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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

(Mark One)

 

For the quarterly period ended: December 31, 2015

or

 

 

For the transition period from ____________ to _____________

 

Commission File Number: 0-53570

(Exact name of registrant as specified in its charter)

(Registrant's telephone number, including area code)

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 Web site, 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

 

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

 

As of February 24, 2016, the registrant had 78,445,171 shares of common stock outstanding.

ActiveCare, Inc.

Quarterly Report on Form 10-Q

Table of Contents

 

 

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

 

ActiveCare, Inc.

Condensed Consolidated Balance Sheets (Unaudited)

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ActiveCare, Inc.

Condensed Consolidated Balance Sheets (Unaudited) (continued)

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ActiveCare, Inc.

Condensed Consolidated Statements of Operations (Unaudited)

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ActiveCare, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

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ActiveCare, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited) (continued)

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ActiveCare, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

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1.	Basis of Presentation

The unaudited interim condensed consolidated financial statements of ActiveCare, Inc. (the "Company" or "ActiveCare") have been prepared in accordance with Article 8 of Regulation S-X promulgated by the Securities and Exchange Commission.  Certain information and disclosures normally included in financial statements prepared in accordance with US generally accepted accounting principles ("US GAAP") have been condensed or omitted pursuant to such rules and regulations.  In the opinion of management, the accompanying interim condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the Company's financial position as of December 31, 2015 and September 30, 2015, and the results of its operations and its cash flows for the three months ended December 31, 2015 and 2014.  These financial statements should be read in conjunction with the annual consolidated financial statements and notes thereto that are included in the Company's Annual Report on Form 10-K for the year ended September 30, 2015.  The results of operations for the three months ended December 31, 2015 may not be indicative of the results for the full fiscal year ending September 30, 2016.

Going Concern

The Company continues to incur negative cash flows from operating activities and net losses.  The Company had negative working capital and negative total equity as of December 31, 2015 and September 30, 2015 and is in default with respect to certain debt.  These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

In order for the Company to 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 the Company's services and products.  There can be no assurance that the Company will be able to raise sufficient additional capital or that revenues will increase rapidly enough to achieve operating profits.  If the Company is unable to increase revenues or obtain additional financing, it will be unable to continue the development of its products and services and may have to cease operations.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the balance sheet dates and the reported amounts of revenues and expenses for the reporting periods. Actual results could differ from these estimates.

Fair Value of Financial Instruments

The Company measures the fair values of its assets and liabilities using the US GAAP hierarchy.  The carrying amounts reported in the condensed 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 values because the underlying instruments are at interest rates which approximate current market rates.

2.	Discontinued Operations

In December 2014, the Company sold substantially all of its customer contracts and equipment leased to customers associated with its CareServices segment.  Additional equipment held in stock was sold to the buyer pursuant to a written invoice.  The purchase price included cash receipts of $412,280 for the customer contracts and $66,458 for the equipment held in stock.  The sale included all segment assets that generated revenue related to the CareServices segment.  The Company no longer holds any ownership interest in these assets and has ceased incurring costs related to the operations and development of the CareServices segment.  This segment was engaged in the business of developing, distributing and marketing mobile health monitoring and concierge services to distributors and consumers.  The debt secured by the CareServices customer contracts was amended in January 2015 and December 2015 and remains an obligation of the Company (see Note 11).  There were no material liabilities of discontinued operations.

As a result of the sale of the CareServices assets, the Company has reflected this segment as discontinued operations in the condensed consolidated financial statements for the three months ended December 31, 2014.  The following table summarizes certain operating data for discontinued operations for the three months ended December 31:

3.	Net Loss per Common Share

Basic net loss per common share ("Basic EPS") is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period.

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

Common share equivalents consist of shares issuable upon the exercise of common stock warrants and options, shares issuable from restricted stock grants, and shares issuable from convertible notes and convertible Series D, Series E and Series F preferred stock.  As of December 31, 2015 and 2014, there were 49,873,389 and 27,905,091 outstanding common share equivalents, respectively, that were not included in the computation of Diluted EPS as their effect would be anti-dilutive.  The common stock equivalents outstanding consist of the following as of December 31:

   

4.	Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09, Revenue from Contracts with Customers, which supersedes nearly all existing revenue recognition guidance under US GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing US GAAP. In August 2015, the FASB voted to defer the effective date of the new revenue standard by one year. The standard is effective for annual periods beginning after December 15, 2017, and interim periods therein, which will be effective for the Company for the quarter ending December 31, 2018. The Company is assessing the impact, if any, of implementing this guidance on its consolidated financial position, results of operations and liquidity.

