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

FORM 10-K

Commission file number: 0-53570

 (Exact name of registrant as specified in its charter)

1365 West Business Park Drive, Suite 100, Orem, Utah  84058
(Address of principal executive offices, Zip Code)

(877) 219-6050
(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 ☑

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 ☑

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

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  ☑    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 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.

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

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of March 31, 2015 was approximately $6 million, based on the average bid and asked price ($0.25 per share) and a total of 23,315,602 shares issued and outstanding to non-affiliates on that date.

There were 79,486,873 shares of the registrant's common stock outstanding as of January 11, 2016.

 

Documents Incorporated by Reference

None.

ACTIVECARE, INC.

FORM 10-K

For the Fiscal Year Ended September 30, 2015

INDEX

Disclosure Regarding Forward-Looking Statements

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended, relating to our operations, results of operations, and other matters that are based on our current expectations, estimates, assumptions, and projections.  Words such as "may," "will," "should," "likely," "anticipates," "expects," "intends," "plans," "projects," "believes," "estimates," and similar expressions are used to identify these forward-looking statements.  These statements are not guarantees of future performance and involve risks, uncertainties, and assumptions that are difficult to predict.  Forward-looking statements are based upon assumptions as to future events that might not prove to be accurate.  Actual outcomes and results could differ materially from what is expressed or forecast in these forward-looking statements.  Risks, uncertainties, and other factors that might cause such differences, some of which could be material, include, but are not limited to, the factors discussed under Item 1A of this report entitled "Risk Factors."

Item 1.  Business

Background

ActiveCare, Inc. ("we," "us," "our," the "Company" or "ActiveCare") was formed March 5, 1998 as a wholly owned subsidiary of Track Group [OTCQX: TRCK], a Utah corporation, formerly known as Track Group, Inc. ("Track Group").  We were spun off from Track Group in February 2009.  Effective July 15, 2009, we changed our name to ActiveCare, Inc., and our state of incorporation to Delaware. Our fiscal year ends on September 30.

In this Annual Report on Form 10-K, unless indicated otherwise, references to "dollars" and "$" are to United States dollars.

We own or have rights to trademarks, service marks or trade names that we use in connection with the operation of our business, including, without limitation, "CareCenter," "4G," "ActiveOne," "ActiveOne+," "ActiveHome," "ActiveCare" and the stylized "ActiveCare" logo.  Solely for convenience, some of the trademarks, service marks and trade names referred to in this report are listed without the ©, ® and ™ symbols, but we will assert, to the fullest extent under applicable law, our rights to our copyrights, trademarks, service marks, trade names and domain names. The trademarks, service marks and trade names of other companies appearing in this report are, to our knowledge, the property of their respective owners.

General

Our focus is on markets addressing chronic conditions and disease states.  Remote patient monitoring ("RPM") is a technology to enable monitoring of patient vital signs and physical functions outside of conventional clinical settings (e.g., in the home, work or travel).  Physiological data such as blood sugar levels, blood pressure, pulse rate, and blood oxygen levels are collected by sensors on medical peripheral devices.  Examples of these devices include glucometers, blood pressure cuffs, weight scales, and pulse oximeters.  The data is stored for future assessment or transmitted to healthcare providers or third parties via wireless telecommunication devices.  Disease states targeted by RPM technology providers typically include diabetes, congestive heart failure, sleep apnea, activity monitoring, and diet management.  Since the launch of our Chronic Illness Monitoring segment in 2012, its primary focus has been on those patients diagnosed with diabetes.  We believe that we can improve the lives of the chronically ill through the use of technology, while reducing the cost of care.  Central to these efforts is our "CareCenter."  This service is designed to monitor and track patients' health conditions and chronic illnesses on a real time basis.  As part of these efforts we have staffed this CareCenter with trained specialists to assist the chronically ill 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 products and technologies designed to improve the health of the chronically ill.

There are obvious problems associated with aging and patients diagnosed with chronic conditions.  According to a 2004 presentation to the American Telemedicine Association, approximately one in every four Americans suffers from a chronic illness, which typically becomes more severe and prominent with age.  The demographics of chronic illnesses include over 29 million people with diabetes (according to the Centers for Disease Control and Prevention's 2015 National Diabetes Statistics Report) and close to 14 million with coronary heart disease (according to reports published by the American Heart Association), as well as over 10 million with osteoporosis (according to a study by the University of Maryland Medical Center).  All of these reports and studies, as well as those cited elsewhere in this report, are on file with the Company. 

According to a 2010 analysis from the Centers for Disease Control and Prevention ("CDC"), as many as one in three U.S. adults could have diabetes by 2050 if current trends continue.  Diabetes currently affects approximately 9% of the overall U.S. population or 29 million people.  According to a 2012 diabetes fact sheet the annual cost of treating an individual diagnosed with diabetes, and the comorbidities associated with the disease, can range from $12,000 to $16,000 per year.  This combination costs the U.S. health system up to $245 billion annually.  A major driver of the diabetic related claims is the lack of adherence to regular blood glucose monitoring.  It is estimated by the National Center for Biotechnology Information that less than 30% of diabetics monitor their blood glucose levels on a regular basis.

With U.S. healthcare costs increasing annually, we believe that cost containment is a primary issue facing the industry. These escalating costs will only intensify 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.  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 the present number.  According to an article published in the National Review Online and the sources cited therein, approximately 80% of healthcare costs occur in the last two years of life.  This combined with an aging population supports the assertion that the nation is in dire need of viable cost-saving options for health care.

We believe the ability to monitor chronic illness in your own home will mitigate health care costs for the chronically ill and the elderly.  Through the technologies we are developing, we believe we can both enhance lives of and provide peace of mind with the knowledge that their vital signs are being monitored.  At the same time we believe we can save millions of dollars in the health care sector as we identify problems and issues before they become crises.

We believe that through the technologies we have already developed and are continuing to develop, we can enhance the lives not only of the growing diabetic segment of today's population, but also the lives of other segments of the population, such as those with other chronic illnesses.  The CareCenter is staffed around the clock with advisors that receive calls originating from our clients who utilize our products.  We can immediately communicate with them and emergency personnel in times of need and communicate their location and an abbreviated medical history.

Our Product and Service Strategy

During the fiscal year 2015, our product/service strategy fell into two distinctly different categories; chronic illness monitoring and care services ("CareServices") or personal emergency response systems ("PERS").  In December 2014, we sold substantially all of our customer contracts and equipment leased to customers associated with our CareServices segment.  The sale of our CareServices contracts allows us to focus solely on our Chronic Illness Monitoring segment.

Chronic Illness Monitoring

Chronic illness monitoring involves the use of biometric monitoring devices in combination with proprietary data and algorithms to assess the wellbeing of an individual under care.  Individual care profiles are created through the aggregation of personal health and medical claims information from multiple data sources.  Real-time biometric readings for blood glucose levels, blood pressure, heart rate, weight, tidal volume and other vital readings can be captured over time and added to the existing personal information.  This unique data set may now be used for proactive care protocols, care provider alerts to elevated readings, and behavioral intervention prior to crisis events.

Technology to facilitate data-driven chronic illness monitoring consists of three components: (1) biometric monitoring products and supplies, (2) medical and claims data aggregation, and (3) algorithms for the analysis of the data.  Biometric monitoring products and supplies are provided by numerous medical hardware providers and deliver a wide range of features and functionality.  ActiveCare is agnostic to any specific device requirement, and has as a core competency the ability to integrate and capture data from any 510(k) or HL7 compliant monitoring device (see "Regulatory Matters" on page 8 of this report).  Strategic relationships have been created with technology and market leaders, and evaluation of new and emerging technology partners is ongoing.  Medical and claims data is aggregated from multiple source providers using a proprietary application programmatic interface and data storage architecture.  This data is analyzed to identify individual care needs of those entering the program.  Monitoring alerts, predictive informatics and individual care plans are created and managed using the ActiveCare technology platform.  Care for chronic conditions may now be performed in real-time, and outcomes may be measured on both a medical and claims cost basis.

During the fiscal year ended September 30, 2015, we spent approximately $107,000 on research and development for chronic illness monitoring related to ongoing improvements to methods and systems for the capture and analysis of data, as well as scalable architectures to migrate to production applications and deployments that were developed during fiscal years 2013 and 2012.  We will continue to identify claims and medical data sets as well as analytical and informatics technologies that advance our ability to provide unique services.  Core competency will continue to evolve in the methods and technologies for data analytics and predictive informatics. 

Care Services

We have developed products that incorporate 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 belt clip, or carried in a purse, and sends a cellular signal to our CareCenter.  When the wearer of the device pushes the button, the staff at the CareCenter evaluate the situation and decide whether to call emergency services or a designated friend or family member.

CareCenter

The central point of our product offerings is our CareCenter.  Our CareCenter is staffed 24x7 with CareCenter 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 CareCenter specialists and CareCenter provide monitoring related to chronic illness test results, contact testers who have not tested when scheduled, and onboard new users to our services.  We focus on our outreach initiatives in respect of engagement programs, which assist end users with the importance of monitoring their health.

In contrast to a typical monitoring center, our CareCenter is equipped to respond to real-time alerts and data to better assist users of our services.  In addition, the CareCenter's software will identify the caller, access the individual's medical information, and assist with emergency dispatch.  We believe the CareCenter is a cornerstone of our business and will support current technology as well as evolve to support the integration of future technologies.

Recent Developments

We have financed operations primarily through the sale of equity securities, long-term debt and short-term debt.  Until revenues are sufficient to meet our needs, we will attempt to secure financing through equity or debt securities.  We continue to incur negative cash flows from operating activities and net losses.  We had negative working capital and negative total equity as of September 30, 2015 and September 30, 2014 and are in default with respect to certain debt.  We determined that our goodwill of $825,894 was impaired during the fourth quarter of 2015 and it was expensed.  These factors, among others, raise substantial doubt about our ability to continue as a going concern. The financial statements included in this Form 10-K do not include any adjustments that might result from the outcome of this uncertainty.

