unvested options held by Mr. Boone will immediately vest and be exercisable.  In addition, in the event of a termination of Mr. Boone within 12 months following a change of control, we are required to pay Boone a lump sum payment equal to 12 months of his base salary.
 
In the event of a termination resulting from disability or illness or without cause, or in the event of a voluntary termination of employment by Mr. Boone for good reason as defined in the Employment Agreement, we are to pay monthly payments equal to his base compensation and benefits for a period of 12 months following termination.  Mr. Boone is prohibited from competing with the Company for 24 months following any termination of his employment.
 
Director Compensation
 
Each of our independent (non-employee) directors is paid a director’s fee of $30,000 per year.  In addition, in June 2009, each outside director received a common stock purchase warrant for the purchase of up to 125,000 shares of our common stock at a price of $1.25 per share, exercisable for five years from the date of grant.
 
The table below summarizes the compensation we paid to our outside directors for their services as directors for the fiscal year ended September 30, 2011.
 
Name
(a)
   
Fees Earned or Paid in Cash
($)
(b)
   
Stock Awards
($)
(c)
     
Option Awards
($)
(d)
     
Non-Equity Incentive Plan Compensation
($)
(e)
     
Change in Pension Value and Nonqualified Deferred Compensation Earnings
($)
(f)
     
All Other Compensation
($)
(g)
     
Total
($)
(h)
 
James J. Dalton (1)
   
--
   
--
     
--
     
--
     
--
     
--
     
--
 
James G. Carter
 
$
30,000
   
--
     
--
     
--
     
--
     
--
   
$
30,000
 
William K. Martin
 
$
30,000
   
--
     
--
     
--
     
--
     
--
   
$
30,000
 
Robert J. Welgos
 
$
30,000
   
--
     
--
     
--
     
--
     
--
   
$
30,000
 
Jack Johnson
 
$
30,000
   
--
     
--
     
--
     
--
     
--
   
$
30,000
 
 
 
(1)
Mr. Dalton is Chairman of the Board of Directors.  He previously served as our Chief Executive Officer, until October 2011.  Mr. Dalton received 4,000,000 restricted shares of our common stock in lieu of cash compensation and warrants to purchase 3,000,000 shares of our common stock for services provided as our Chief Executive Officer.  Mr. Dalton did not receive additional compensation for his service on the Board of Directors. His compensation for the year ended September 30, 2011 is disclosed in the Summary Compensation Table on page 28 below.

 
27

 
 
Item 11.  Executive Compensation
 
Chief Executive’s Management Agreement
 
During the fiscal year ended September 30, 2011, we entered into a four-year management contract with our Chief Executive Officer, James J. Dalton, with an effective term of October 1, 2010 through September 30, 2014.  Under that agreement, we paid Mr. Dalton for his services as follows:
 
·
4,000,000 restricted shares of common stock were granted to Mr. Dalton at a price of $0.46 per share, which vested immediately; and
 
·
Warrants for the purchase of 3,000,000 shares of common stock at a price of $0.50 per share.
 
The compensation payable to our new Chief Executive Officer, Mr. Boone, is described above on page 27.
 
Section 162(m) Compliance
 
Section 162(m) of the Internal Revenue Code, or “Code”, limits us to a deduction for federal income tax purposes of no more than $1 million of compensation paid to certain executive officers in a taxable year. Compensation above $1 million may be deducted if it is “performance-based compensation” within the meaning of the Code.
 
Our Board of Directors has determined that the stock purchase warrants granted under Mr. Dalton’s management contract as described above, with an exercise price at least equal to the fair value of our common stock on the date of grant should be treated as “performance-based compensation.”  Our Board of Directors believes that we should be able to continue to manage our executive compensation program for our Chief Executive Officer and Chief Financial Officer (collectively, our “Named Executive Officers”) so as to preserve the related federal income tax deductions, although individual exceptions may occur.
 
Summary Compensation Table
 
The following table sets forth certain information with respect to compensation for the year ended September 30, 2011 earned by, awarded or paid to our Named Executive Officers.
 