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. This standard sets forth management's responsibility to evaluate, each reporting period, whether there is substantial doubt about the Company's ability to continue as a going concern, and if so, to provide related disclosures. The standard is effective for annual reporting periods ending after December 15, 2016 and interim periods within annual periods beginning after December 15, 2016, which will be effective for the Company for the quarter ending December 31, 2017. The Company is assessing the impact, if any, of implementing this guidance on its evaluation of going concern.

In November 2014, the FASB issued ASU 2014-16, Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity. The ASU clarifies how current guidance should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Specifically, the amendments clarify that an entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of a host contract. The ASU is effective for fiscal years and interim periods beginning after December 15, 2015, which will be effective for the Company for the quarter ending December 31, 2016. The Company is assessing the impact, if any, of implementing this guidance on its consolidated financial position, results of operations and liquidity.

In June 2015, the FASB issued ASU 2015-10, Technical Corrections and Improvements. The purpose of this ASU is to clarify guidance, correct unintended application of guidance, or make minor improvements to guidance. The ASU is effective for fiscal years and interim periods beginning after December 15, 2015, which will be effective for the Company for the quarter ending December 31, 2016. The Company is assessing the impact, if any, of implementing this guidance on its consolidated financial position, results of operations and liquidity.

In July 2015, the FASB issued ASU 2015-11, Inventory: Simplifying the Measurement of Inventory. The purpose of this ASU is to more closely align the measurement of inventory in U.S. GAAP with the measurement of inventory in International Financial Reporting Standards. This ASU requires entities to measure most inventory at the "lower of cost and net realizable value." Additionally, some of the amendments are designed to more clearly articulate the requirements for the measurement and disclosure of inventory. The ASU is effective for fiscal years and interim periods beginning after December 15, 2016, which will be effective for the Company for the quarter ending December 31, 2017. The Company is assessing the impact, if any, of implementing this guidance on its consolidated financial position, results of operations and liquidity.

5.	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.  Interest is not charged on accounts receivable that are past due.  The Company recorded an allowance for doubtful accounts of $67,749 and $30,495 as of December 31, 2015 and September 30, 2015, respectively.

6.

Inventory

Inventory is recorded at the lower of cost or market, cost being determined using the first-in, first-out ("FIFO") method. Inventory consists of diabetic supplies.  Inventory held by distributors is reported as inventory until the supplies are shipped to the end user by the distributor.  The Company estimates 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.  During the three months ended December 31, 2015, the Company disposed of $163,526 of inventory for which a reserve for obsolescence had previously been recorded.  Inventory consists of the following as of:

7.	Customer Contracts

The Company amortized Chronic Illness Monitoring customer contracts acquired during 2012 over their estimated useful lives through 2014.  As of December 31, 2015 and September 30, 2015, the cost associated with these customer contracts of $214,106 was fully amortized. Amortization expense related to these contracts for the three months ended December 31, 2015 and 2014 was $0.

The Company sold substantially all of the CareServices customer contracts during December 2014.  Amortization expense related to customer contracts in the CareServices segment for the three months ended December 31, 2015 and 2014 was $0 and $179,648, respectively. 

8.

Patents

Amortization expense for the three months ended December 31, 2015 and 2014 was $0 and $31,718, respectively.  As of December 31, 2015 and September 30, 2015, the cost associated with the patents of $514,046 was fully amortized.

9.	Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation and amortization.  Depreciation and amortization are determined using the straight-line method over the estimated useful lives of the assets, which range between 3 and 7 years.  Leasehold improvements are amortized over the shorter of the estimated useful lives of the assets or the terms of the lease.  Expenditures for maintenance and repairs are expensed as incurred.  Upon the sale or disposal of property and equipment, any gains or losses are included in operations.  Property and equipment consist of the following as of:

Assets to be disposed of are reported at the lower of their carrying amounts or fair values, less the estimated costs to sell or dispose.  During the three months ended December 31, 2015, the Company recorded a gain on the disposal of property and equipment of $600.  During December 2014, the Company sold all of its equipment leased to customers (see Note 2).  Depreciation expense for the three months ended December 31, 2015 and 2014 was $13,745 and $38,061, respectively.

10.	Accrued Expenses

Accrued expenses consisted of the following as of:

11.	Notes Payable

The Company had the following notes payable outstanding as of: 

The Company had the following related-party notes payable outstanding as of:

13.	Fair Value Measurements

The Company measures the fair values of its assets and liabilities using the US GAAP hierarchy levels as follows:

 

The Company's embedded derivative liabilities are re-measured to fair value as of each reporting date until the contingency is resolved.  See Note 14 for more information about derivatives and the inputs used for calculating fair value.