In order for us to eliminate substantial doubt about our ability to continue as a going concern, we must achieve profitability, generate positive cash flows from operating activities and obtain the necessary debt or equity funding to meet our projected capital investment requirements.  Our management's plans with respect to this uncertainty consist of raising additional capital by issuing debt or equity securities and increasing the sales of our products and services.  There can be no assurance that we will be able to raise sufficient additional capital or that revenues will increase rapidly enough to offset operating losses.  If we are unable to increase revenues or obtain additional financing, we will be unable to continue the development of our products and services and may have to cease operations.

In December 2014, we sold substantially all of our customer contracts and equipment leased to customers associated with our CareServices segment.  Additional equipment that we held in stock was sold to the buyer pursuant to a written invoice.  The purchase price included a cash payment of $412,280 for the customer contracts and $66,458 for the equipment held in stock.  The sale of the CareServices segment allows us to focus our resources solely on Chronic Illness Monitoring.

Our Growth Strategy

Our plan is to continue to focus on addressing the diabetic population and to execute our existing business plan serving this chronic illness market during fiscal year 2016.  We market our products through insurance companies, disease management companies, third-party administrators ("TPAs"), and self-insured companies.  We plan to invest in research and development and patent filings, as we broaden the services we offer.  We will continue to look for ways to provide solutions for other chronic illness and disease states markets.

Our strategy is to develop relationships with these various customers.  TPAs administer the claims, payments, co-pays, and medical coding for self-insured companies.  They effectively act as the medical benefits administrators for their customers, most of which are not large enough to justify a fully operational in-house department.  Disease management companies are hired by insurance companies and self-insured companies to actively engage with members and employees with the goal that more interaction will reduce significant health care claims.  Our strategy is achieved by providing specific information related to the benefits to be realized by all parties, which, in most cases is substantial to the self-insured companies and the insurance companies.  The key to monetary savings is the CareCenter, which operates 24x7 and is integral to chronic illness monitoring. The CareCenter is the real-time recipient of all test results which are delivered using cellular glucometers. This information is gathered, sorted and reported.  This information, which the customers have generally never before seen, is then delivered to the customers. The ultimate objective is to increase the percentage of diabetics who are regularly testing, which has been proven to be a major factor in reducing the cost of claims based on statistical history. Once the customers recognize the benefits to be realized from this information for one or more patients, it is a natural progression to add the rest of the customer's members or clients to the ActiveCare solution.

Our ultimate objective is to become a chronic illness monitor for all of our customer's members, measuring not only blood sugar for diabetics, but also blood pressure, weight, and blood oxygen levels.

Research and Development Program

During fiscal year 2015, we spent approximately $107,000, compared to $215,000 in fiscal year 2014, on research and development related to chronic illness monitoring.  The research and development program focused on ongoing improvements to methods and systems for the capture and analysis of data, as well as scalable architectures to migrate to production applications and deployments during fiscal year 2015 that were developed during fiscal years 2013 and 2012.

Competition

Over the past decade, technology device manufacturers have rushed to provide peripheral devices to capture data related to chronic health conditions rather than provide any assessment or intelligence regarding the data being captured.  In most cases the data captured remains static on the peripheral device or data capture system, providing little to no perspective on the current and recent condition of the patient.  In cases in which the data are utilized, the application of that data is typically limited to the "point of care" or physician's office.  The ActiveCare solution is a complex combination of components that provide an overall care system.  The analysis of the competitive landscape will focus on six primary market segments representing the primary components of our system, noting the implications for us resulting from the strengths of the leaders in each segment.

Overview – While not a primary threat to our business model, several leading providers of health care technologies have targeted the patient monitoring market and made significant investments in pursuing the segment.  The primary business focus of these companies is high-end diagnostics equipment, point of care technologies, and health information technologies.  While the investments in telehealth technologies have totaled significant dollars they represent a very small component of these competitors' overall business in the health care segment.  The approach to entering the market has typically been to acquire an existing technology and attempt to distribute that technology through existing distribution channels in complementary offerings.  Examples of providers in this segment include:

 

Strengths – The strengths of this segment are the competitors' overall position in the health care market, existing distribution channels and availability of capital to fund and pursue future opportunities.

Weaknesses – The value proposition of the providers in this segment has been focused on providing a consumer-based platform for "telemedicine," or providing care to a patient not at the same location as the provider of care.  Solutions have been an extension of the videophone concept, and in some cases have included connectivity to blood pressure and blood oxygen measuring peripherals. The weaknesses in the execution of this approach include:

Summary – We do not directly compete with the offerings in this segment.  The possible threat is based on the competitors' reassessment of strategy in this market and the ability to fund and customize products.  If they follow past patterns, we believe that we would be a prime candidate for partner relationship or acquisition by one of these competitors to gain an immediate presence in a more viable business model.

Overview – Competitors in this segment have specialized in the delivery of low cost diagnostic peripherals for measuring blood pressure, weight, pulse rate, blood sugar and activity.  Examples include:

Strengths – These competitors have refined the product requirements to meet the needs of the market.  Products are easy to use and accurately capture vitals and metrics.  In the past five years significant effort has been made to lower the cost of products as they compete more on cost rather than functionality or other benefits.

Weaknesses – These products continue to evolve as commodity offerings, differentiating on price rather than any other feature.  Solutions have been targeted on facilitating the moment of care, and lack complementing strategies to make data for later assessment.

Summary – Currently this segment provides us with some key partnerships.  They facilitate the means of capturing patient data with an easy to use, low cost offering.  While some devices have been innovative, the strategies continue to focus primarily on the manufacture and sale of hardware components.

Overview – The past five years have seen a proliferation of consumer-oriented devices to monitor individuals' physical activity, sleep patterns and pulse rate.  The strategy of those in this segment has also been focused on integration with smartphones and other consumer devices.  Examples include:

Strengths – The rapid evolution of product and strategy has been fueled by the culture and investors that innovated the technology segment.  Companies such as Apple, Google, Frog Design and Stanford Research Institute (SRI) are directly or indirectly funding and leading efforts of innovation.  Designs are state-of-the-art and are focused on attracting use by consumers in daily activity.  The segment has a strong first adopter appeal.

Weaknesses – To date, the business models of the products in the segment have been an evolution of the products produced by traditional monitoring device companies, with one notable exception; products are not yet qualified for clinical data capture and are relegated to providing consumers with the most basic of physical monitoring data.  Providers in this segment have noted intentions to become more robust, capturing clinical data type and securing federal 510(k) medical device certification in future products.  It has also been forecasted by technology thought leaders that the segment strategy will fail unless it adds complementing user value and revenue opportunities.

Summary – Competitors in this segment are expected to become strategic partners for our business model as they evolve their ability to capture and transmit clinical data.  We expect to expand into strategic market segments complementing the strengths of these technologies, offering data analytics, and personal fitness planning and wellness management services.

Overview – Health data informatics has become a strategic focus of health care providers and payer organizations over the past 30 years.  Aggregation, analytics, informatics and predictive modeling have enabled service providers to differentiate and better manage the process of health care.  Traditionally providers specialized in offering information or services based on a vertical focus of EHR patient data, geographic and regional health care information, or insurance claims processing data.  Examples include:

Strengths – Data aggregation and utilization are core competencies of the companies in this segment.  Product and service offerings have been successfully marketed to insurance companies and health plan providers.

Weaknesses – Sources of the data driving the product strategy of these competitors is becoming increasingly available, forcing an evolution of the business model in two directions; to become a provider of advanced services (rather than data), or to be acquired by large insurance and care groups to mine that specific groups' data.  While significant federal and state funding has driven the efforts to create regional health information organizations, projects have become graveyards for careers and future funding.  The fallout of this effort has had a significant impact on the viability of several major data services providers.

Summary – This segment presents us with direct competition and business opportunities.  Forced to rapidly evolve their strategies, competitors are recognizing the value of real-time and "prior to care event" data.  Increasing efforts are being made to facilitate data at the point of care and make that data available to the entire care and reimbursement cycle. Having the ability to capture and assess the data upstream of current offerings strategically differentiates our business, giving visibility to health risks in advance of change of condition and cost.  Partnering with leaders in this segment should enable us to further gain expertise in this field as well as complement our data repository. Having data of past care from these partners in combination with data of current patient conditions allows for extremely valuable predictive modeling and services.

Dependence on Major Customers and Vendor

During fiscal year 2015, we had three customers that accounted for 69% of total revenue. During fiscal year 2014, we had two customers that accounted for 67% of total revenue.  Although we are able to integrate and capture data from multiple devices, during fiscal years 2015 and 2014 we purchased substantially all of our products and supplies from one vendor.  See Note 2 to the consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations.

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, for our primary trademarks and we claim ownership of certain unregistered copyrights of our website content.  We rely as well on a variety of property rights that we license from third parties as described below.

Patents.  We own 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.

 

Trade Secrets.  We own certain intellectual property, including trade secrets, which 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.

Regulatory Matters

The testing, manufacture, distribution, advertising and marketing of medical devices in the United States is subject to extensive regulation by federal, state and local governmental authorities, including the Food & Drug Administration ("FDA").  Certain of our products may be subject to and required to receive regulatory clearances or approvals, as the case may be, before we may market them. Under United States law, a medical device is an article, which, among other things, is intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment or prevention of disease, in man or other animals (see Food, Drug & Cosmetic Act (the "Act") § 201(h)).

Devices are subject to varying levels of regulatory control, the most comprehensive of which requires that a clinical evaluation be conducted before a device receives clearance or approval for commercial distribution. The FDA classifies medical devices into one of three classes. Class I devices are relatively simple and can be manufactured and distributed with general controls. Class II devices are somewhat more complex and require greater scrutiny. Class III devices are new and frequently help sustain life.  Examples of the varying levels of regulatory control are described in the following paragraphs.

