10-Q 1 activecare.htm ACTIVECARE, INC., 10Q 2013-03-31 activecare.htm


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

FORM 10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended: March 31, 2013

or
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ____________ to _____________
 
Commission File Number: 0-53570

ActiveCare, Inc.
(Exact name of registrant as specified in its charter)

Delaware
 
87-0578125
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
1365 West Business Park Drive
Orem, UT
(Address of principal executive offices)
 
84058
(Zip Code)
 

(877) 219-6050
(Registrant’s telephone number, including area code)

5095 West 2100 South, West Valley City, Utah 84120
(Former address of principal executive offices)

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 x  No o
  
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 x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o
Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)   Yes  o No  x
 
As of May 15, 2013, the registrant had 46,857,271 shares of common stock outstanding.

 
 

 

ActiveCare, Inc.

Quarterly Report on Form 10-Q

Table of Contents

 
Page
   
PART I – FINANCIAL INFORMATION
3
   
Item 1.  Financial Statements
3
   
Condensed Consolidated Balance Sheets (unaudited)
3
   
Condensed Consolidated Statements of Operations (unaudited)
5
   
Condensed Consolidated Statements of Cash Flows (unaudited)
6
   
Notes to Condensed Consolidated Financial Statements (unaudited)
8
   
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations
23
   
Item 3.  Quantitative and Qualitative Disclosures About Market Risk
30
   
Item 4.  Controls and Procedures
30
   
PART II – OTHER INFORMATION
31
   
Item 1.  Legal Proceedings
31
   
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
31
   
Item 3.  Defaults Upon Senior Securities
31
   
Item 5.  Other Information
31
   
Item 6.  Exhibits
32
   
SIGNATURES
33

 
2

 

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

ActiveCare, Inc. and Subsidiaries
 
Condensed Consolidated Balance Sheets (unaudited)
 
As of March 31, 2013 and September 30, 2012
 
             
             
   
March 31,
2013
   
September 30,
2012
 
Assets
           
             
Current assets:
           
Cash
  $ 42,066     $ 529,839  
Accounts receivable, net of allowance for doubtful accounts of $24,343 and $20,195, respectively
    6,010,262       644,974  
Inventories, net of valuation allowances of $4,075 and $4,984, respectively
    766,825       290,768  
Prepaid expenses and other
    27,671       7,277  
                 
Total current assets
    6,846,824       1,472,858  
                 
Customer contracts, net of accumulated amortization of $518,846 and $102,330, respectively
    1,851,037       2,267,552  
Goodwill
    825,894       825,894  
Patents, net of accumulated amortization of $292,022 and $228,587, respectively
    630,355       693,790  
Equipment leased to customers, net of accumulated depreciation of $223,258 and $144,905, respectively
    453,903       312,993  
Property and equipment, net of accumulated depreciation of $673,921 and $625,401, respectively
    259,168       266,078  
Deposits and other
    76,218       24,634  
Domain name, net of accumulated amortization of $2,502 and $2,145, respectively
    11,798       12,155  
                 
Total assets
  $ 10,955,197     $ 5,875,954  
 
See accompanying notes to consolidated financial statements.
 
 
3

 
 
ActiveCare, Inc. and Subsidiaries
 
Consolidated Balance Sheets
 
As of March 31, 2013 and September 30, 2012
 
(Continued)
 
             
             
   
March 31,
2013
   
September 30,
2012
 
Liabilities and Stockholders’ Deficit
           
             
Current liabilities:
           
Accounts payable
  $ 2,612,581     $ 1,132,611  
Accounts payable, related-party
    117,437       150,395  
Accrued expenses
    4,082,943       2,104,623  
Derivatives liability
    -       4,015,855  
Current portion of notes payable
    3,988,980       2,569,221  
Current portion of notes payable, related-party
    1,410,597       1,563,923  
Deferred revenue
    68,116       61,608  
Dividends payable
    116,885       18,322  
                 