14.	Derivatives Liability

The derivatives liability as of December 31, 2015 and September 30, 2015 was $385,164 and $79,347, respectively.  The derivatives liability as of September 30, 2014 was related to a variable conversion price adjustment on the Series F preferred stock.  The derivatives liability as of December 31, 2014 was eliminated due to the conversion price on Series F preferred stock being adjusted from $1.00 to $0.3337 based on the number of subscribers as of December 31, 2014.  The derivatives liability as of December 31, 2015 and September 30, 2015 is related to a variable conversion price adjustment on outstanding notes payable.

During the three months ended December 31, 2015, the Company estimated the fair value of the embedded derivatives prior to their conversion and elimination using a binomial option-pricing model with the following assumptions, according to the instrument: exercise prices ranging from $0.03 to $0.09 per share; risk free interest rates ranging from 0.16% to 1.06%; expected lives ranging from 0.17 to 2.09 years; expected dividends of 0%; volatility factors ranging from 125.33% to 231.42%; and stock prices ranging from $0.03 to $0.09.  During the fiscal year ended September 30, 2015, the Company estimated the fair value of the embedded derivatives prior to their conversion and elimination using a binomial option-pricing model with the following assumptions, according to the instrument: exercise prices ranging from $0.12 to $0.33 per share; risk free interest rates ranging from 0.010% to 0.260%; expected lives ranging from 0.001 to 0.50 years; expected dividends of 0%; volatility factors ranging from 0.01% to 138.68%; and stock prices ranging from $0.12 to $0.33.  The expected lives of the instruments were equal to the average term of the conversion option.  The expected volatility is based on the historical price volatility of the Company's common stock.  The risk-free interest rate represents the US Treasury constant maturities rate for the expected life of the related conversion option. The dividend yield represents anticipated cash dividends to be paid over the expected life of the conversion option.  The Company recognized a gain on derivatives liability for the three months ended December 31, 2015 and 2014 of $46,311 and $106,444, respectively.

15.	Preferred Stock

The Company is authorized to issue 10,000,000 shares of preferred stock, with a par value of $0.00001 per share.  Pursuant to the Company's Certificate of Incorporation, the Board of Directors has the authority to amend the Company's Certificate of Incorporation, without further stockholder approval, to designate and determine the preferences, limitations and relative rights of the preferred stock before any issuance of the preferred stock and to create one or more series of preferred stock, fix the number of shares of each such series, and determine the preferences, limitations and relative rights of each series of preferred stock, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, and liquidation preferences.

The Board of Directors has designated 1,000,000 shares of preferred stock as Series D convertible preferred stock ("Series D preferred stock").  The Series D preferred stock is voting on an as-converted basis.  The Series D preferred stock has a dividend rate of 8%, payable quarterly.  The Company may redeem the Series D preferred shares at a redemption price equal to 120% of the original purchase price with 15 days' notice. During each of the three months ended December 31, 2015 and 2014, the Company accrued $6,251 of dividends on Series D preferred stock.  During the three months ended December 31, 2014, the Company settled $6,251 of accrued dividends by issuing 18,522 shares of common stock.

During fiscal year 2013, the Board of Directors designated shares of preferred stock as Series E convertible preferred stock ("Series E preferred stock").  Series E preferred stock is convertible into common stock at $1.00 per share, the conversion price is adjustable if there are distributions of common stock or stock splits by the Company.  The designation also provides that the Series E preferred stock is non-voting and receives a monthly dividend of 3.322% for 25 to 32 months.  In addition, the convertibility and the redemption price of the Series E preferred stock is gradually reduced by dividend payments over 25 to 32 months.  After the dividend payment term, the redemption price of Series E preferred stock is $0, the Series E preferred stock has no convertibility to common stock and the holders are entitled to receive a pro-rata share of cumulative royalties totaling 4% of the Company's gross profits payable quarterly for a two-year period.

During fiscal year 2014, $83,473 of debenture loans and accrued interest converted into 8,347 shares of Series E preferred stock.  During the three months ended December 31, 2015 and 2014, the Company accrued dividends of $84,572 and $81,716, respectively, to Series E preferred shareholders.  As of December 31, 2015 and September 30, 2015, the redemption price for the Series E preferred stock was $477,829.