 
Name and principal
 position
 
Year
 
Salary
($)
   
Bonus
($)
   
Stock
awards
($)
   
Option
awards
($)
   
Non-equity
incentive plan
compensation
($)
    Nonqualified
deferred
compensation
earnings
($)
    All other
compensation
 ($)(1)
   
Total
($)
 
(a)
(b)
 
(c)
   
(d)
   
(e)(3)
   
(f)(4)
   
(g)
   
(h)
   
(i)
   
(j)
 
James J. Dalton,(2)
2011
  $ -     $ -     $ 1,840,000     $ 791,434     $ -     $ -     $ 7,325     $ 2,638,759  
Principal Executive
2010
  $ 50,000     $ -     $ 540,000     $ 2,323,464     $ -     $ -     $ 23,933     $ 2,937,397  
Officer
2009
  $ -     $ -     $ 190,000     $ 571,540     $ -     $ -     $ 6,717     $ 768,257  
Michael G. Acton,
2011
  $ 78,895     $ -     $ 411,426     $ -     $ -     $ -     $ 29,258     $ 519,579  
Principal Financial
2010
  $ 60,000     $ 300     $ 326,628     $ -     $ -     $ -     $ 20,744     $ 407,672  
Officer
2009
  $ 72,309     $ -     $ -     $ -     $ -     $ -     $ 4,944     $ 77,253  
 
 
(1)
Column (i) includes long-term care insurance and other personal benefits. The amounts included in that column, representing premiums paid by us for the applicable insurance policies, include the following:
 
     
 
   
Term Life
   
Health
   
Dental
   
Vision
 
Name
 
Insurance
   
Insurance
   
Insurance
   
Insurance
 
James J. Dalton
  $ 103     $ 6,300     $ 670     $ 252  
Michael G. Acton
  $ 4,727     $ 23,194     $ 1,085     $ 252  

 
(2)
All amounts paid under the management agreement described above.  All amounts except those reported in column (c) and column (i) are non-cash amounts and represent stock or option grants.
  
 
(3)
 
 
Amounts in this column represent non-cash compensation expense of stock grants based on the market value of the stock on the grant date.  The aggregate grant date fair value of stock awards to Mr. Dalton in the three-year period was $2,570,000.  During the fiscal year ended September 30, 2010, we granted Mr. Acton $222,750 of the restricted stock awards vest pursuant to certain performance conditions. As of September 30, 2011, none of the performance conditions were met.  During the fiscal year ended September 30, 2011, we recognized $66,426 of expense associated with the restricted stock grants.  During the fiscal year ended September 30, 2011, the aggregate grant date fair value of stock awards issued to Mr. Acton was $345,000.  The total stock base compensation we recognized for Mr. Acton during the three-year period is $738,054.
 
 
(4)
 
Amounts in this column represent non-cash compensation expense based on the fair value of options granted, calculated using the Black-Scholes option-pricing model.  During the period, the options granted to Mr. Dalton have an aggregate grant date fair value of $791,434 using the following assumptions:  exercise price of $0.50; risk-free interest rate of 0.68%; expected life of two and a half years; expected dividend of 0%; and a volatility factor of 104%.
 
 
28

 
 
Outstanding Equity Awards at Fiscal Year-End
 
The following table summarizes information regarding options and other equity awards owned by the Named Executive Officers as of September 30, 2011.
 
   
Option Awards
   
Stock Awards
 
Name
(a)
 
Number of
Securities
Underlying
 Unexercised
Options
(#)
Exercisable
(b)
   
Number of
Securities
Underlying
 Unexercised
Options
(#)
Unexercisable
(c)
   
Equity
Incentive
 Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
(d)
   
Option
Exercise
Price
($)
(e)
   
Option
Expira-tion
Date
(f)
   
Number
of Shares
 or Units
of Stock
That
Have Not
Vested
(#)
(g)
   
Market
Value of
Shares or
Units of
Stock
That
Have Not
Vested
($)
(h)
   