Total current liabilities
    12,397,539       11,616,558  
                 
Notes payable, net of current portion
    3,275,373       1,804,929  
Notes payable, related-party, net of current portion
    2,107,711       169,857  
                 
Total long-term liabilities
    5,383,084       1,974,786  
                 
Total liabilities
    17,780,623       13,591,344  
                 
Stockholders’ deficit:
               
Preferred stock, $.00001 par value: 10,000,000 shares authorized; 480,000 and 480,000 shares of Series C; and 841,543 and 386,103 shares of Series D, outstanding, respectively
    13       9  
Common stock, $.00001 par value: 50,000,000 shares authorized; 46,857,271 and 46,369,771 shares outstanding,  respectively
    469       464  
Additional paid-in capital
    36,698,327       29,643,351  
Accumulated deficit
    (43,524,235 )     (37,359,214 )
                 
Total stockholders’ deficit
    (6,825,426 )     (7,715,390 )
                 
Total liabilities and stockholders’ deficit
  $ 10,955,197     $ 5,875,954  

See accompanying notes to consolidated financial statements.
 
4

 
 
ActiveCare, Inc. and Subsidiaries
 
Condensed Consolidated Statements of Operations (unaudited)
 
For the Three and Six Months Ended March 31, 2013 and 2012
 
                         
                         
   
Three Months Ended
   
Six Months Ended
 
   
March 31,
   
March 31,
 
   
2013
   
2012
   
2013
   
2012
 
                         
Revenues:
                       
Chronic illness monitoring
  $ 4,256,011     $ 3,118     $ 6,209,615     $ 3,118  
CareServices
    457,113       62,740       876,801       124,627  
Reagents
    130,029       114,457       254,499       221,738  
Total revenues
    4,843,153       180,315       7,340,915       349,483  
                                 
Cost of revenues:
                               
Chronic illness monitoring
    3,123,637       1,280       4,585,423       1,280  
CareServices
    746,097       170,892       1,467,624       330,705  
Reagents
    71,739       98,132       169,599       196,807  
Total cost of revenues
    3,941,473       270,304       6,222,646       528,792  
                                 
Gross margin (deficit)
    901,680       (89,989 )     1,118,269       (179,309 )
                                 
Operating expenses:
                               
Selling, general and administrative (including $73,783, $759,087, $1,502,502 and $4,124,110, respectively, of stock-based compensation)
    2,293,419       1,519,257       4,950,754       5,478,174  
Research and development
    266,672       28,210       468,713       48,901  
Total operating expenses
    2,560,091       1,547,467       5,419,467       5,527,075  
                                 
Loss from operations
    (1,658,411 )     (1,637,456 )     (4,301,198 )     (5,706,384 )
                                 
Other income (expense):
                               
Gain (loss) on derivatives liability
    7,360       (25,256 )     45,697       (25,256 )
Interest expense, net
    (767,391 )     (145,270 )     (1,790,983 )     (235,816 )
Other income
    13,113       -       15,438       -  
Total other expense, net
    (746,918 )     (170,526 )     (1,729,848 )     (261,072 )
                                 
Net loss
    (2,405,329 )     (1,807,982 )     (6,031,046 )     (5,967,456 )
                                 
Dividends on preferred stock
    (74,432 )     (26,784 )     (133,974 )     (26,784 )
                                 
Net loss attributable to common stockholders
  $ (2,479,761 )   $ (1,834,766 )   $ (6,165,020 )   $ (5,994,240 )
                                 
Net loss per common share – basic and diluted
  $ (0.05 )   $ (0.05 )   $ (0.13 )   $ (0.15 )
                                 
Weighted average common shares outstanding – basic and diluted
    46,536,000       40,564,000       46,503,000       40,138,000  

See accompanying notes to consolidated financial statements.

 
5

 
 
ActiveCare, Inc.
 