During fiscal year 2014, the Board of Directors designated 7,803 shares of preferred stock as Series F convertible preferred stock ("Series F preferred stock").  In April 2014, the Company increased the authorized shares of Series F preferred stock to 10,000.  Series F preferred stock is non-voting, has a stated value of $1,000 and is convertible into common stock at $0.3337 per share (see Note 14).  The Series F preferred stock has a dividend rate, payable quarterly, of 8% until April 30, 2015, 16% from May 1, 2015 to July 31, 2015, 20% from August 1, 2015 to October 31, 2015 and 25% thereafter.  In February 2016, the Company converted all 5,361 outstanding shares into 10,000,000 shares of common stock and $5,900,000 of notes payable.  See Note 20.

During fiscal year 2014, the Company issued 5,361 shares of Series F preferred stock for net proceeds of $3,580,771, after considering $675,229 of related costs, and the conversion of $574,592 of debt and accrued interest.  During the three months ended December 31, 2015 and 2014, the Company accrued dividends of $312,725 and $107,220, respectively, to Series F preferred shareholders.

Upon any liquidation, dissolution or winding up of the Company, before any distribution or payment may be made to the holders of the common stock, the holders of the Series D preferred stock, Series E preferred stock, and Series F preferred stock are entitled to be paid out of the assets an amount equal to $1.00 per share plus all accrued but unpaid dividends.  If the assets of the Company are insufficient to make payment in full to all holders of preferred stock, then the assets shall be distributed among the holders of preferred stock ratably in proportion to the full amounts to which they would otherwise be entitled.

16.	Common Stock

In April 2014, the Company amended its Certificate of Incorporation increasing the total number of authorized shares of common stock from 50,000,000 shares to 200,000,000 shares.

During the three months ended December 31, 2015, the Company issued 1,372,866 shares of common stock as follows:

·

250,000 shares for future services to be provided by an independent consultant, the value at the date of grant was $22,500;

·

1,122,866 shares for notes payable origination and financing fees, the value on the date of grant was $101,058.

The fair value of unvested common stock as of December 31, 2015 was $1,918,011.

17.	Common Stock Options and Warrants

The fair value of each stock option or warrant is estimated on the date of grant using a binomial option-pricing model.  The expected life of stock options or warrants represents the period of time that the stock options or warrants are expected to be outstanding, based on the simplified method.  Expected volatilities are based on historical volatility of the Company's common stock, among other factors.  The Company uses the simplified method within the valuation model due to the Company's short trading history.  The risk-free rate related to the expected term of the stock options or warrants is based on the US Treasury yield curve in effect at the time of grant.  The dividend yield is zero.

During the three months ended December 31, 2015 and 2014, the Company did not grant any common stock options or warrants.

The following table summarizes information about stock options and warrants outstanding as of December 31, 2015:

 

As of December 31, 2015, the outstanding warrants have an aggregate intrinsic value of $0, the weighted average remaining term of the warrants was 2.66 years, and the fair value of unvested stock options and warrants was $124,784.

18.	Segment Information

The Company operated one business segment during the three months ended December 31, 2015 and two business segments during the three months ended December 31, 2014, based primarily on the nature of the Company's products. The Chronic Illness Monitoring segment is engaged in the business of developing, distributing and marketing mobile monitoring of patient vital signs and physical activity to insurance companies, disease management companies, third-party administrators, and self-insured companies.  The customer contracts and equipment leased to customers of the Company's CareServices segment were sold in December 2014 and that segment was discontinued.  The CareServices segment was engaged in the business of developing, distributing and marketing mobile health monitoring and concierge services to distributors and consumers.

At the corporate level, the Company raises capital and provides for the administrative operations of the Company as a whole.

The following table reflects certain financial information relating to each reportable segment as of December 31, 2015 and 2014 and for the three months then ended:

 

19.	Commitments and Contingencies

During the three months ended December 31, 2014, the Company leased office space under a non-cancelable operating lease, which was terminated during June 2015.  In February 2015, the Company entered into a sublease agreement for part of the office space under the non-cancelable operating lease through the end of the original lease period.  Payments under the sublease were made by the sublessee directly to the Company's landlord.

The Company's rent expense for facilities under the terminated operating lease for the three months ended December 31, 2014 was approximately $76,000.

During June 2015, the Company entered into a new non-cancelable operating lease for its existing office space, excluding the previously subleased space, and with payments beginning in July 2015.  Future minimum rental payments under the non-cancelable operating lease as of December 31, 2015 were as follows:

The Company's rent expense under the new non-cancelable operating lease for three months ended December 31, 2015 was approximately $31,000.

On May 28, 2015, an investor of the Company filed a lawsuit claiming damages of $1,000,000 exclusive of interest and costs against the Company, its Executive Chairman, an entity controlled by its former Executive Chairman, and 4G Biometrics, a wholly owned subsidiary of the Company for a breach of contract.  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.