In the United States, a company generally can obtain permission to distribute a new device in two ways – through a Section 510(k) premarket notification application ("510(k) submission"), or through a Section 515 premarket approval ("PMA") application. The 510(k) submission applies to any device that is substantially equivalent to a "Predicate Device" (a device first marketed prior to May 28, 1976 or a device marketed after that date which was substantially equivalent to a pre-May 28, 1976 device). These devices are either Class I or Class II devices. Under the 510(k) submission process, the FDA will issue an order finding substantial equivalence to a Predicate Device and permitting commercial distribution of that device for its intended use. A 510(k) submission must provide information supporting its claim of substantial equivalence to the Predicate Device. The FDA permits certain low risk medical devices to be marketed without requiring the manufacturer to submit a premarket notification. In other instances, the FDA may not only require that a premarket notification be submitted, but also that such notification be accompanied by clinical data. If clinical data from human experiences are required to support the 510(k) submission, these data must be gathered in compliance with Integral Device Exemption ("IDE") regulations for clinical trials performed in the United States. The FDA review process for premarket notifications submitted pursuant to section 510(k) should take about 90 days on average, but it can take substantially longer if the FDA has concerns. Furthermore, there is no guarantee that the FDA will "clear" the device for marketing, in which case the device cannot be distributed in the United States. There is no guarantee that the FDA will deem the device subject to the 510(k) process, as opposed to the more time-consuming, resource intensive and problematic process described below.

We do not manufacture our own devices.  We have contracted with a third party to manufacture the device for us.  Manufacturers of medical devices are required to register with the FDA before they begin to manufacture devices for commercial distribution. As a result, any entity that manufactures products on our behalf will be subject to periodic inspection by the FDA for compliance with the FDA's Quality System Regulation ("QSR") requirements and other regulations. These regulations require us and our manufacturers to manufacture products and maintain documents in a prescribed manner with respect to design, manufacturing, testing and control activities. Further, we are required to comply with various FDA and other agency requirements for labeling and promotion. The Medical Device Reporting regulations require that we provide information to the FDA whenever there is evidence to reasonably suggest that a device may have caused or contributed to a death or serious injury or, if a malfunction were to occur, could cause or contribute to a death or serious injury. In addition, the FDA prohibits us from promoting a medical device for unapproved indications.

In the United States, Health Insurance Portability and Accountability Act ("HIPAA") regulations require national standards for some types of electronic health information transactions and the data elements used in those transactions, security standards to ensure the integrity and confidentiality of health information and standards to protect the privacy of individually identifiable health information. Covered entities under HIPAA, which include health care organizations such as our clients, our employer clinic business model and our claims processing, transmission and submission services, are required to comply with the privacy standards, the transaction regulations and the security regulations. As a business associate of our clients who are covered entities, we are generally required by contract to comply with the HIPAA regulations as they pertain to handling of covered client data. However, the extension of these HIPAA obligations to business associates by law has created additional liability risks related to the privacy and security of individually identifiable health information.

Employees

As of September 30, 2015, we had thirty four full-time and three part-time employees in the U.S.  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 1365 West Business Park Drive, Suite 100, Orem, Utah, 84058.  Our telephone number is (877) 219-6050. We maintain a website at www.activecare.com. The information on our website should not be considered part of this report.  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 occur, our business, financial condition and results of operations could be seriously and materially harmed, and the trading price of our common stock could decline.

Investors should also be aware that while we do, from time to time, communicate with securities analysts, it is against our policy to disclose to them any material non-public information or other confidential commercial information.  Accordingly, stockholders should not assume that we agree with any statement or report issued by any analyst, regardless of the content of the statement or report.  Furthermore, we do not confirm financial forecasts or projections issued by others.  Thus, to the extent that reports issued by securities analysts contain any projections, forecasts, or opinions, such reports are not the responsibility of ActiveCare.

Because of our history of accumulated deficits, recurring losses and negative cash flows from operating activities, we must improve profitability and may be required to obtain additional funding if we are to continue as a "going concern."

We incurred negative cash flows from operating activities and recurring net losses in fiscal years 2015 and 2014.  We had negative working capital at the end of each of those years.  As of September 30, 2015 and 2014, our accumulated deficit was $91,840,158 and $78,327,447, respectively.  These factors, among others, raise substantial doubt about our ability to continue as a going concern. The financial statements included with this report do not include any adjustments that might result from the outcome of this uncertainty.  In order for us to remove substantial doubt about our ability to continue as a going concern, we must achieve profitability, generate positive cash flows from operating activities and obtain necessary debt or equity funding.  If we are unable to increase revenues or obtain additional financing, we will be unable to continue the development of our products and services and we may have to cease operations.

Our profitability depends upon achieving success in our future operations through implementing our business plan, increasing sales, and expanding our customer base, for which there can be no assurance given.

Profitability depends upon many factors, including the success of our sales program, our ability to identify and obtain the rights to additional products to add to our existing product line, expansion of our customer base, maintenance or reduction of expense levels and the success of our business activities.  We anticipate that we will generate operating income in the next 12 months.  Our ability to achieve profitable operations will depend on our success in developing and maintaining valuable product and monitoring solutions, sales strategies, and strategic partnerships.  There can be no assurance that we will be able to develop and maintain adequate resources to fund these goals.  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.

Our products utilize 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 sources.  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 products are subject to the risks and uncertainties associated with the protection of intellectual property and related proprietary rights. We believe that our success depends in part on our ability to obtain and enforce patents, maintain trade secrets and operate without infringing on the proprietary rights of others in the United States and in other countries.

We own or have license rights under several patents; we have also applied for several additional patents and those applications are awaiting action by the United States Patent Office. There is no assurance those patents will issue or that when they do issue they will include all of the claims currently included in the applications. Even if they do issue, those new patents and our existing patents must be protected against possible infringement. The enforcement of patent rights can be uncertain and involve complex legal and factual questions. The scope and enforceability of patent claims are not systematically predictable with absolute accuracy. The strength of our own patent rights depends, in part, upon the breadth and scope of protection provided by the patent and the validity of our patents, if any.

We also rely on trade secrets laws to protect portions of our technology for which patent protection has not yet been pursued or is not believed to be appropriate or obtainable.

These laws may protect us against the unlawful or unpermitted disclosure of any information of a confidential and proprietary nature, including but not limited to our know-how, trade secrets, methods of operation, names and information relating to vendors or suppliers and customer names and addresses. We intend to protect this unpatentable and unpatented proprietary technology and processes, in addition to other confidential and proprietary information in part, by entering into confidentiality agreements with employees, collaborative partners, consultants and certain contractors. There can be no assurance that these agreements will not be breached, that we will have adequate remedies for any breach, or that our trade secrets and other confidential and proprietary information will not otherwise become known or be independently discovered or reverse-engineered by competitors.

Recent changes in insurance and health care laws have created uncertainty in the health care industry.

The Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act, each enacted in March 2010, generally known as the Health Care Reform Law, significantly expanded health insurance coverage to uninsured Americans and changed the way health care is financed by both governmental and private payers. We expect expansion of access to health insurance to increase the demand for our products and services, but other provisions of the Health Care Reform Law could affect us adversely. Additionally, further federal and state proposals for health care reform are likely. We cannot predict what further reform proposals, if any, will be adopted, when they may be adopted, or what impact they may have on us.

The collection, retention and disclosure of personal information and patient health information is regulated by law and subjects us and our business associates to potential liability for unauthorized disclosure and other use of such information.

State, federal and foreign laws, such as the federal Health Insurance Portability and Accountability Act of 1996 (HIPAA), regulate the confidentiality of sensitive personal information and the circumstances under which such information may be released. These measures may govern the disclosure and use of personal and patient medical record information and may require users of such information to implement specified security measures, and to notify individuals in the event of privacy and security breaches. Evolving laws and regulations in this area could restrict the ability of our customers to obtain, use or disseminate patient information, or could require us to incur significant additional costs to re-design our products in a timely manner to reflect these legal requirements, either of which could have an adverse impact on our results of operations. Other health information standards, such as regulations under HIPAA, establish standards regarding electronic health data transmissions and transaction code set rules for specified electronic transactions, for example, transactions involving claims submissions to third-party payers. These also continue to evolve and are often unclear and difficult to apply. In addition, under the federal Health Information Technology for Economic and Clinical Health Act (HITECH Act), which was passed in 2009, some of our business that was previously only indirectly subject to federal HIPAA privacy and security rules became directly subject to such rules because we may serve as "business associates" to persons or entities that are subject to these rules. On January 17, 2013, the Office for Civil Rights of the Department of Health and Human Services released a final rule implementing the HITECH Act and making certain other changes to HIPAA privacy and security requirements. Compliance with the rule was required by September 23, 2013, and increased the requirements applicable to some of our business. Failure to maintain the confidentiality of sensitive personal information in accordance with the applicable regulatory requirements, or to abide by electronic health data transmission standards, could expose us to breach of contract claims, fines and penalties, costs for remediation and harm to our reputation.

Our industry is fragmented, and we experience intense competition from a variety of sources, many of which are better financed and better managed than we are.

We face, and will continue to face, competition in the Chronic Illness Monitoring market.  Many, if not most, of our competitors and potential competitors are much larger and consequently have greater access to capital.  Moreover, many of our competitors have far greater name recognition and experience in the Chronic Illness Monitoring 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 sales, technical and operations employees.

We depend heavily on our executive officers and certain sales, technical, and operations employees.  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 executives, sales, or technical personnel on acceptable terms.

We rely on third parties to manufacture our product line.