Condensed Consolidated Statements of Cash Flows
 
(unaudited)
 
  
           
             
   
Six Months Ended
 
   
March 31
 
   
2013
   
2012
 
             
Cash flows from operating activities:
           
Net loss
  $ (6,031,046 )   $ (5,967,455 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
    612,218       150,445  
Stock-based compensation expense
    1,502,502       4,124,110  
Stock issued for interest expense
    257,362       -  
Amortization of debt discount as interest expense
    480,614       165,069  
Loss (gain) on derivatives liabilities
    (45,697 )     25,256  
Loss on disposal of property and leased equipment
    1,499       -  
Changes in operating assets and liabilities:
               
Accounts receivable
    (5,365,288 )     (8,138 )
Inventories
    (476,057 )     (3,019 )
Prepaid expenses and other assets
    (20,394 )     1,404  
Accounts payable
    1,447,011       143,002  
Accrued expenses
    2,936,405       193,978  
Deferred revenue
    6,508       7,796  
Deposits
    (51,584 )     -  
Net cash used in operating activities
    (4,745,947 )     (1,167,552 )
                 
Cash flows from investing activities:
               
Purchase of equipment leased to customers
    (225,800 )     (6,505 )
Purchase of property and equipment
    (41,610 )     (1,223 )
Acquisition of 4G Biometrics, LLC
    -       (200,000 )
Net cash used in investing activities
    (267,410 )     (207,728 )
                 
Cash flows from financing activities:
               
Proceeds from notes payable
    3,041,746       -  
Proceeds from notes payable, related-party
    1,990,799       1,390,000  
Principal payments on notes payable, related-party
    (191,831 )     -  
Principal payments on notes payable
    (315,130 )     (85,000 )
Net cash provided by financing activities
    4,525,584       1,305,000  
                 
Net decrease in cash
    (487,773 )     (70,280 )
Cash, beginning of the period
    529,839       178,131  
                 
Cash, end of the period
  $ 42,066     $ 107,851  
 
See accompanying notes to consolidated financial statements.
 
 
6

 
 
ActiveCare, Inc.
 
Condensed Consolidated Statements of Cash Flows
 
(unaudited) cont.
 
             
   
Six Months Ended
 
   
March 31
 
   
2013
   
2012
 
Supplemental Disclosure of Cash Flow Information:
           
Cash paid for interest
  $ 469,749     $ 3,161  
                 
Supplemental Disclosure of Non-Cash Investing
               
and Financing Information:
               
Issuance of preferred stock for accrued dividends
    35,411       -  
Issuance of preferred stock for accrued liabilities
    865,552       -  
Issuance of derivatives liability
    514,643       -  
Reclassification of derivatives liability to equity
    4,484,801       -  
Dividends on preferred stock
    151,660       -  
Issuance of preferred stock for purchase of patents
    -       622,378  
Issuance of common stock for settlement of liabilities
    -       612,000  
 
See accompanying notes to consolidated financial statements.
 
 
7

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


 
1.
Basis of Presentation
 
The unaudited interim condensed consolidated financial information of ActiveCare, Inc. (the “Company” or “ActiveCare”) has 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 U.S. 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 information contains all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the Company’s financial position as of March 31, 2013, and the results of its operations and its cash flows for the six months ended March 31, 2013 and 2012. 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, 2012. The results of operations for the three and six months ended March 31, 2013 may not be indicative of the results for the full fiscal year ending September 30, 2013.
 
Going Concern
 
Although the Company had a positive gross margin for the three and six months ended March 31, 2013, it incurred negative gross margins, working capital and cash flows from operating activities for the fiscal years ended September 30, 2012 and 2011, and had negative working capital and cash flows from operating activities for the three and six months ended March 31, 2013. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
In order for the Company to remove substantial doubt about its ability to continue as a going concern, it must continue to improve gross margins, 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 include raising additional capital by issuing 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 capital or that revenues will increase rapidly enough to offset operating losses and repay debts as they come due. If the Company is unable to increase revenues or obtain additional financing, it will be unable to continue the development of its products and may have to cease operations.
 