On November 4, 2015, the Company received a demand for payment of $275,000 from a former employee of the Company and former principal of 4G Biometrics who was terminated for cause in regards to his employment agreement.  On December 4, 2015, the Company filed a complaint against the former owners of 4G Biometrics, including this former employee, seeking damages in excess of $300,000 related to alleged misrepresentations made to induce ActiveCare to acquire 4G Biometrics.  Between February 4, 2016 and February 8, 2016, the Company settled the complaint with each of the former owners of 4G Biometrics where all parties released each other from all outstanding claims, including any current monetary obligations to each party, excluding one former owner of 4G Biometrics who continues employment with the Company.  A Stipulation for Order of Dismissal with Prejudice of all Claims and Counterclaims has been filed and is in the process of being approved.  The settlement resulted in the termination of $39,863 of related party accounts payable.

20.	Subsequent Events

Subsequent to December 31, 2015, the Company entered into the following agreements and transactions:

 

(7)

In February 2016, the Company settled secured borrowings from third parties with outstanding principal balances totaling $233,333 for a total of 5,800,000 shares of common stock, or $0.04 per common share, which was below the fair value of the Company's stock on the date of conversion.  The stock will be issued subsequent to the filing of the Company's Quarterly Report on Form 10-Q for the three months ended December 31, 2015, which includes these financial statements.

(8)

In February 2016, the Company converted 5,361 shares of its Series F Convertible Preferred Stock plus accrued dividends of $603,113 into 10,000,000 shares of common stock with certain temporary restrictions, and $5,900,000 of notes payable, interest at 10%, due November 2018. The Company may, at its option, make payments either in cash, shares of common stock or a combination thereof.  The notes payable are convertible at $0.30 per common share and adjustable to a rate the same as any grants of warrants, conversion options, or sale of equity at a rate lower than the conversion price subsequent to the agreement date.  The conversion of these notes is limited to a maximum of 19,667,000 common shares.  The Company is also required to cancel warrants to purchase 5,022,000 shares of common stock and issue new warrants with an exercise price of $0.30 per common share.  The Company is also required to issue warrants for the purchase of up to 8,000,000 shares of common stock exercisable at $0.001 per share that vest upon certain events of default.  No shares of Series F Convertible Preferred Stock remained after the conversion

(9)

In February 2016, the Company modified a third party convertible note payable with a principal balance of $300,000 to subordinate to newly acquired notes payable.  The Company also amended the note to reduce the conversion price from $0.30 per share to $0.06 per share, which was below the fair value of the Company's stock on the date of the agreement.  The note holder shall only be able to convert the loan, or a portion thereof, upon maintaining holdings at 9.99% or below.

(10)

In February 2016, the Company modified related party convertible notes payable with principal balances totaling $3,024,235 to subordinate to newly acquired notes payable.  The Company also amended the notes to reduce the conversion price from $0.30 per share to $0.06 per share, which was below the fair value of the Company's stock on the date of the agreement.  In addition, the Company modified another note payable with the related party with a principal balance of $25,463 to subordinate to newly acquired notes payable.  The Company also amended the note to make it convertible into shares of common stock at $0.06 per share, which was below the fair value of the Company's stock on the date of the agreement.  The conversion of these notes is limited to a combined maximum of 20,000,000 common shares.  These notes were also amended in combination to have a default penalty of 4,477,780 shares of common stock if not paid by maturity.

(11)

In February 2016, the Company bifurcated a related party note payable with a principal balance of $396,667 and accrued interest of $56,924 into two new notes payable with principal balances of $210,510 and $243,082, respectively.  The bifurcated note with principal balance of $243,082 and $20,000 of the bifurcated note with principal balance of $210,510 was assigned to a third party and exchanged for a new convertible note payable which bears interest at 18%, is due in January 2017, and is payable at the Company's option in cash or shares of common stock at fair value. The note holder shall only be able to convert the loans, or a portion thereof, upon maintaining holdings at 4.99% or below

(12)

In February 2016, the Company converted related party notes payable with principal balances totaling $514,525 and accrued interest totaling $27,480 into a new convertible note payable which bears interest at 18%, is due in January 2017, and is convertible into shares of common stock at $0.06 per share, which was below the fair value of the Company's stock on the date of the agreement.  The conversion of the note is limited to a maximum of 9,250,000 common shares, subject to a beneficial ownership cap of 4.99% of the issued and outstanding common stock and has a default penalty of 734,489 shares of common stock if not paid by maturity.