We do not own or operate manufacturing facilities for the manufacture of our Chronic Illness Monitoring products.  Consequently, we are dependent on these contract manufacturers for the production of our products and will depend on third-party manufacturing resources to manufacture products we may add to our product line in the future.  During fiscal years 2015 and 2014, we purchased substantially all of our products and supplies from one vendor. Although there are other vendors who manufacture similar products and supplies, our systems would need to be modified to accommodate those products and supplies. A change in suppliers could cause a delay in providing products and services to customers and a possible loss of sales.  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 products.

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 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.

Ineffective internal controls could impact our business and operating results.

Our internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud.  Even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements.  If we fail to maintain the adequacy of our internal controls, including any failure to implement required new or improved controls, or if we experience difficulties in their implementation, our business and operating results may be harmed and we could fail to meet our financial reporting obligations.

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.

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. 

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:

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.

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:

 

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 sublease office facilities of approximately 6,900 square feet located at 1365 West Business Park Drive, Suite 100, Orem, Utah, 84058.  This lease expires in July 2018 and the monthly rent is approximately $10,300 subject to annual adjustments.

Management believes the facilities described above are adequate to accommodate presently expected growth and needs of our operations.

Item 3.  Legal Proceedings

On May 28, 2015, Fouzi, Al-Fouzan, an investor in the Company, filed a lawsuit against the Company, James Dalton, our Executive Chairman, ADP Management, an entity controlled by David Derrick, our former Executive Chairman, and 4G Biometrics, a wholly owned subsidiary of the Company in the District Court of Utah-Central Division (Case No. 2:15-CV-00373-BCW).  The lawsuit alleges a breach of contract and seeks damages of $1,000,000 exclusive of interest and costs.  The Company has engaged legal counsel regarding the matter.  As the lawsuit is in its early stages, it is not possible to predict the outcome of the matter.  The Company intends to vigorously dispute the litigation and believes it has meritorious defenses to the claims.

Item 5.  Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our common stock has traded on the OTCQB under the symbol "ACAR."  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		High				Low
September 30, 2014
First Quarter		$	1.45			$	0.80
Second Quarter		$	1.00			$	0.60
Third Quarter		$	0.75			$	0.35
Fourth Quarter		$	0.61			$	0.22
Fiscal Year Ended		High				Low
September 30, 2015
First Quarter		$	0.44			$	0.12
Second Quarter		$	0.43			$	0.05
Third Quarter		$	0.35			$	0.20
Fourth Quarter		$	0.28			$	0.11
Fiscal Year Ended		High				Low
September 30, 2016
First Quarter		$	0.13			$	0.03

Holders

As of January 7, 2016, there were approximately 1,700 holders of record of our common stock and 79,486,837 shares of common stock outstanding. We have granted options and warrants for the purchase of 10,830,884 shares of common stock.  We have issued and outstanding 70,070 shares of Series E preferred stock, 45,000 shares of Series D preferred stock, and 5,361 shares of Series F preferred stock.  There are two holders of Series D preferred stock, 11 holders of Series E preferred stock and eight holders of Series F preferred stock.  These shares of preferred stock are convertible into a total of 16,768,158 shares of common stock subject to the terms and conditions of their respective Designation of Rights and Preferences.

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.   Our Series D preferred stock carries an 8% annual dividend rate.  Our Series E preferred stock carries a 3.322% monthly dividend rate.  Our Series F preferred stock carries an 8% annual dividend rate until April 30, 2015, 16% from May 1, 2015 until July 31, 2015, 20% from August 1, 2015 until October 31, 2015, and 25% thereafter.

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 the exercise of stock options and warrants.  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

Under management agreements in fiscal years 2012, 2013 and 2014, we granted our former Chief Executive Officers, former directors, and current officers equity compensation in the form of restricted stock and warrants for the purchase of common stock.  The following table summarizes certain information concerning equity plan awards outstanding as of September 30, 2015.

 

Equity Compensation Plan Information

Recent Sales of Unregistered Securities

The following discussion summarizes sales and issuances of our common stock and other equity securities during the fiscal year ended September 30, 2015 not previously reported by the Company, including securities issued in exchange for property, services or other securities, and new securities resulting from the modification of outstanding 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.  We did not repurchase any securities during the fiscal year ended September 30, 2015.

During the three months ended September 30, 2015, we issued the following securities without registration under the Securities Act:

·	500,000 shares on August 6, 2015, to ADP Management as severance, the value on the date of grant was $130,000;
·	250,000 shares on August 6, 2015, to ADP Management for guarantees made on behalf of the Company, the value on the date of grant was $65,000;
·	620,200 shares on September 23, 2015, to certain employees for bonuses, the value on the date of grant was $115,636;
·	750,000 shares on August 6, 2015, to certain employees for bonuses, the value on the date of grant was $210,000;
·	568,750 shares on September 23, 2015, to James Dalton and Bluestone Advisors for guarantees made on behalf of the Company, the value on the date of grant was $102,375;
·	976,068 shares on September 23, 2015, to James Dalton, for per employment agreement bonus, the value on the date of grant was $175,692;
·	870,969 shares on September 23, 2015, to certain employees of the Company for employee compensation for past services rendered in lieu of cash, the value on the date of grant was $215,873
·	59,644 shares on September 23, 2015, to the holders of our Series D preferred stock in lieu of cash dividends, the value on the date of grant was $12,434;
·	275,000 shares on September 23, 2015 to Alliance Advisors as part of a settlement agreement on accounts payable, the value on the date of grant was $68,750;
·	3,000,000 shares on September 23, 2015 to  Advance Technology Investors as part of a settlement agreement on notes payable and accounts payable that resulted in a new note payable, the value on the date of grant was $780,000 which is included in loss on extinguishment of debt;
·	4,000,000 shares on September 23, 2015 to James Dalton, the Executive Chairman of the Board of Directors for future services, according to an employment agreement entered into for further appointment as the Chief Executive Officer.  The value on the date of grant was $720,000.  The shares vest monthly over two years;

·	305,556 shares on September 23, 2015 to the James Dalton, Executive Chairman of the Board of Directors for a future bonus to be earned for additional end users (300 shares for each new end user).  The value on the date of grant was $55,000.  Additional shares may be issued to the Executive Chairman of the Board of Directors for additional end users acquired through December 2015;
·	2,000,000 shares on September 23, 2015 to Jeffrey Peterson, the Chief Financial Officer for future services according to a consulting agreement, the value on the date of grant was $360,000.  The shares vest monthly over two years;
·	1,000,000 shares on September 23, 2015 to Meyers Associates, independent consultants, for services provided to the Company, the value on the date of grant was $280,000;
·	250,000 shares on September 23, 2015 to R.C.C. Ventures, independent consultants, for services provided to the Company, the value on the date of grant was $50,000;
·	250,000 shares on September 23, 2015 to Purizer Corporation, an entity controlled by David Derrick, the former Executive Chairman of the Board of Directors for services provided, the value of the shares on the date of grant was $53,500.
·	250,000 shares on September 23, 2015 to Hallmark Investments, Inc. for future services to be provided as an independent consultant, the value at the date of grant was $45,000;
·	250,000 shares on September 1, 2015 to the holders of our convertible debenture as origination fees, the value on the date of grant was $50,000;
·	34,996 shares on September 1, 2015 to Meyers Associates, independent consultants, for services provided to the Company, the value on the date of grant was $4,889;
·	174,980 shares on September 18, 2015 to the holders of our convertible debenture as origination fees, the value on the date of grant was $24,497;
·	50,000 shares on September 18, 2015 to Meyers Associates, independent consultants, for services provided to the Company, the value on the date of grant was $4,899;
·	6,000,000 shares on September 23, 2015 to Bluestone Advisors, an entity controlled by Jeffrey Peterson, an executive officer of the Company for related-party notes payable origination fees, the value on the date of grant was $1,080,000.

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 is intended to help the reader better understand our Company, our operations and our present business environment.  This information is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements for the fiscal years ended September 30, 2015 and 2014 and the accompanying notes thereto contained in this report.

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 income (loss), net revenues, gross profit (loss) and levels of selling, general and administrative expenses.

Net Income (Loss)

 

Net income (loss) constitute gross profit (loss) net of selling, general and administrative expenses, research and development expenses, and other income (expenses).

Net Revenues

Fiscal Year 2015 Compared to Fiscal Year 2014

Net Revenues

Net revenues for fiscal year 2015 were $6,598,000 compared to $6,108,000 for fiscal year 2014, an increase of $490,000 or 8%.   The increase is primarily due to resupply shipments to end users who were newly enrolled during fiscal year 2015 and 2014 and increased sales to new customers offset, in part, by the deferral of monitoring revenue.

Cost of Revenues

Cost of revenues for fiscal year 2015 was $5,197,000, compared to $6,438,000 for fiscal year 2014, a decrease of $1,241,000.  The decrease in cost of revenues is due to the cost of an obsolescence reserve for inventory during fiscal year 2014 not being repeated to the same extent in fiscal year 2015.

Gross Profit (Loss)

Gross profit for fiscal year 2015 was $1,401,000, compared to a gross loss for fiscal year 2014 of $330,000, an increase of $1,731,000.  The increase in gross profit primarily resulted from the absence of a reserve for inventory obsolescence in 2015 that was needed in the prior fiscal year.  We expect gross profit to improve in fiscal year 2016 as we acquire more Chronic Illness Monitoring customers, retain existing customers and manage inventory.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for fiscal year 2015 were $10,358,000, compared to $9,800,000 for fiscal year 2014, an increase of $558,000, or 6%.  The increase in expenses was primarily due to increases in stock-based compensation of $2,177,000, offset, in part, by a decrease in legal and professional expenses of $588,000 and depreciation and amortization expense of $832,000.

Research and Development Expenses

Research and development expenses for fiscal year 2015 were $107,000, compared to $215,000 for fiscal year 2014, a decrease of $109,000.  We expect to continue investing in research and development as we develop new platforms for Chronic Illness Monitoring.