Use of Estimates in the Preparation of Financial Statements
 
The preparation of financial statements in conformity with 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 at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
 
Fair Value of Financial Instruments
 
The carrying amounts reported in the condensed consolidated balance sheets for accounts receivable, accounts payable, and accrued liabilities approximate fair value because of the immediate or short-term maturity of these financial instruments. The carrying amounts reported for notes payable approximate fair value because the underlying instruments are at interest rates which approximate current market rates.
 
US GAAP defines fair values as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants as of the measurement date. Additionally, the inputs used to measure fair value are prioritized based on a three-level hierarchy. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
 
·
Level 1 — Quoted prices in active markets for identical assets or liabilities.
   
·
Level 2 — Observable inputs other than quoted prices included in Level 1. Assets and liabilities included in this level are valued using dealer and broker quotations, bid prices, quoted prices for similar assets and liabilities in active markets, or other inputs that are observable or can be corroborated by observable market data.
   
·
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
 
 
8

 
 
In valuing certain contracts, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. For disclosure purposes, assets and liabilities are classified in their entirety in the fair value hierarchy level based on the lowest level of input that is significant to the overall fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement within the fair value hierarchy levels.
 
2.
Net Loss per Common Share
 
Net loss per common share is computed by dividing net loss attributable 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 net loss per common share does not assume exercise or conversion of securities that would have an anti-dilutive effect.
 
Common share equivalents consist of shares of common stock issuable upon the exercise of stock purchase warrants or the conversion of convertible preferred stock or debt instruments.  As of March 31, 2013 and 2012, there were 96,870,521 and 19,302,871 outstanding common share equivalents, respectively, that were not included in the computation of diluted net loss per common share as their effect would be anti-dilutive. The common stock equivalents outstanding as of March 31, 2013 and 2012 consisted of the following:
 
   
March 31,
2013
   
March 31,
 2012
 
                 
Common stock options and warrants
    41,368,871       13,865,871  
Series D convertible preferred stock
    42,077,150       -  
Series C convertible preferred stock
    4,800,000       4,800,000  
Convertible debt
    8,222,500       -  
Restricted shares of common stock
    402,000       637,000  
Total common stock equivalents
    96,870,521       19,302,871  
 
3.
Recent Accounting Pronouncements
 
The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements will have a material impact on the Company’s financial position, results of operations, or liquidity.
 
4.
Acquisitions, Goodwill and Other Intangible Assets
 
4G Biometrics, LLC
 
On March 8, 2012, the Company acquired 4G Biometrics, LLC, a Texas limited liability company (“4G”).  Pursuant to the acquisition agreement, the Company acquired 100 percent of the member interests of 4G and 4G is operated as a wholly owned subsidiary of the Company.  As amended, the purchase consideration for the member interests of 4G was comprised as follows:
 
·
$350,000 in cash;
   
·
The assumption of $50,000 of accounts payable and accrued liabilities;
   
·
160,000 shares of Series D convertible preferred stock;
   
·
Options for the purchase of up to 4,333,333 shares of common stock of the Company at $0.10 per share to each of the three sellers with vesting as follows:
   
o
Options for 433,333 shares vest when 4G has 9,300 members
   
o
Options for another 433,333 shares vest when an additional 5,000 4G members are added, or a total of 14,300 members;
   
o
Options for another 433,333 shares vest when an additional 5,000 4G members are added, or a total of 19,300 members;
   
o
Options for another 433,333 shares vest when an additional 5,000 4G members are added, or a total of 24,300 members; and
   
o
so forth until fully vested.
 
 
9

 
 
As of March 31, 2013, options to purchase 2,600,000 shares of common stock have vested.
 
Three of the 4G key operational managers are under two-year written employment agreements with the Company.
 
Under the purchase method of accounting, the purchase price was allocated to 4G’s assets and assumed liabilities based on their estimated fair values as of the closing date of the acquisition.  The excess of the purchase price over the fair values of the net assets acquired was recorded as goodwill.
 