(13)

In  February 2016, the Company paid $150,000 to a related-party in connection with an existing consulting agreement for a commission on fund raising activities..

(14)

In January 2016, the Company received 1,041,666 shares of common stock returned from a vendor, which were cancelled.  The stock will be reissued to the same vendor subsequent to the filing of the Company's Quarterly Report on Form 10-Q for the three months ended December 31, 2015, which includes these financial statements.

 

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

The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to assist in better understanding our operations and our present business environment.  This MD&A is provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements for the fiscal years ended September 30, 2015 and 2014, and the accompanying notes thereto, contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2015 and our unaudited condensed consolidated financial statements for the three months ended December 31, 2015 and 2014, and the accompanying notes thereto, contained in this Quarterly Report on Form 10-Q. Unless otherwise indicated, the terms "ActiveCare," the "Company," "we," and "our" refer to ActiveCare, Inc., a Delaware corporation and its subsidiaries.

Overview

ActiveCare, Inc. is a Delaware corporation, formed March 5, 1998. Our fiscal year ends on September 30.

In fiscal year 2012, we launched a product line focused on technology for assisting the chronically ill.  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.  Our 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.

With US 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.  We believe the ability to monitor chronic illness in the 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 and provide peace of mind with the knowledge that 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.

Going Concern

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 December 31, 2015 and September 30, 2015 and are in default with respect to certain debt.  We determined that our goodwill of $825,894 was impaired during the fourth fiscal 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-Q 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.

Our Product and Service Strategy

During the three months ended December 31, 2015, our product and service strategy consisted solely of chronic illness monitoring.  During the three months ended December 31, 2014, our product/service strategy fell into two distinctly different categories; chronic illness monitoring and 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.  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.

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.  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.

CareServices

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.

Research and Development Program

During the three months ended December 31, 2015, we spent approximately $23,000, compared to $45,000 during the same period in 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.

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 measure 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, due, in part, to a potentially long-term reduction in the market capitalization of the Company subsequent to September 30, 2015.

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 considered to be impaired during the three months ended December 31, 2015.

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 2014 period 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 and, therefore, the 2015 period only reflects revenues from Chronic Illness Monitoring.  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.

Results of Operations

Three Months Ended December 31, 2015 and 2014

Revenues

Revenues for the three months ended December 31, 2015 were $2,088,000 compared to $1,508,000 for the same period in 2014, an increase of $580,000, or 38%.  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.

Cost of Revenues

Cost of revenues for the three months ended December 31, 2015 was $1,593,000, compared to $1,117,000 for the same period in 2014, an increase of $476,000, or 43%.  The increase in cost of revenues is primarily due to an increase in revenue and the cost of warranty liabilities, offset, in part, by a reduction in the reserve for obsolescence during the three months ended December 31, 2015.

Gross Profit

Gross profit for the three months ended December 31, 2015 was $494,000, compared to $391,000 for the same period in 2014, an increase of $103,000 for the reasons described above.  We expect gross profit to improve throughout the remainder of fiscal year 2016 as we acquire more Chronic Illness Monitoring members and retain existing members.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended December 31, 2015 were $2,347,000, compared to $2,351,000 for the same period in 2014, a decrease of $4,000.  Included in selling, general and administrative expense is $1,179,922 and $1,169,977 of stock-based compensation incurred during the three months ended December 31, 2015 and 2014, respectively.  The decrease in expenses incurred is primarily due to decreases in rent expense and accounting expense, offset, in part, by increases in bad debt expense, travel expense and advertising expense.

Research and Development Expenses

Research and development expenses for the three months ended December 31, 2015 were $23,000, compared to $45,000 for the same period in 2014, a decrease of $22,000.  We expect to continue investing in research and development as we develop new platforms for Chronic Illness Monitoring and as funds become available.

Gain on Derivatives Liability

Gain on derivatives liability for the three months ended December 31, 2015 was $46,000, compared to $106,000 for the same period in 2014.  The derivatives liability recorded as of December 31, 2015 relates to variable conversion features of notes payable, some of which are at a 15% discount from the fair value of the Company's common stock on the maturity date and others at the fair value of the Company's common stock.  The gain on derivatives liability recorded during the three months ended December 31, 2014 relates to a variable conversion feature for the Series F preferred stock related to a milestone adjustment that occurred during the quarter then ended.  This adjustment eliminated the variable conversion feature of Series F preferred stock.

Interest Expense

Interest expense for the three months ended December 31, 2015 was $491,000, compared to $351,000 for the same period in 2014, an increase of $141,000.  The increase is primary due to additional notes payable issued and modifications made to existing notes payable during the fiscal year ended September 31, 2015 and three months ended December 31, 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 cash receipts of $412,280 for the customer contracts and $66,458 for the leased equipment.  During the three months ended December 31, 2014, we recognized a loss from discontinued operations of $273,000.