Loss on Extinguishment of Debt

During fiscal year 2015, we entered into settlement agreements on notes payable and accounts payable with related and unrelated parties that resulted in new notes.  In connection therewith, a loss on extinguishment of debt of $928,000 was recorded.  See Notes 8 and 9 to the consolidated financial statements.

Gain on Derivatives Liability

Gain on derivatives liability for fiscal year 2015 was $129,000, compared to a gain on derivatives liability of $373,000 for fiscal year 2014.  The derivatives liability recorded as of September 30, 2015 relates to a variable conversion feature at a 15% discount from the fair value of the Company's common stock on the maturity date.  The derivatives liability recorded as of September 30, 2014 relates to a variable conversion feature for the Series F preferred stock related to a potential milestone adjustment.  The derivatives liability as of September 30, 2014 was eliminated due to the milestone adjustment occurring during the quarter ended December 31, 2014.  This adjustment eliminated the variable conversion feature of Series F preferred stock.

Loss on Induced Conversion of Debt and Sale of Common Stock

In order to induce the conversion of certain debt to common stock, during 2014, we offered a conversion rate to all debt holders of $0.75 of debt per share of common stock, which was below the market price of the stock.  During the fiscal year ended September 30, 2014, debt and accrued interest of approximately $541,000, were converted to shares of common stock.  During fiscal year 2014, debt and accrued interest due to related parties of approximately $1,786,000 were converted to shares of common stock at $0.60 per share of common stock, which was below the market price of the stock.  The difference between the offered price and the market price of all common stock was issued is recorded as a loss on induced conversion of debt of approximately $114,000.  We believe this improved our balance sheet and positioned us to invest more resources in growing the Chronic Illness Monitoring business.

 

Gain on Liability Settlements

During fiscal year 2015, we entered into agreements which settled payables due to third parties, which resulted in gains totaling $261,000.

Interest Expense

Interest expense for fiscal year 2015 was $977,000, compared to $1,936,000 for fiscal year 2014.  The decrease is mainly due to stock based loan origination fees of $813,000 related to short-term debts, debt conversions, and late payment fees during fiscal year 2014.  During fiscal year 2015, other loan origination fees related to short- term debts, debt conversion, and late payment fees totaled $120,000.

Impairment of Goodwill

Subsequent to fiscal year 2015, our market capitalization experienced a significant decrease for an extended period of time.  As a result, the Company impaired its goodwill by $825,894 as of September 30, 2015.

Discontinued Operations

During December 2014, we sold substantially all of our customer contracts and equipment leased to customers associated with our CareServices segment.  Additional equipment held in stock was sold to the buyer pursuant to a written invoice.  The purchase price included a cash receipt of $412,280 for the customer contracts and $66,458 for the leased equipment.  During fiscal years 2015 and 2014, we recognized a loss from discontinued operations of $186,000 and $1,453,000, respectively.

Net Loss

Net loss for fiscal year 2015 was $11,528,000, compared to $13,462,000 for fiscal year 2014 for the reasons described above.

Dividends on Preferred Stock

Dividends on preferred stock for fiscal year 2015 were $995,000, compared to $737,000 for fiscal year 2014.  The increase is due an increase in the dividend rate from 8% to 20% for dividends on Series F preferred stock, which was issued during fiscal year 2014.

Liquidity and Capital Resources

Our primary sources of liquidity are the proceeds from the sale of our equity securities and debt.  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 equity securities and debt until we achieve positive cash flows from operating activities.

Our cash balance as of September 30, 2015 was $172,000.  At that time, we had a working capital deficit of $5,424,000, compared to a working capital deficit of $6,011,000 as of September 30, 2014.  The reduction in working capital deficit is primarily due to conversions of related-party accounts payable and modifications of current related party notes into long-term related party notes payable and the reductions in accrued expenses, offset, in part, by reductions in accounts receivable due to customer collections, the sale of substantially all of our customer contracts and equipment leased to customers associated with CareServices.

Investing activities in fiscal year 2015 provided cash of $464,000, compared to $99,000 in fiscal year 2014.  The increase in cash provided by investing activities is primarily due to the sale of substantially all of our customer contracts and equipment leased to customers associated with CareServices in December 2014.

Financing activities in fiscal year 2015 provided cash of $290,000, compared to $4,485,000 in fiscal year 2014. The decrease in cash provided from financing activities is primarily due to the net increase in proceeds from the sale of preferred stock and issuance of debt during fiscal year 2014 over 2015, offset, in part by, a net decrease in principal payments on debt during fiscal year 2015 compared to fiscal year 2014.

We had an accumulated deficit as of September 30, 2015 of $91,840,000, compared to $78,327,000 as of September 30, 2014.  Our total stockholders' deficit as of September 30, 2015 was $8,608,000 compared to $5,144,000 as of September 30, 2014.  These changes were primarily due to our net loss for fiscal year 2015.

Going Concern

We incurred negative cash flows from operating activities and recurring net losses in fiscal years 2015 and 2014.  We had negative working capital and negative total equity, and had certain debt that was in default as of September 30, 2015 and 2014.  These factors, among others, raise substantial doubt about our ability to continue as a going concern. The financial statements included in this Form 10-K do not include any adjustments that might result from the outcome of this uncertainty.

In order for us to eliminate substantial doubt about its ability to continue as a going concern, it must achieve profitability, generate positive cash flows from operating activities and obtain the necessary debt or equity funding to meet its projected capital investment requirements.  Management's plans with respect to this uncertainty consist of raising additional capital by issuing debt or equity securities and increasing the sales of our products and services.  There can be no assurance that we will be able to raise sufficient additional capital or that revenues will increase rapidly enough to offset operating losses.  If we are unable to increase revenues or obtain additional financing, we will be unable to continue the development of our products and services and may have to cease operations.

Off Balance Sheet Arrangements

We are not a party to any off balance sheet arrangements.

Impact of Inflation

Recent Accounting Pronouncements

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:

Fair Value of Financial Instruments

We measured the fair values of our assets and liabilities using the US GAAP hierarchy.  The carrying amounts reported in the consolidated balance sheets for cash, accounts receivable, accounts payable, and accrued liabilities approximate fair values due to the short-term nature and liquidity of these financial instruments. Derivative financial instruments are recorded at fair value based on current market pricing models. The carrying amounts reported for notes payable approximate fair value because the underlying instruments are at interest rates which approximate current market rates.

Accounts Receivable

Accounts receivable are carried at original invoice amount less an estimate made for doubtful accounts.  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.  Accounts receivable are written off when management determines the likelihood of collection is remote.  A receivable is considered to be past due if any portion of the receivable balance has not been received by the contractual payment date.

Inventory

Inventory consists of diabetic supplies and is recorded at the lower of cost or market, cost being determined using the first-in, first-out ("FIFO") method.  Inventory held by distributors is reported as inventory until the supplies are shipped to the end user by the distributor.  We estimate an inventory reserve for obsolescence and excessive quantities.  Due to competitive pressures and technological innovation, it is possible that estimates of net realizable values could change in the near term.

 

Goodwill

Goodwill is reviewed for impairment annually or more frequently when an event occurs or circumstances change that indicate that the carrying value may not be recoverable.  Our annual testing date is September 30.  The estimates of fair value are based on the best information available as of the date of the assessment, which primarily incorporates management assumptions about expected future cash flows and the Company's overall market capitalization.  Future cash flows can be affected by changes in industry or market conditions.  Goodwill was impaired by $825,894 as of September 30, 2015.  The impairment of goodwill was due to a potentially long-term reduction in the market capitalization of the Company subsequent to September 30, 2015.  Goodwill was not impaired as of September 30, 2014.

 

Impairment of Long-Lived Assets

Purchased intangible assets with finite lives are amortized using the straight-line method over the estimated economic lives of the assets, which range from two to twenty years.  Long-lived assets, including intangible assets with finite lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts of such assets may not be recoverable.  Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition.  No long-lived assets were impaired as of September 30, 2015.  We impaired our CareServices customer contracts by $89,460 and patents by $408,332 as of September 30, 2014, which were recorded as part of discontinued operations related to the CareServices segment for the fiscal year ended September 30, 2014.  The impairment of the customer contracts is due to the sales price being lower than their net book value as of the date of sale.  The patents impaired were solely related to the CareServices segment that provide no future cash flows after the CareServices customer contracts and equipment leased to customers were sold in December 2014.  Our other long-lived assets were not impaired as of September 30, 2014.

Extinguishment of Debt

We compare the cash flow of a modified note payable on the date of modification to the original terms of the note payable.  The original note is derecognized and a gain or loss on the extinguishment is recognized if the present value of the cash outflow of the original note payable is 10% or more different than the modified note payable.

Revenue Recognition

For the years presented, revenues came from two sources: (1) sales of Chronic Illness Monitoring products and services; and (2) sales from CareServices.  The CareServices segment was sold in December 2014.  Information regarding revenue recognition policies relating to the Chronic Illness Monitoring and CareServices business segments is contained in the following paragraphs.

Chronic Illness Monitoring revenues are recognized when persuasive evidence of an arrangement exists, delivery of the product or service to the end user has occurred, prices are fixed or determinable and collection is reasonably assured.

We enter into agreements with insurance companies, disease management companies, third-party administrators, and self-insured companies (collectively, the customers) to lower medical expenses by distributing diabetic testing products and supplies to employees (end users) covered by their health plans or the health plans they manage.  Cash is due from the customer or the end user's health plan as the products and supplies are deployed to the end user.  We also monitor the end user's test results in real-time with our 24x7 CareCenter.  Customers who are billed separately for monitoring are obligated to pay as the service is performed and revenue is recognized ratably over the period of the contract.  The term of these contracts is generally one year and, unless terminated by either party, will automatically renew for another year.  Collection terms are net 30 days after claims are submitted.  There is no contingent revenue in these contracts.