Equity
Incentive
Plan
 Awards:
Number of
Unearned
Shares,
 Units, or
Other
 Rights That
Have Not
Vested
(#)
(i)
   
Equity
 
Incentive
Plan Awards:
 Market or
 Payout Value
of Unearned
Shares, Units,
or Other
Rights That
 Have Not
Vested
($)
(j)
 
 
James J. Dalton,
President and Chief
Executive Officer
 
    3,000,000       0       0     $ 0.50    
6/21/2016
      0     $ 0       0     $ 0  
    4,002,000       0       0     $ 0.25    
5/11/2014
      0     $ 0       0     $ 0  
Michael G. Acton, Chief Financial Officer
    0       0       0     $ 0       0       0     $ 0       0     $
 
Options Exercised and Vested
 
During the fiscal year ended September 30, 2010, 1,060,000 warrants vested in February 2010 and at the discretion of the Board of Directors, vesting of 4,000,000 and 8,440,000 options was accelerated in April and July 2010 respectively.  During the fiscal year ended September 30, 2011, 3,000,000 warrants were vested, and 5, 082,000 options were exercised.
 
Indemnification of Officers and Directors
 
Our certificate of incorporation provides that we will indemnify our directors and officers to the fullest extent permitted by the Delaware General Corporation Law, or DGCL.  We expect to obtain directors’ and officers’ liability insurance that insures such persons against the costs of defense, settlement or payment of a judgment under certain circumstances.
 
In addition, our certificate of incorporation provides that our directors will not be liable for monetary damages for breach of fiduciary duty.
 
We entered into indemnification agreements with each of our executive officers and directors.  The indemnification agreements provide the executive officers and directors with contractual rights to indemnification, expense advancement and reimbursement, to the fullest extent permitted under the DGCL.
 
29

 
There is no pending litigation or proceeding naming any of our directors or officers to which indemnification is being sought, and we are not aware of any pending or threatened litigation that may result in claims for indemnification by any director or officer.
 
Board of Directors
 
Election and Vacancies
 
Directors hold office until the next annual meeting of the stockholders and until their successors have been elected or appointed and duly qualified.  Vacancies on the board which are created by the retirement, resignation or removal of a director may be filled by the vote of the remaining members of the board, with such new director serving the remainder of the term or until his successor shall be elected and qualify.
 
Item 12.              Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
The following table sets forth information as of December 23, 2011 by:
 
 
·
each person or group who is known by us to own beneficially more than 5% of our outstanding shares of common stock;
 
·
each of our Named Executive Officers;
 
·
each of our directors; and
 
·
all of the executive officers and directors as a group.
 
Beneficial ownership for the purposes of the following table is determined in accordance with the rules and regulations of the SEC.  These rules generally provide that a person is the beneficial owner of securities if such person has or shares the power to vote or direct the voting thereof, or to dispose or direct the disposition thereof or has the right to acquire such powers within 60 days.  Common stock subject to options that are currently exercisable or exercisable within 60 days of December 23, 2011, is deemed to be outstanding and beneficially owned by the person holding the options.  These shares, however, are not deemed outstanding for the purposes of computing the percentage ownership of any other person. Percentage of beneficial ownership is based on 38,568,160 shares of common stock outstanding as of September 30, 2011.  Except as disclosed in the footnotes to this table and subject to applicable community property laws, we believe that each stockholder identified in the table possesses sole voting and investment power over all shares of common stock shown as beneficially owned by the stockholder.  Unless otherwise indicated in the table or footnotes below, the address for each beneficial owner is c/o ActiveCare, Inc., 5095 West 2100 South, West Valley City, Utah 84120.
 