Net Loss

Net loss for the three months ended December 31, 2015 was $2,320,000, compared to $2,523,000 for the same period in 2014 for the reasons described above.

Dividends on Preferred Stock

Dividends on preferred stock for the three months ended December 31, 2015 were $404,000, compared to $195,000 for the same period in 2014.  The increase in dividends is due an increase in the dividend rate (as set out in the Series F Convertible Preferred stock certificate of designation) from 8% to 25%.

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.

In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09, Revenue from Contracts with Customers, which supersedes nearly all existing revenue recognition guidance under US GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing US GAAP. In August 2015, the FASB voted to defer the effective date of the new revenue standard by one year. The standard is effective for annual periods beginning after December 15, 2017, and interim periods therein, which will be effective for the Company for the quarter ending December 31, 2018. The Company is assessing the impact, if any, of implementing this guidance on its consolidated financial position, results of operations and liquidity.

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. This standard sets forth management's responsibility to evaluate, each reporting period, whether there is substantial doubt about the Company's ability to continue as a going concern, and if so, to provide related disclosures. The standard is effective for annual reporting periods ending after December 15, 2016 and interim periods within annual periods beginning after December 15, 2016, which will be effective for the Company for the quarter ending December 31, 2017. The Company is assessing the impact, if any, of implementing this guidance on its evaluation of going concern.

In November 2014, the FASB issued ASU 2014-16, Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity. The ASU clarifies how current guidance should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Specifically, the amendments clarify that an entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of a host contract. The ASU is effective for fiscal years and interim periods beginning after December 15, 2015, which will be effective for the Company for the quarter ending December 31, 2016. The Company is assessing the impact, if any, of implementing this guidance on its consolidated financial position, results of operations and liquidity.

In June 2015, the FASB issued ASU 2015-10, Technical Corrections and Improvements. The purpose of this ASU is to clarify guidance, correct unintended application of guidance, or make minor improvements to guidance. The ASU is effective for fiscal years and interim periods beginning after December 15, 2015, which will be effective for the Company for the quarter ending December 31, 2016. The Company is assessing the impact, if any, of implementing this guidance on its consolidated financial position, results of operations and liquidity.

In July 2015, the FASB issued ASU 2015-11, Inventory: Simplifying the Measurement of Inventory. The purpose of this ASU is to more closely align the measurement of inventory in US GAAP with the measurement of inventory in International Financial Reporting Standards. This ASU requires entities to measure most inventory at the "lower of cost and net realizable value." Additionally, some of the amendments are designed to more clearly articulate the requirements for the measurement and disclosure of inventory. The ASU is effective for fiscal years and interim periods beginning after December 15, 2016, which will be effective for the Company for the quarter ending December 31, 2017. The Company is assessing the impact, if any, of implementing this guidance on its consolidated financial position, results of operations and liquidity.

Recent Developments

 

Subsequent to December 31, 2015 and prior to the date of this report on Form 10-Q, we entered into certain transactions to restructure our capitalization, consolidate certain obligations and obtain additional debt financing.  These transactions included the conversion of outstanding preferred stock into common stock and debt and the conversion of outstanding debentures and other notes into common stock, as well as the repayment or restructuring of debt obligations of the Company as follows:

The statements contained in this report that are not purely historical are considered to be "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). These statements represent our expectations, hopes, beliefs, anticipations, commitments, intentions, and strategies regarding the future. They may be identified by the use of words or phrases such as "believes," "expects," "anticipates," "should," "plans," "estimates," and "potential," among others. Forward-looking statements include, but are not limited to, statements contained in Management's Discussion and Analysis of Financial Condition and Results of Operations regarding our financial performance, revenue, and expense levels in the future and the sufficiency of our existing assets to fund our future operations and capital spending needs. Readers are cautioned that actual results could differ materially from the anticipated results or other expectations that are expressed in these forward-looking statements for the reasons that are detailed in our most recent Annual Report on Form 10-K. The fact that some of these risk factors may be the same or similar to those in our past Exchange Act reports means only that the risks are present in multiple periods. We believe that many of the risks detailed here and in our other Exchange Act filings are part of doing business in the industry in which we operate and will likely be present in all periods reported. The fact that certain risks are common in the industry does not lessen their significance. The forward-looking statements contained in this report are made as of the date of this report, and we assume no obligation to update them or to update the reasons why our actual results could differ from those that we have projected.