We also enter into agreements with distributors who take title to products and distribute those products to the end user.  Delivery is considered to occur when the supplies are delivered by the distributor to the end user.  Cash is due from the distributor, the customer or the end user's health plan as initial products are deployed to the end user.  Subsequent sales (resupplies) are shipped directly from us to the end user and cash is due from the customer or the end user's health plan.

Shipping and handling fees are typically not charged to end users.  The related freight costs and supplies directly associated with shipping products to end users are included as a component of cost of revenues.  Sales of Chronic Illness Monitoring products and services contain multiple elements.

We evaluate each element in a multiple-element arrangement to determine whether it represents a separate unit of accounting. In order to account for elements in a multiple-element arrangement as separate units of accounting, the deliverables must have stand-alone value upon delivery.  In determining whether monitoring services have stand-alone value, the nature of our monitoring services, whether we sell supplies to new customers without monitoring services, and availability of monitoring services from the other vendors are factors that are considered.

When multiple elements included in an arrangement are separable into different units of accounting, the arrangement consideration is allocated to the identified separate units of accounting based on the relative selling prices. Multiple-element arrangements accounting guidance provides a hierarchy to use when determining the relative selling price for each unit of accounting. Vendor-specific objective evidence (VSOE) of selling price, based on the price at which the item is regularly sold by the vendor on a stand-alone basis, should be used if it exists. If VSOE of selling price is not available, third-party evidence (TPE) of selling price is used to establish the selling price if it exists. If VSOE of selling price and TPE of selling price are not available, then the best estimate of selling price is to be used. Total consideration under our multiple-element contracts is allocated to supplies and monitoring through application of the relative fair value method.

During the three months ended June 30, 2014, we began to provide enhanced monitoring services to a key customer, which pays a separate monthly monitoring fee.  Beginning in the three months ended June 30, 2015, our sales initiatives under the direction of new executive management became focused on the monitoring of end users.  This monitoring is accounted for as an element with stand-alone value.

CareServices included contracts in which we leased monitoring devices and provided monitoring services to end users.  We typically entered into contracts on a month-to-month basis with end users that used CareServices.  These contracts could be cancelled by either party at any time with 30-days' notice.  Under a standard contract, the device and service became billable on the date the end user ordered the device, and remained billable until the device was returned to the Company.  Revenues were recognized at the end of each month the service had been provided.  In those circumstances in which payment was received in advance, we recorded deferred revenue.

CareServices revenue was recognized when persuasive evidence of an arrangement existed, delivery of the device or service had occurred, prices were fixed or determinable, and collection was reasonably assured.  Shipping and handling fees were included as part of net revenues.  The related freight costs and supplies directly associated with shipping products to end users were included as a component of cost of revenues.  All CareServices sales were made with net 30-day payment terms.

Stock-Based Compensation

We measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award.  That cost is recognized in the statement of operations over the period during which the employee is required to provide service in exchange for the award – the requisite service period.  The grant-date fair values of the equity instruments are estimated using option-pricing models adjusted for the unique characteristics of those instruments.

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Certain written and oral statements made by us in this report are "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).  Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievements, and may contain words such as "believe," "anticipate," "expect," "estimate," "project," or words or phrases of similar meaning.  In our reports and filings we may make forward-looking statements regarding our expectations about future sales growth, future training and consulting sales activity, renewal of existing contracts, anticipated expenses, the adequacy of existing capital resources, projected cost reduction and strategic initiatives, expected levels of depreciation and amortization expense, expectations regarding tangible and intangible asset valuation expenses, future compliance with the terms and conditions of our debt obligations, the expected repayment of our liabilities in future periods, expectations regarding income tax expenses as well as tax assets and credits and the amount of cash expected to be paid for income taxes, estimated capital expenditures, and cash flow estimates used to determine the fair value of long-lived assets.  These, and other forward-looking statements, are subject to certain risks and uncertainties that may cause actual results to differ materially from the forward-looking statements.  These risks and uncertainties are disclosed from time to time in reports filed by us with the SEC, including reports on Forms 8-K, 10-Q, and 10-K.  Such risks and uncertainties include, but are not limited to, the matters discussed in Item 1A of this annual report on Form 10-K for the fiscal year ended September 30, 2015, entitled "Risk Factors."  

 

The risks included in this report are not exhaustive.  Other sections of this report may include additional factors that could adversely affect our business and financial performance.  Moreover, we operate in a very competitive and rapidly changing environment.  New risk factors may emerge and it is not possible for our management to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any single factor, or combination of factors, may cause actual results to differ materially from those contained in forward-looking statements.  Given these risks and uncertainties, investors should not rely on forward-looking statements as a prediction of actual results.

The market price of our common stock has been and may remain volatile.  In addition, the stock markets in general have experienced increased volatility.  Factors such as quarter-to-quarter variations in revenues and earnings or losses and our failure to meet expectations could have a significant impact on the market price of our common stock.  In addition, the price of our common stock can change for reasons unrelated to our performance.  Due to our low market capitalization, the price of our common stock may also be affected by conditions such as a lack of analyst coverage and fewer potential investors.

Forward-looking statements are based on management's expectations as of the date made, and we do not undertake any responsibility to update any of these statements in the future except as required by law.  Actual future performance and results will differ and may differ materially from those contained in or suggested by forward-looking statements as a result of the factors set forth in this Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in our filings with the SEC.

Item 8.  Financial Statements and Supplementary Data

The consolidated financial statements are included beginning on page F-1 of this report.

Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

During the years ended September 30, 2015 and 2014, there were no: (i) disagreements with our independent registered public accounting firm on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to such firm's satisfaction, would have caused the independent registered public accounting firm to make reference to the subject matter thereof in connection with their reports for such years; or (ii) reportable events, as described under Item 304(a)(1)(v) of Regulation S-K, except for the material weaknesses noted in Item 9A.

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 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, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2015, our disclosure controls and procedures were not effective.  During the audit process, material weaknesses were identified as discussed below in the Report of Management on Internal Control over Financial Reporting.

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. Our management, audit committee, and directors will continue to work to ensure that our controls and procedures become adequate and effective.

 

The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to completely eliminate misconduct. Accordingly, any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurances. In addition, 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. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting.

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, 2015.

James J. Dalton – Chief Executive Officer and Chairman

Mr. Dalton was appointed as our Chief Executive Officer in April 2015.  Mr. Dalton also served as a consultant from January to March 2015.  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 Track Group from August 2003 until June 2008.  Prior to joining Track Group, 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 Company, 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.

On October 24, 2014, Mr. Dalton settled allegations with the Securities and Exchange Commission. The SEC (File No. 3-16214) alleged that during the period Mr. Dalton was an officer and director of Track Group (then known as SecureAlert, Inc.), Mr. Dalton and David G. Derrick, also an officer and director of Track Group, failed to disclose personal guarantees related to the sale of equipment by Track Group, and that the non-disclosures resulted in material misstatements of $2 million in overstated revenue in Track Group's financial statements for fiscal years 2007 and 2008 in that company's Forms 10-KSB, 10-KSB/A, 10-QSB, and 10-QSB/A filed from September 2007 through January 2010. As part of the settlement, Mr. Dalton agreed, without admitting or denying the SECs allegations, to an injunction from future violations of Sections 17(a)(2) and (3) of the Securities Act and Sections , 13(b)(2)(A) and (B), and 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder; and to pay a civil penalty in the amount of $65,000.

Jeffrey S. Peterson – Director, Chief Financial Officer, and Secretary-Treasurer

Mr. Peterson was appointed as our Chief Financial Officer during September 2015.  He joined our Board of Directors in April 2014.  He has been involved in numerous early stage ventures in the public and private sectors, with an emphasis in healthcare and technology while assisting such companies in advisory and investment initiatives.  Mr. Peterson served in various capacities within ActiveCare from July 2011 until July 2012.  From January 2010 until July 2012, he was the Director of Investor Relations for Track Group.  Prior to Track Group, Mr. Peterson was a co-owner of a stock brokerage firm in Utah, where his roles included broker, market maker, communications officer, while holding numerous FINRA security licenses.  He graduated from the University of Utah with a Bachelor of Arts Degree in Finance and Business Administration and is a founding member of the University Venture Fund.  Mr. Peterson also currently holds board observatory seats with Juneau Biosciences and CoNextions Medical.

Robert J. Welgos – Director

Mr. Welgos joined our Board of Directors in June 2009.  He has a Bachelor of Science 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 the 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 management 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.

Darrell Meador – President of Sales

Mr. Meador joined us as President of Sales in March 2012 and has spent the last 15 years involved in healthcare technology and new business initiatives.  He was one of the founders of 4G Biometrics, the predecessor of ActiveCare Biometrics and was previously the Vice-President of Marketing and Sales for a leader in the healthcare monitoring industry and started and built their telehealth business segment.  Mr. Meador served as the President for an innovative managed care organization focused on diabetes for five years and was the founder and President of a start-up consulting firm specializing in technology, management and education for healthcare and related companies for two years. He was also the co-founder and President of a provider of distance learning and communication services to the healthcare industry for seven years.  Mr. Meador received his Bachelor or Arts Degree from the University of North Texas in 1986 and was an Academic All-American at Panola Junior College while on a baseball scholarship.  Mr. Meador is currently involved in a complaint against the former owners of 4G Biometrics, as disclosed in Item 13.

Director Compensation

The table below summarizes the compensation we paid to our non-employee directors for their services as directors for the fiscal year ended September 30, 2015.