The purchase price for 4G reflects total consideration paid of $1,040,000, of which $825,894 was allocated to goodwill and $214,106 was allocated to customer contracts.
 
GWire
 
During fiscal year 2012, the Company established GWire Corporation (“GWire”) as a subsidiary.  Effective September 1, 2012, GWire acquired the assets and assumed certain liabilities of Green Wire, LLC, Green Wire Outsourcing, Inc., Orbit Medical Response, LLC, and Rapid Medical Response, LLC (collectively, “Green Wire”).  The Company entered into employment agreements with two of Green Wire’s operating managers on November 1, 2012. These two individuals were granted 27% ownership in GWire and ActiveCare owns the remaining 73%.  The purchase consideration for Green Wire consisted of the following:
 
·
$2,236,737 in the form of a note payable with a 36-month term (including imputed interest at 12%); and
   
·
20,000 shares of ActiveCare’s Series D convertible preferred stock, valued at $40,000.
 
Under the purchase method of accounting, the purchase price for Green Wire was allocated to the assets purchased and liabilities assumed based on their estimated fair values as of the closing date of the acquisition.
 
The purchase price for Green Wire reflects total consideration paid of $2,276,737, which has been allocated as $12,215 of cash, $13,976 of accounts receivable, $92,022 of property and equipment, $16,964 of deposits and other assets, $229,249 of leased equipment, $2,155,776 of customer contracts, $154,206 of accounts payable, $55,117 of accrued expenses and $34,142 of deferred revenue.
 
Subsequent to March 31, 2013, the two operating managers converted their 27% ownership and 4,250,000 of related options into 4,250,000 shares of the Company’s common stock as part of the exercise of the 4,250,000 related options as discussed further in Note 14.  As a result, the Company owns 100% of GWire.
 
5.
Inventories
 
Inventories are recorded at the lower of cost or market, cost being determined using the first-in, first-out (“FIFO”) method. Inventories consisted of raw materials, work-in-process, and finished goods as of March 31, 2013 and September 30, 2012 as follows:
 
             
   
March 31,
2013
   
September 30,
2012
 
Chronic Illness Monitoring
           
Finished goods
  $ 646,392     $ 185,884  
                 
CareServices
               
ActiveHome™
    56,767       56,767  
                 
Reagents
               
Raw materials
    57,423       41,195  
Work in process
    5,354       5,745  
Finished goods
    4,964       6,161  
Reserves for obsolescence and valuation
    (4,075 )     (4,984 )
Total inventories
  $ 766,825     $ 290,768  
 
 
10

 
 
When required, provisions are made to reduce excess and obsolete inventories to their estimated net realizable values.  Due to competitive pressures and technological innovation, it is possible that estimates of the net realizable values could change in the near term.
 
6.
Property and Equipment
 
Property and equipment are stated at cost, less accumulated depreciation and amortization.  Depreciation and amortization are determined using the straight-line method over the estimated useful lives of the assets, typically three to seven years.  Leasehold improvements are amortized over the shorter of the estimated useful lives of the asset or the term of the lease.  Expenditures for maintenance and repairs are expensed while renewals and improvements over $500 are capitalized.  Upon the sale or disposal of property and equipment, any gains or losses are included in the results of operations.
 
Property and equipment consisted of the following as of March 31, 2013 and September 30, 2012:
 
             
   
March 31,
2013
   
September 30,
2012
 
                 
Leasehold improvements
  $ 402,016     $ 402,016  
Equipment
    406,210       374,229  
Software
    72,160       65,111  
Furniture
    52,703       50,123  
Total gross property and equipment
    933,089       891,479  
                 
Accumulated depreciation and amortization
    (673,921 )     (625,401 )
Property and equipment, net
  $ 259,168     $ 266,078  
 
Depreciation expense for the six months ended March 31, 2013 and 2012 was $48,521 and $31,633, respectively.
 
7.
 