5% Stockholders:
 
Title of Class
 
 
Name and address of Beneficial Owner
 
Amount and Nature
Of Beneficial
Ownership
   
 
Percent of Class
 
               
Common
Harborview Master Fund LP (1)
850 Third Avenue, Suite 1801
New York, NY 10022
    3,041,568       7.67 %
                   
Common
Gemini Master Fund LTD (2)
135 Liverpool Drive, Suite C
Cardiff, CA 92007
    2,340,820       5.93 %
                   
Common
Pacific Capital S.ar.l.(3)
28 Boulevard d’Avranches
L-1160 Luxembourg
    2,000,000       5.19 %
 
 
30

 
 
Executive Officers and Directors:
             
 
Title of Class
 
Name of Beneficial Owner
 
Amount and
Nature of Beneficial
Ownership
   
Percent of Class
 
Common
James J. Dalton(4)
    14,756,417       30.01 %
Common
David S. Boone(5)
    1,111,110       2.80 %
Common
James G. Carter(6)
    307,932       *  
Common
William K. Martin(7)
    764,178       1.98 %
Common
Robert J. Welgos(8)
    272,593       *  
Common
Jack Johnson(9)
    140,000       *  
Common
Michael G. Acton(10)
    1,215,310       3.15 %
All executive officers and directors as a group (6 persons)(11)
    18,567,540       39.80 %
 
*      Represents beneficial ownership of less than one percent (1%) of our outstanding common stock.
 
(1)
Includes 1,972,261 shares and 1,069,307 warrants owned of record by Harborview Master Fund LP.
 
(2)
Includes 1,409,857 shares and 930,963 warrants owned of record by Gemini Master Fund LTD.
 
(3)
Includes 2,000,000 shares owned of record by Pacific Capital S.a.r.l.
 
(4)
Mr. Dalton is a member of our Board of Directors and until October 17, 2011 served as our CEO.  This amount includes 4,154,417 shares and 7,002,000 warrants owned of record by Mr. Dalton.
 
(5)
Mr. Boone became our Chief Executive Officer on October 17, 2011.  This amount includes 1,111,110 warrants vested among the 3,000,000 warrants granted according to the employment agreement.
 
(6)
Mr. Carter is a director.  Includes 230,932 shares and 77,000 warrants owned of record by Mr. Carter.
 
(7)
Mr. Martin is a director. Includes 93,000 shares and 77,000 warrants owned of record by Mr. Martin.  Also, includes 594,178 shares held in the name of Zenith Holding, LTD, an entity controlled by Mr. Martin.
 
(8)
Mr. Welgos is a director.  Includes 171,593 shares and 101,000 warrants owned of record by Mr. Welgos.
 
(9)
Mr. Johnson is a director.  Includes 75,000 shares and 65,000 warrants owned of record by Mr. Johnson.
 
(10)
Mr. Acton is our Chief Financial Officer and Secretary-Treasurer.
 
(11)
Duplicate entries eliminated.
 
Item 13.              Certain Relationships and Related Transactions, and Director Independence
 
Related Party Transactions
 
Related Party Note Payable
 
During the year ended September 30, 2011, the Company owed $25,000 to one of its officers.  The note had an annual interest rate of 12% and was due on demand.  The Company repaid the loan together with $1,915 of interest during the quarter ended December 31, 2010.
 
Indemnification Agreements
 
We have entered into indemnification agreements with each of our current directors and executive officers. These agreements require us to indemnify these individuals to the fullest extent permitted under Delaware law against liabilities that may arise by reason of their service to us, and to advance expenses incurred as a result of any proceeding against them as to which they could be indemnified. We also intend to enter into indemnification agreements with our future directors and executive officers.
 
Procedures for Related Party Transactions
 
Under our code of business conduct and ethics adopted in June 2009, our employees, officers and directors are discouraged from entering into any transaction that may cause a conflict of interest for us.  In addition, they must report any potential conflict of interest, including related party transactions, to their managers or our corporate counsel who then reviews and summarizes the proposed transaction for our audit committee.  Pursuant to its charter, our audit committee is required to then approve any related-party transactions, including those transactions involving our directors. In approving or rejecting such proposed transactions, the audit committee will be required to consider the relevant facts and circumstances available and deemed relevant to the audit committee, including the material terms of the transactions, risks, benefits, costs, availability of other comparable services or products and, if applicable, the impact on a director’s independence.  Our audit committee will approve only those transactions that, in light of known circumstances, are in, or are not inconsistent with, our best interests, as our audit committee determines in the good faith exercise of its discretion.  A copy of our code of business conduct and ethics and audit committee charter are available on our corporate website at www.activecare.com.