(1)	Mr. Derrick is a former Executive Chairman of the Board of Directors.  He resigned from the Board of Directors in April 2015.  Mr. Derrick received 1,379,258 shares with fair value of $370,000 as compensation for his service as a director during fiscal year 2015.  On October 9, 2015, Mr. Derrick settled allegations with the Securities and Exchange Commission. The SEC (File No. 3-16213) alleged that during the period Mr. Derrick was an officer and director of Track Group (then known as SecureAlert, Inc.), Mr. Derrick and Mr. Dalton, as executive officers and directors failed to disclose personal guarantees related to the sale of equipment by Track Group, and that the non-disclosures resulted in material misstatements of $2 million in overstated revenue in Track Group's financial statements for fiscal years 2007 and 2008 in that company's Forms 10-KSB, 10-KSB/A, 10-QSB, and 10-QSB/A filed from September 2007 through January 2010. As part of the settlement, Mr. Derrick agreed, without admitting or denying the SEC's allegations, to an injunction to cease and desist from committing or causing violations, and any future violations, of Section 17(a) of the Securities Act and Sections 10(b), 13(a), 13(b)(2)(A) and (B),and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-13, 13a-14, 13b2-1, and 13b2-2 thereunder; to be barred from acting as an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act or that is required to file reports pursuant to Section 15(d) of the Exchange Act; and to pay a civil penalty in the amount of $232,500.
(2)	Mr. Welgos earned $30,000 of compensation for serving on the Board of Directors during fiscal year 2015.

 

Item 11.  Executive Compensation

Section 162(m) Compliance

Section 162(m) of the Internal Revenue Code ("Code"), limits us to a deduction for federal income tax purposes of no more than $1,000,000 of compensation paid to certain executive officers in a taxable year. Compensation in excess of $1,000,000 may be deducted if it is "performance-based compensation" within the meaning of the Code.

Compensatory Arrangement with Executive Chairman

During April 2015, James J. Dalton was appointed Executive Chairman of the Board of Directors and Chief Executive Officer.  On September 23, 2015, we entered into a written Employment Agreement containing compensation and other terms related to Mr. Dalton's appointment effective July 1, 2015.  The term of the Employment Agreement was one year.

The compensation payable to Mr. Dalton under the Employment Agreement included a base salary of $40,000 per month, 15% fee for any loans that Mr. Dalton personally guarantees for the Company, plus member bonus upon the achievement of certain milestones up through and inclusive of December 31, 2015.  We also granted Mr. Dalton 4,976,068 shares of common stock as a signing bonus, of which 976,068 shares were vested immediately, and 4,000,000 shares to be vested monthly over a one-year period starting July 2015.  During fiscal year 2015, we granted 5,555,643 shares of common stock with a fair value of $1,000,016 to Mr. Dalton according to the Employment Agreement as a signing bonus, loan guarantee fees, and a bonus for achievement of certain milestones.  Prior to the Employment Agreement, we also entered into a written Consulting Agreement with Mr. Dalton.  The compensation payable to Mr. Dalton under the Consulting Agreement included a base salary of $25,000 per month starting January 2015, 2,000,000 shares of common stock, plus a member bonus upon the achievement of certain milestones.  During fiscal year 2015, we vested 2,000,000 shares of the common stock, however, we did not grant any shares for the member bonus due to the limitation of the milestones related to the Consulting Agreement.  During fiscal year 2015, $2,057,516 was recognized as compensation expense, and $540,000 as deferred compensation, which will be amortized monthly through June 2016.  During fiscal year 2015, we also granted Mr. Dalton 305,556 shares of common stock with a fair value of $55,000 for future services.

Summary Compensation Table

The following table summarizes information concerning the compensation awarded to, earned by, or paid to, our Chief Executive Officer (Principal Executive Officer) and our two most highly compensated executive officers other than the Principal Executive Officer during fiscal years 2015 and 2014 (collectively, the "Named Executive Officers") who were serving in such capacities as of September 30, 2015, as well as Michael Jones, who served as our Chief Executive Officer from April 2014 until March 1, 2015.

Name and principal position	Year ended September 30		Salary				Bonus				Stock awards				Option awards				Nonequity incentive plan compensation				Nonqualified deferred compensation earnings				All other compensation				Total
			($)				($)				($)				($)				($)				($)				($)				($)
(a)	(b)		(c)				(d)				(e)				(f)				(g)				(h)				(i)				(j)
Michael Jones,	2015		$	67,500				-			$	250,670			$	-				-				-			$	7,947			$	326,117
PEO	2014		$	158,918				-			$	42,016			$	-				-				-			$	25,654			$	226,588
James J. Dalton	2015		$	120,000				-			$	1,104,828			$	20,472				-				-			$	982			$	1,246,282
Chief Executive Officer, Executive Chairman
Jeffrey Peterson	2015		$	60,000				-			$	330,065			$	-				-				-			$	3,035			$	393,100
Chief Financial Officer, Vice President of Finance	2014		$	114,450				-			$	424,190			$	5,165				-				-				-			$	543,805
Darrell Meador,	2015		$	135,000				50,000			$	164,848			$	-				-				-			$	19,769			$	369,617
President of Sales	2014		$	158,918				-			$	129,791			$	109,138				-				-			$	25,683			$	423,530

(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:

 

		Stock granted				Value  of granted stock				Amount deferred				Amount recognized				Amortization of past  deferrals				Total  stock awards
Michael Jones,			399,815			$	99,470			$	-			$	99,470			$	151,200			$	250,670
PEO
James J. Dalton			7,957,380			$	1,699,828			$	595,000			$	1,104,828			$	-			$	1,104,828
Chief Executive Officer, Executive Chairman
Jeffrey Peterson			2,738,297			$	561,084			$	270,000			$	291,084			$	38,981			$	330,065
Chief Financial Officer, Vice President of Finance
Darrell Meador,			506,123			$	129,158			$	-			$	129,158			$	35,690			$	164,848
President of Sales

 

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, 2015.  See footnotes following the table below:

Options Exercised and Vested

During the fiscal year ended September 30, 2015, warrants for the purchase of 100,000 shares of common stock were vested and no options for the purchase of shares of common stock were exercised.

Compliance with Section 16(a) of the Exchange Act

Section 16(a) of the Exchange Act requires our officers, directors, and persons who beneficially own more than 10 percent of our common stock to file reports of ownership and changes in ownership with the SEC.  Officers, directors, and greater-than-ten-percent shareholders are also required by the SEC to furnish us with copies of all Section 16(a) forms that they file.

Based solely upon a review of these forms that were furnished to us, we believe that all reports required to be filed by these individuals and persons under Section 16(a) were filed during fiscal year 2015 and that such filings were timely except the following which were filed late:

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 have entered into indemnification agreements with each of our current 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.

James Dalton, our Executive Chairman and Chief Executive Officer, is named in a lawsuit with an investor, as discussed in Item 13, and is subject to indemnification.  There is no other pending litigation or proceeding naming any of our directors or officers to which indemnification is being sought, and we are not aware of any other pending or threatened litigation that may result in claims for indemnification by any director or officer.

 

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the registrant pursuant to the foregoing provisions and agreements, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.

 

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.

The following tables set forth information as of January 7, 2016 (the "Table Date") by:

(1)	Includes 6,567,675 shares of common stock, and options to purchase 450,000 shares of common stock, owned by Advanced Technology Investors LLC ("ATI") and its related entity. By agreement, ATI may not vote or take delivery of common shares that would result in ATI becoming the beneficial owner of more than 9.99% of the issued and outstanding common stock of the Company at any given time.
(2)	Includes 5,237,148 shares of common stock, and options to purchase 150,000 shares of common stock owned by Mr. David G. Derrick, a former member of our Board of Directors, and entities that are controlled by him.  Of the total shares of common stock owned or controlled by Mr. Derrick, 5,951,272 shares are held by ADP Management Corporation, 250,000 shares by Purizer Corporation, and 35,876 shares by Mr. Derrick.
(3)	Includes 21,556,662 shares of common stock and 25,000 shares of Series D preferred stock, which are convertible to 125,000 shares of common stock, owned by Mr. Jeffrey S. Peterson, a director and our Chief Financial Officer, and entities that are controlled by him.  Of the total shares of common stock owned or controlled by Mr. Peterson, 12,680,388 shares are held by Tyumen Holdings, LLC, 2,862,966 shares by Wynnman's Hill, LLC, 5,319,708 shares by Bluestone Advisors, LLC, 378,148 shares by Keystone Partners, LLC, 295,139 shares by Rimrock Capital, LLC, 20,270 shares by Banyan Investment Company, LLC and 43 shares by Blackhawk Properties, LLC.
(4)	Includes 8,147,787 shares of common stock and options to purchase 511,200 shares of common stock, owned by Mr. James Dalton, Chairman of our Board of Directors and Chief Executive Officer.
(5)	Includes 857,797 shares of common stock, and options to purchase 173,333 shares of common stock, owned by Mr. Darrell Meador, our President of Sales.
(6)	Includes 269,403 shares of common stock and 13,843 shares of Series E preferred stock convertible to 13,843 shares of common stock, owned by Mr. Robert J. Welgos, a member of our Board of Directors.

 

 

Related-Party Transactions

Related-Party Notes Payable

As of September 30, 2015, we owed $3,840,746 of notes payable to one of our officers, two of our former board members, and two of our former officers, or entities controlled by each, with annual interest rates ranging from 12% to 18%.  Five entities controlled by Jeffrey S. Peterson, Vice President of Finance and Chief Financial Officer, (Banyan Investment Company, LLC, Keystone Partners, LLC, The Mark and Nancy Peterson Foundation, Rimrock Capital, LLC, and Bluestone Advisors, LLC) were owed notes payable totaling $3,049,698.  Michael Jones, former interim Chief Executive Officer, was owed a note payable of $13,644.  An entity under control of David Derrick, former Executive Chairman of the Board of Directors, ADP Management Corporation, was owed notes payable totaling $720,683.  Michael Acton, our former Chief Financial Officer, was owed a note payable of $30,000.  Bill Martin, a former director, was owed a note payable of $26,721.  During February 2015, we modified the exercise price of options and warrants previously issued to the Executive Chairman of the Board of Directors from $1.00 to $0.30 per share, according to an agreement entered into prior to his appointment as the Executive Chairman, and recognized additional expense of $20,472.