Equipment Leased to Customers
 
Equipment leased to customers as of March 31, 2013 and September 30, 2012 was as follows:

   
March 31,
2013
   
September 30,
 2012
 
                 
Leased equipment
  $ 677,161     $ 457,898  
Accumulated depreciation
    (223,258 )     (144,905 )
Leased equipment, net
  $ 453,903     $ 312,993  
 
The Company began leasing monitoring equipment to customers for CareServices in October 2009.  The leased equipment is depreciated using the straight-line method over the estimated useful lives of the related assets over three years regardless of whether the equipment is leased to a customer or remaining in stock.  Customers have the right to cancel the service agreements at any time.
 
Assets to be disposed of are reported at the lower of the carrying amounts or fair values, less the estimated costs to sell.  During the six months ended March 31, 2013 and 2012, the Company recorded as cost of revenues the disposal of equipment leased to customers of $1,500 and $3,059, respectively. Depreciation expense for equipment leased to customers is recorded as cost of revenues for CareServices and depreciation for the six months ended March 31, 2013 and 2012 totaled $83,392 and $27,857, respectively.
 
8.
Patent License Agreement
 
During fiscal year 2009, the Company licensed the use of certain patents from a third party.  Under the license agreement, the Company was required to pay $300,000 plus a 5% royalty on the net revenues of all licensed products. As of September 30, 2009, the Company had capitalized the initial license fee as a long-term asset and had recorded a corresponding current liability as the fee was not yet paid.
 
During fiscal year 2012, the Company agreed to purchase the related patents and settle amounts owed under the license agreement by issuing 600,000 shares of common stock and 480,000 shares of Series C preferred stock to the licensor.  The patents were valued at $922,378, based on a valuation performed by an independent valuation expert.  The value of the common stock issued was $240,000, based on the market price of the common stock on the date of issuance. The implied value of the Series C preferred stock was $682,378, which was based on the difference between the value of the patents and the common stock issued in settlement of the existing liability.
 
 
11

 
 
The Company is amortizing the patents over their remaining useful lives (through 2018).  The Company recognized $63,435 and $83,843 of amortization expense for the six months March 31, 2013 and 2012, respectively.
 
The Company’s future patent amortization as of March 31, 2013, is as follows:
 
Years Ending September 30,
     
2013
  $ 63,435  
2014
    126,870  
2015
    126,870  
2016
    126,870  
2017
    126,870  
Thereafter
    59,440  
    $ 630,355  
 
9.
Notes Payable
 
 
As of March 31, 2013 and September 30, 2012, the Company had the following notes payable outstanding:
 
   
March 31,
2013
   
September 30,
2012
 
             
Note payable to the former owners of Green Wire, secured by customer contracts, imputed interest rate equal to 12%, with monthly installments over a 36-month term.  During the quarter ended March 2013, the Company agreed to issue 150,000 shares of common stock to lender to extend the 37th and 38th payments to period 37 and 38 without late penalty.  The common stock has a value of $24,000 at the date of grant, which will be amortized over the remaining life of the loan.
  $ 2,099,227     $ 2,236,737  
                 
Series A debenture loans payable to unrelated parties, secured by current customer contracts and payable in 36 monthly installments, maturing between September and December 2015. The loans bear interest at 12% and are convertible into common stock after 180 days.  After payment of principal and interest, the holders of the Series A debentures and the Series B debentures (see Note 10), as a class, are entitled to receive a pro-rata share of a cumulative royalty totaling 4% of the Company’s gross profits payable for the two-year period commencing at the maturity date; provided that no royalties are payable following conversion of any Series A or Series B debenture to the holder thereof. The Company has the right to buy out the royalty rights of Series A debenture holders by paying the respective holder $20,000 for every $25,000 loaned.
    2,764,126       300,000  
                 
Unsecured note payable to an unrelated party, interest at 15% (18% after due date), due November 2012. In connection with the loan, the Company issued 60,000 shares of Series D preferred stock as a loan origination fee with a total fair value of $150,000.  Note guaranteed by the Company’s CEO.
    1,500,000       1,500,000  
                 