 
31

 
 
Corporate Governance and Director Independence
 
Board Composition
 
Our business and affairs are managed under the direction of our Board of Directors.  Our Board of Directors is comprised of five directors, four of whom (Mr. Carter, Mr. Martin, Mr. Johnson, and Mr. Welgos) are independent within the meaning of the Nasdaq Marketplace Rules.  This means that the Board of Directors has determined that those directors (1) are not officers or employees of ActiveCare or its subsidiary and (2) have no direct or indirect relationship with ActiveCare that would interfere with the exercise of their independent judgment in carrying out the responsibilities of a director.  We have determined that it is in our best interest to have directors who would meet the requirements of being “independent” under the rules of the Nasdaq Stock Market.
 
Board Committees
 
Our Board of Directors has established an audit committee and a compensation committee.  The composition and responsibilities of each committee are described below.  Members serve on these committees until their resignation or until otherwise determined by our Board of Directors.  
 
Audit Committee
 
Our audit committee is comprised of two of our independent directors: Mr. Welgos and Mr. Martin.  Mr. Welgos serves as chair of the audit committee and is considered to be the financial expert on that committee.  Our audit committee has responsibility for, among other things:
 
·
selecting and hiring our independent registered public accounting firm, and approving the audit and non-audit services to be performed by and the fees to be paid to our independent registered public accounting firm;
 
·
evaluating the qualifications, performance and independence of our independent auditors;
 
·
monitoring the integrity of our financial statements and our compliance with legal and regulatory requirements as they relate to financial statements or accounting matters;
 
·
reviewing the adequacy and effectiveness of our internal control policies and procedures;
 
·
discussing the scope and results of the audit with the independent registered public accounting firm and reviewing with management and the independent registered public accounting firm our interim and year-end operating results; and
 
·
preparing the audit committee report required by the SEC, to be included in our annual proxy statement.
 
As indicated above, our Board of Directors has affirmatively determined that Mr. Welgos and Mr. Martin meet the definition of “independent directors” for purposes of serving on an audit committee under applicable SEC rules, and we intend to comply with these independence requirements within the time periods specified.  In addition, the Board of Directors has determined that Mr. Welgos meets the standards established by the SEC to qualify as a “financial expert” under Item 407 of Regulation S-K under the Securities Act.  Our Board of Directors has adopted a written charter for our audit committee, which is available on our corporate website at www.activecaresys.com.
 
Compensation Committee
 
Our compensation committee consists of two independent directors, Mr. Johnson and Mr. Carter.  Mr. Johnson is the chairman of our compensation committee.  The compensation committee is responsible for, among other things:  
 
·
reviewing and approving compensation of our executive officers including annual base salary, annual incentive bonuses, specific goals, equity compensation, employment agreements, severance and change in control arrangements, and any other benefits, compensations or arrangements;
 
·
reviewing succession planning for our executive officers;
 
 
32

 
 
·
reviewing and recommending compensation goals, bonus and stock compensation criteria for our employees;
 
·
preparing the compensation committee report required by the SEC to be included in our annual proxy statement; and
 
·
administering, reviewing and making recommendations with respect to our equity compensation plans.
 
Our Board of Directors has adopted a written charter for our compensation committee, which is available on our corporate website at www.activecaresys.com.
 
Compensation Committee Interlocks and Insider Participation
 
None of our executive officers currently serves, or in the past year has served, as a member of the Board of Directors or compensation committee of any entity that has one or more executive officers serving on our Board of Directors or compensation committee.
 
Code of Business Conduct and Ethics
 
We have adopted a code of business conduct and ethics applicable to our principal executive, financial and accounting officers and all persons performing similar functions.  A copy of that code is available on our corporate website at www.activecaresys.com.  We expect that any amendments to such code, or any waivers of its requirements, will be disclosed on our website.
 