During fiscal year 2015, ADP Management Corporation, an entity controlled by Mr. Derrick, converted $291,667 of secured borrowings along with $25,000 of loan origination fee into an unsecured note payable, which is included in the $720,683.

Related Party Contracts

 

During fiscal year 2015, Purizer Corporation, an entity controlled by Mr. Derrick, introduced and helped us enter into an agreement with a customer.  In connection with the sales contract, we granted Purizer Corporation 250,000 shares of common stock with fair value of $53,500.  We also agreed to pay Purizer Corporation 8.5% of revenue from this customer as long as the sales contract remains in full force.

 

During September 2015, the Company entered into consulting agreements with ADP Management, an entity controlled by Mr. David Derrick.  The Company agreed to pay for Mr. Derrick's healthcare insurance premiums plus $6,000 per month for his consulting services.  The Company also agreed to pay as a bonus to ADP Management a fee equal to 15% of the funds raised less payments to third parties owed in regards to the funds raised.

During September 2015, the Company entered into a one-year consulting agreement with Bluestone Advisors, LLC, an entity controlled by Mr. Jeffrey S. Peterson, who assumed a new role as Chief Financial Officer of the Company.  The Company agreed to pay Bluestone Advisors, LLC $20,000 per month and 2,000,000 shares of Common Stock with a fair value of $360,000 as compensation to Mr. Peterson.

 

Corporate Governance and Director Independence

Board Composition

Board Committees

Our Board of Directors has adopted a written charter for our compensation committee, which is available on our corporate website at www.activecare.com.

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.activecare.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 eight times during fiscal year 2015.  All directors attended 100% of the meetings of the Board and the Board committees of which they are members.  The Board performed acts by unanimous written consent in lieu of a meeting four times during fiscal year 2015.

Audit Services Fees, Audit Related Fees, Tax Fees, and All Other 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.

 

During the years ended September 30, 2015 and 2014, Tanner LLC ("Tanner") performed audit and audit related services including the audit of the annual consolidated financial statements of the Company and its subsidiaries, reviews of the quarterly financial information and quarterly reports on Form 10-Q and current reports on Form 8-K.  Tanner did not perform any financial information systems design and implementation services for the Company.

 

Auditor Independence

Our audit committee considered that the work done for us in fiscal year 2015 by Tanner was compatible with maintaining that firm's independence.

Tanner has advised us that it has no direct or indirect financial interest in the Company or in any of its subsidiaries and that it has had, during the last four years, no connection with the Company or any of its subsidiaries, other than as independent auditors.

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 control. The director who serves on the Audit Committee is 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 and Tanner the audited financial statements for the year ended September 30, 2015.  The Audit Committee has discussed with Tanner the matters that are required to be discussed under PCAOB standards.  Tanner has provided to the Audit Committee the written disclosures and the letter required by applicable requirements of the PCAOB regarding the independent registered public accounting firm's communications with the Audit Committee concerning independence, and the committee has discussed with Tanner that firm's independence.  The Audit Committee has concluded that Tanner is independent from the Company and its management.

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, 2015, for filing with the Securities and Exchange Commission.

Respectfully submitted by the Audit Committee:

PART IV

Item 15.  Exhibits, Financial Statement Schedules

(a) The following documents are filed as part of this Form:

1.    Financial Statements—all consolidated financial statements of the Company as set forth under Item 8, of this Form 10-K.

2.

Financial Statement Schedules.    [N/A, because the required information is included in the Consolidated Financial Statements or Notes thereto, or is not applicable.]

3.

Exhibits. The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the Commission:

Exhibit Number		Description
(3)(i)(1)		Articles of Incorporation*
(3)(i)(2)		Articles of Amendment to Articles of Incorporation*
(3)(i)(3)		Articles of Amendment to Articles of Incorporation for Change of Name**
(3)(i)(4)		Certificate of Incorporation filed with Delaware July 15, 2009**
(3)(i)(5)		Designation of Rights and Preferences for Series A Convertible Preferred Stock***
(3)(i)(6)		Amended and Restated Certificate of Designation of Rights and Preferences for Series A Convertible Preferred Stock+
(3)(i)(7)		Certificate of Designation of Rights and Preferences of Series B Convertible Preferred Stock+
(3)(i)(8)		Certificate of Designation of Rights and Preferences of Series C Preferred Stock [?]
(3)(i)(9)		Certificate of Designation of Rights and Preferences of Series D Preferred Stock [?]
(3)(i)(10)		Certificate of Designation of Rights and Preferences of Series E Preferred Stock [?]
(3)(i)(11)		Certificate of Designations of Preferences, Rights and Limitations of Series F Variable Rate Convertible Preferred Stock++
(3)(i)(12)		Amendment to Certificate of Designations of Preferences, Rights and Limitations of Series F Variable Rate Convertible Preferred Stock+++
(3)(ii)(1)		Bylaws*
(3)(ii)(2)		Amended and Restated Bylaws**
(4)		Specimen of common stock certificate*
(4)(i)		Form of Stock Purchase Warrant *
(10)(i)		Secured debt addendum *
(10)(ii)		Employment agreement with chief executive officer
(10)(iii)		Consulting agreement for chief financial officer
(10)(iv)		Form of indemnification agreements
(10)(v)		Consulting agreement with ADP Management
(10)(vi)		Settlement agreement with Bluestone Advisors
(10)(vii)		Note payable agreement with ADP Management
(10)(viii)		Settlement agreement with Advance Technology Investors
(10)(ix)		Corporate office sublease agreement
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		Certification of principal executive officer and principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*		Previously filed
**		Previously filed as exhibit to 10-K for the year ended September 30, 2009
***		Previously filed as exhibit to 8-K, September 11, 2009
+		Previously filed as exhibit to 8-K, March 29, 2010
++		Previously filed as exhibit to 8-K, December 18, 2013
+++		Previously filed as part of Definitive Information Statement on Form 14C, May 21, 2014

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: January 13, 2016

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders of ActiveCare, Inc.

We have audited the accompanying consolidated balance sheets of ActiveCare, Inc. and subsidiaries (collectively, the Company) as of September 30, 2015 and 2014, and the related consolidated statements of operations, stockholders' deficit, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company'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. and subsidiaries as of September 30, 2015 and 2014, and the results of their operations and their cash flows for the years then ended 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 recurring losses, negative cash flows from operating activities, negative working capital, negative total equity, and certain debt that is in default.  These conditions, among others, raise substantial doubt about its ability to continue as a going concern.  Management's plans regarding these matters are also discussed in Note 1.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Tanner LLC

Salt Lake City, Utah

January 13, 2016.

 

ActiveCare, Inc.
Consolidated Balance Sheets (continued)
As of September 30, 2015 and 2014
		2015				2014
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable		$	4,493,211			$	4,549,451
Accounts payable, related party			162,797				1,109,775
Accrued expenses			743,967				1,451,331
Current portion of notes payable			1,259,916				1,212,937
Current portion of notes payable, related party			492,495				1,669,620
Dividends payable			567,350				246,738
Derivatives liability			79,347				106,444
Total current liabilities			7,799,083				10,346,296
Notes payable, related party, net of current portion			3,348,251				-
Notes payable, net of current portion			-				219,048
Total liabilities			11,147,334				10,565,344
Stockholders' deficit:
Preferred stock, $.00001 par value: 10,000,000 shares authorized; 45,000 shares of Series D; 70,070 shares of Series E; and 5,361 shares of Series F outstanding			1				1
Common stock, $.00001 par value: 200,000,000 shares authorized; 78,113,971 and 45,815,351 shares outstanding, respectively			781				458
Additional paid-in capital, common and preferred			83,231,002				73,183,429
Accumulated deficit			(91,840,158	)			(78,327,447	)
Total stockholders' deficit			(8,608,374	)			(5,143,559	)
Total liabilities and stockholders' deficit		$	2,538,960			$	5,421,785

ActiveCare, Inc.
Consolidated Statements of Operations
For the Years Ended September 30, 2015 and 2014
		2015				2014
Chronic illness monitoring revenues		$	6,597,981			$	6,107,941
Chronic illness monitoring cost of revenues			5,196,827				6,437,943
Gross profit (loss)			1,401,154				(330,002	)
Operating expenses:
Selling, general and administrative (including $5,762,755, and $3,585,379, respectively, of stock-based compensation)			10,358,410				9,800,374
Research and development			106,526				215,074
Total operating expenses			10,464,936				10,015,448
Loss from operations			(9,063,782	)			(10,345,450	)
Other income (expense):
Gain on liability settlements			260,830				-
Gain on derivatives liability			128,942				373,293
Gain on lease termination			91,692				-
Other income			14,129				55,368
Loss on induced conversion of debt			-				(114,098	)
Loss on disposal of property and equipment			(42,336	)			(42,094	)
Impairment of goodwill			(825,894	)			-
Loss on extinguishment of debt			(927,784	)			-
Interest expense, net			(977,234	)			(1,936,039	)
Total other expense			(2,277,655	)			(1,663,570	)
Loss from continuing operations			(11,341,437	)			(12,009,020	)
Loss from discontinued operations			(186,232	)			(1,452,567	)
Net loss			(11,527,669	)			(13,461,587	)
Dividends on preferred stock			(994,983	)			(737,138	)
Deemed dividends on conversion of accrued dividends to common stock			(301,097	)			-
Deemed dividends on conversion of preferred stock to common stock			-				(2,234,924	)
Net loss attributable to common stockholders		$	(12,823,749	)		$	(16,433,649	)
Net loss per common share - basic and diluted
Continuing operations		$	(0.25	)		$	(0.43	)
Discontinued operations			(0.00	)			(0.04	)
Net loss per common share		$	(0.25	)		$	(0.47	)
Weighted average common shares outstanding – basic and diluted			51,444,000				35,010,000