 

Item 3.                  Quantitative and Qualitative Disclosures about Market Risk

Information about our exposure to market risk was disclosed in our Annual Report on Form 10-K for the year ended September 30, 2015, which was filed with the Securities and Exchange Commission ("SEC") on January 13, 2016. There have been no material quantitative or qualitative changes in market risk exposure since the date of that filing.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information that is required to be disclosed in our reports under the Securities Exchange Act of 1934 ("Exchange Act") is recorded, processed, summarized, and reported within the time periods that are specified in the rules and forms of the SEC and that such information is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding any required disclosure.  In designing and evaluating these disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

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.

PART II – OTHER INFORMATION

On May 28, 2015, an investor of the Company filed a lawsuit claiming damages of $1,000,000 exclusive of interest and costs against the Company, its Executive Chairman, an entity controlled by its former Executive Chairman, and 4G Biometrics, a wholly owned subsidiary of the Company for a breach of contract.  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.

On November 4, 2015, the Company received a demand for payment of $275,000 from a former employee of the Company and former principal of 4G Biometrics who was terminated for cause in regards to his employment agreement.  On December 4, 2015, the Company filed a complaint against the former owners of 4G Biometrics, including this former employee, seeking damages in excess of $300,000 related to alleged misrepresentations made to induce ActiveCare to acquire 4G Biometrics.  Between February 4, 2016 and February 8, 2016, the Company settled the complaint with each of the former owners of 4G Biometrics where all parties released each other from all outstanding claims, including any current monetary obligations to each party, excluding one former owner of 4G Biometrics who continues employment with the Company.  A Stipulation for Order of Dismissal with Prejudice of all Claims and Counterclaims has been filed and is in the process of being approved.  The settlement resulted in the termination of $39,863 of related party accounts payable.

Recent Sales of Unregistered Securities

During the three months ended December 31, 2015, we issued the following shares of common stock without registration under the Securities Act of 1933 (the "Securities Act"):

 

The securities issued in the above transactions were issued to accredited investors, existing stockholders, and affiliates of the Company, and the offer and sale of those securities were not registered under the Securities Act in reliance upon exemptions from registration, including the exemptions for non-public offers and sales of securities under Section 4(a)(2) of the Securities Act and rules and regulations promulgated thereunder.

As of the date of this report, notes payable due to unrelated parties with total principal amounts of $298,000 are past due, in default, and unpaid.  In addition, a note payable due to a former Executive Chairman with a total principal amount of $397,000 is past due, in default, and unpaid.  Notes payable due to other related parties with total principal amounts of $57,000 are past due, in default and unpaid.  The Company will make payments on these notes payable as funds are available.

None.

Item 6. Exhibits         

Exhibit Number	Description
10(i)	Form of Loan and Security Agreement between ActiveCare, Inc. and Partners for Growth IV, L.P. dated February 19, 2016
10(ii)	Form of Exchange Agreement by and among ActiveCare, Inc. and the Holders of ActiveCare Series F Convertible Preferred Stock
10(iii)	Form of Notice of Conversion by and among ActiveCare, Inc. and the Holders of ActiveCare 12% Subordinated Convertible Promissory Notes
10(iv)	Form of Merchant Agreement dated February 11, 2016
10(v)	Form of Settlement Agreement dated February 9, 2016
10(vi)	Form of Addendum #1 to Settlement Agreement by and among ActiveCare, Inc. and Bluestone Advisors, LLC
10(vii)	Form of Secured Convertible Promissory Note by and among ActiveCare, Inc. and ADP Management Corporation
10(viii)	Form of Secured Convertible Promissory Note by and among ActiveCare, Inc. and Tonaquint, Inc.
10(ix)	Form of Asset Purchase and Sale Agreement dated November 2, 2015
10(x)	Form of Addendum to Note Payable dated February 16, 2016
10(xi)	Form of Debenture Agreement by and among ActiveCare, Inc. and the Holders of ActiveCare Series F Convertible Preferred Stock
10(xii)	Form of Warrant Agreements by and among ActiveCare, Inc. and the Holders of ActiveCare Series F Convertible Preferred Stock
10(xiii)	Form of Warrant Agreements related to the Partners for Growth Loan and Security 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
101 INS	XBRL Instance Document*
101 SCH	XBRL Schema Document*
101 CAL	XBRL Calculation Linkbase Document*
101 DEF	XBRL Definition Linkbase Document*
101 LAB	XBRL Labels Linkbase Document*
101 PRE	XBRL Presentation Linkbase Document*

               

SIGNATURES

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

 

 

 

 

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