Meetings of the Board of Directors and Committees
 
The Board of Directors is elected by and is accountable to our stockholders.  The Board establishes policy and provides our strategic direction, oversight, and control.  The Board met two times during fiscal year 2011.  All directors attended 100% of the meetings of the Board and the Board committees of which they are members.
 
Item 14.              Principal Accounting Fees and Services
 
Audit Fees
 
Audit services consist of the audit of our annual consolidated financial statements, and other services related to filings and registration statements filed by us and other pertinent matters.  Audit fees paid to Hansen Barnett & Maxwell, P.C. for fiscal years 2011 and 2010 totaled approximately $73,000 and $60,000, respectively.
 
Audit Related Fees, Tax Fees, Audit Related Fees, and All Other Fees
 
Hansen Barnett & Maxwell, P.C. has not provided to us any consulting services, including tax consulting and compliance services or any financial information systems design and implementation services in fiscal years 2011 and 2010.
 
The audit committee of the Board of Directors considered and authorized all services provided by and fees paid to Hansen Barnett & Maxwell, P.C.
 
Auditor Independence
 
Our audit committee considered that the work done for us in fiscal 2011 by Hansen Barnett & Maxwell, P.C. was compatible with maintaining Hansen Barnett & Maxwell, P.C.’s independence.
 
Report of the Audit Committee
 
The Audit Committee oversees the Company’s financial reporting process on behalf of the Board of Directors.  Management has the primary responsibility for the financial statements and the reporting process, including the systems of internal controls. The directors who serve on the Audit Committee are all independent for purposes of applicable SEC Rules.  The Audit Committee operates under a written charter that has been adopted by the Board of Directors.
 
We have reviewed and discussed with management the Company’s audited financial statements as of and for the year ended September 30, 2011.
 
We have discussed with the independent registered public accountant of the Company, Hansen Barnett & Maxwell, P.C., the matters that are required to be discussed by Statement on Auditing Standards No. 114, The Auditors Communication with Those Charged with Governance, as amended, by the Auditing Standards Board of the American Institute of Certified Public Accountants, which includes a review of the findings of the independent registered public accountant during its examination of the Company’s financial statements.
 
We have received and reviewed written disclosures and the letter from Hansen Barnett & Maxwell, P.C., which is required by Independence Standard No. 1, Independence Discussions with Audit Committees, as amended, by the Independence Standards Board, and we have discussed with Hansen Barnett & Maxell, P.C. their independence under such standards.  We have concluded that the independent registered public accountant is independent from the Company and its management.
 
 
33

 
 
Based on our review and discussions referred to above, we have recommended to the Board of Directors that the audited financial statements of the Company be included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2011, for filing with the Securities and Exchange Commission.
 
Respectfully submitted by the members of the Audit Committee:
 
 
Robert J. Welgos, Chair
 
William K. Martin
 
 
PART IV
 
Item 15.  Exhibits, Financial Statement Schedules
 
(a) The following documents are filed as part of this Form:
 
1.      Financial Statements
 
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Earnings
Consolidated Statements of Stockholders’ Equity and Comprehensive Income
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
 
 
2.
Financial Statement Schedules.    [Included in the Consolidated Financial Statements or Notes thereto.]
 
 
3.
Exhibits. The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the Commission: 
 
Exhibit No.
 
Title of Document
     
(10)(x)
 
Office Lease Agreement between the Company and Reef Parkway, LLC (filed previously as exhibit to report on Form 10-Q, filed February 10, 2011).* 
   
(10)(xi)
Lease Addendum between the Company and Reef Parkway, LLC (filed previously as exhibit to report on Form 10-Q, filed February 10, 2011).* 
   
(10)(xii)
Office Lease Agreement between the Company and Phoenix 2006 Partners, LLC (filed previously as exhibit to report on Form 10-Q, filed February 10, 2011).* 
     
(10)(xiii)
 
Employment Contract with James Dalton, Chief Executive Officer dated June 22, 2011.*
   
(10)(xiv)
Common Stock Purchase Warrant Agreement with James Dalton dated June 22, 2011.*
   
(10)(xv)
 
Employment Agreement with David S. Boone dated October 17, 2011*
     
(11)
 
Computation of Statement of Earnings (included in financial statements filed herewith)*
     
(31)(i)
 
Certifications of Chief Executive (Principal) Executive Officer under Rule 13a-14(a)/15d-14(a)*
     
(31)(ii)
 
Certifications of Chief Financial (Principal Financial and Accounting) Officer under Rule 13a-14(a)/15d-14(a)*
     
31.1  
Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
31.2  
Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
32.1   Certification of Chief Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C.Section 1350
     
101.Ins   XBRL Instance
101.Sch   XBRL Schema
101.Cal   XBRL Calculation
101.Def   XBRL Definition
101.Lab   XBRL Label
101.Pre   XBRL Presentation
 
* Previously filed.
 

 
34

 
 
ActiveCare, Inc.
Financial Statements
September 30, 2011 and 2010

 
 

 

Index to Financial Statements
 
Page
   
Report of Independent Registered Public Accounting Firm
F-3
   
Balance Sheets as of September 30, 2011 and 2010
F-4
   
Statements of Operations for the Years Ended September 30, 2011 and 2010
F-6
   
Statements of Stockholders’ Equity/ (Deficit) for the Years Ended September 30, 2010 and 2011
F-7
   
Statements of Cash Flows for the Years Ended September 30, 2011 and 2010
F-8
   
Notes to Financial Statements
F-10
   
 
 
 

 
 


 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and the Shareholders
ActiveCare, Inc.

We have audited the accompanying balance sheets as of September 30, 2011 and 2010 and the related statements of operations, stockholders' equity and cash flows of ActiveCare, Inc., (the Company), for the years ended September 30, 2011 and 2010.  These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ActiveCare, Inc. as of September 30, 2011 and 2010 and the results of their operations and cash flows for the years ended September 30, 2011 and 2010 in conformity with U.S. generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has incurred recurring operating losses and has an accumulated deficit. These conditions raise substantial doubt about its ability to continue as a going concern.  Management's plans regarding those matters are described in Note 1.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
 
 
HANSEN, BARNETT & MAXWELL, P.C.
Salt Lake City, Utah
December 23, 2011


 
 
F-3

 
 
ActiveCare, Inc.
Balance Sheets
September 30, 2011 and 2010

 
   
September 30, 2011
   
September 30, 2010
 
Assets
           
  Current assets:
           
    Cash
  $ 178,131     $ 1,713,923  
    Accounts receivable, net of allowance for doubtful accounts of $6,820 and $3,000, respectively
    103,044       106,142  
    Inventories, net of inventory valuation of $4,404 and $4,326, respectively
    116,010       41,516  
    Prepaid expenses and other assets
    2,217       243,882  
      Total current assets
    399,402       2,105,463  
                 
    Property and equipment, net of accumulated depreciation of $464,276 and $427,827, respectively
    232,182       88,455  
    Deposits
    30,831       128,883  
    Domain name, net of amortization of $1,430 and $715 respectively
    12,870       13,585  
    Leased equipment, net of amortization of $54,549 and $21,921, respectively
    112,955       96,544  
    License agreement, net of amortization of $81,310 and $47,664,  respectively
    218,690       252,336  
    Investment, net of impairment of $50,000 and $0, respectively
    -       50,000  
                 
      Total assets
  $ 1,006,930     $ 2,735,266  
 

See accompanying notes to financial statements.

 
F-4

 

ActiveCare, Inc.
Balance Sheets
September 30, 2011 and 2010 (Cont.) 


   
September 30, 2011
   
September 30, 2010
Liabilities and Stockholders’ Equity / (Deficit)
         
  Current liabilities:
         
    Accounts payable
  $ 452,034     $ 639,568  
    Accrued expenses
    494,919       236,219  
    Deferred revenue
    1,365       25,921  
    Related party notes payable
    -       25,000  
    Note payable, net of discount of $93,103 and $6,164, respectively
    300,000       23,836  
    Accrued payable on license agreement
    300,000       300,000  
      Total current liabilities
    1,548,318       1,250,544  
      Total liabilities
    1,548,318       1,250,544  
             
Stockholders’ equity / (deficit)
           
 Preferred stock; $.00001 par value, 10,000,000 shares authorized; 0 shares issued and outstanding
    -       -  
Common stock, $.00001 par value, 50,000,000 shares authorized;  38,568,160 and 25,039,160 shares issued and outstanding, respectively
    386       251  
    Additional paid in capital
    24,394,501       18,522,033  
    Accumulated deficit
    (24,936,275 )     (17,037,562 )
      Total stockholders’ equity / (deficit)
    (541,388 )     1,484,722  
      Total liabilities and stockholders’ equity / (deficit)
  $ 1,006,930     $ 2,735,266  


See accompanying notes to financial statements.

 
F-5

 

ActiveCare, Inc.
Statements of Operations
For the Years Ended September 30, 2011 and 2010 


   
2011
   
2010
 
             
Revenues:
           
Care Services
  $ 333,902     $ 74,258  
Reagents
    437,489       474,066  
Total revenues
    771,391       548,324  
                 
Cost of Revenue
               
Care Services
    685,729       305,305  
Reagents
    369,392       364,804  
Total cost of revenues
    1,055,121       670,109  
Gross margin
    (283,730 )     (121,785 )
                 
 Operating expenses
               
Research and development (including $15,300 and $69,870, respectively, of paid in stock or stock options/warrants)
    321,245       458,047  
Selling, general and administrative (including $4,232,450 and $6,648,114, respectively, of compensation expense paid in stock or as a result of amortization of stock options/warrants)
    6,958,693       9,327,156  
                 
Loss from operations
    (7,563,668 )     (9,906,988 )
                 
Other income (expenses):
               
Gain (loss) on derivative liability
    -       443,735  
Warrants refinancing expense
    -       (754,385 )
Interest expense (including $306,015 and $1,289,074, respectively, of non cash expenses)
    (334,706 )     (1,420,389 )
Loss on disposal of equipment
    (6,193 )     (425 )
Interest income
    782       -  
Impairment of Investment
    (50,000 )     -  
Gain on accounts payable forgiveness
    55,072       (343 )
                 
Net loss
  (7,898,713 )   (11,638,795 )
                 
 Net loss per common share – basic and diluted
  $ (0.27 )   $ (0.81 )
                 
 Weighted average shares – basic and diluted
    28,974,350       14,296,000  
 

See accompanying notes to financial statements.

 
F-6

 

ActiveCare, Inc.
Statements of Stockholders’ Equity / (Deficit)
For the Years Ended September 30, 2010 and 2011 


   
Common Stock
   
Additional
   
Accumulated
       
   
Shares
   
Amount
   
Paid-in Capital
   
Deficit
   
Total
 
                               
Balance at September 30, 2009
    11,768,196     $ 119     $ 5,330,651     $ (5,398,767 )   $ (67,997 )
                                         
Issuance of common stock for:
                                       
    Cash
    3,484,000       35       2,612,965       -       2,613,000  
    Options/warrants exercised for cash
    2,528,000       25       631,975       -       632,000  
    Services
    3,648,750       35       2,935,239       -       2,935,274  
    Preferred stock dividends
    44,714       1       45,161       -       45,162  
    Connection with loans
    77,500       1       60,624       -       60,625  
    Options/warrants exercised for services
    1,568,000       16       559,984       -       560,000  
Options
    -       -       1,910,902       -       1,910,902  
Amortization of deferred financing fees
    -       -       50,500       -       50,500  
Amortization of warrants issued for services
    -       -       3,220,256       -       3,220,256  
Conversion feature of preferred stock
    1,920,000       19