Unsecured note payable to an unrelated party, interest at a 15%, due March 2013. Note included a $25,000 loan origination fee.  In connection with the loan, the Company issued 1,000,000 shares of common stock as a loan origination fee with a total fair value of $70,000 at date of grant.
    275,000       275,000  
 
 
12

 
 
   
March 31,
2013
   
September 30,
2012
 
             
Unsecured note payable to an unrelated party, interest at 12%, due March 2013.
  $ 250,000     $ 250,000  
                 
Unsecured notes payable to two unrelated parties, annual interest rate at 15% before maturity date and 18% after maturity date, due March and April 2013, respectively.  The Company issued 20,000 shares of Series D as loan origination fee with total fair value of $195,000 at date of grant.
    400,000       -  
                 
Total before discount and current portion
    7,288,353       4,561,737  
Less discount
    (24,000 )     (187,587 )
                 
Total notes payable
    7,264,353       4,374,150  
Less current portion
    (3,988,980 )     (2,569,221 )
                 
Total notes payable, net of current portion
  $ 3,275,373     $ 1,804,929  
 
10.
Related-Party Notes Payable
 
As of March 31, 2013 and September 30, 2012, the Company had the following notes payable, related-party outstanding:
 
   
March 31,
2013
   
September 30,
2012
 
Series B unsecured debenture loans payable to an entity controlled by an officer of the Company, including 10% loan origination fees totaling $78,587, payable in 36 monthly installments, maturing December 2015.  $421,499 of the debentures were issued to settle a $400,000 Series A secured debenture issued during the three months ended December 31, 2012.  Before the settlement, the prior Series A debenture had a total outstanding balance of $383,181 and $1,845 of accrued interest.  $442,598 of the Series B debenture was issued to settle two related-party notes payable totaling $165,000 and $6,889 of accrued interest, and a $230,800 related-party note payable issued during the three months ended December 31, 2012 to settle previously accrued expenses.  The Series B debenture loan bears interest at 12% and is convertible into common stock after 180 days. After payment of principal and interest, the holders of the Series B debentures and the Series A debentures (see Note 9), as a class, are entitled to receive a pro-rata share of a cumulative royalty totaling 4% of the Company’s gross profits payable for the two-year period commencing at the maturity date; provided that no royalties are payable following conversion of any Series A or Series B debenture to the holder thereof. The Company has the right to buy out the royalty rights of Series B debenture holders by paying the holder $22,000 for every $25,000 loaned.  During the quarter ended March 31, 2013, the Company paid $40,336 of the loan principal.
  $ 824,121     $ -  
 
 
13

 
 
             
   
March 31,
2013
   
September 30,
2012
 
Series B unsecured debenture loan payable to an entity controlled by an officer of the Company, including $64,227 in loan origination fees, payable in 36 monthly installments, maturing December 2015.  The debenture was issued to settle an outstanding note payable of $620,686 and $21,585 of related accrued interest.  The loan bears interest at 12% and is convertible into common stock after 180 days. The holder is entitled to the royalty rights, subject to termination upon conversion and the Company's buy-out rights as described above.  During the quarter ended March 31, 2013, the Company paid $16,401 of the loan principal.
  $ 690,098     $ -  
                 
Series B unsecured debenture loans from entities controlled by an officer of the Company, including $68,914 in loan origination fees added to the principal of the loans, payable in 36 monthly installments, maturing December 2015 and January 2016.  $554,556 of the debenture was issued to settle a related-party note payable with a total outstanding balance of $460,778 and $43,364 of related accrued interest.  $35,000 of the loan was issued to settle an accrued service fee.  The loans bear interest at 12% and are convertible into common stock after 180 days. The holder is entitled to the royalty rights, subject to termination upon conversion and the Company's buy-out rights as described above.  During the quarter ended March 31, 2013, the Company issued 34,400 shares of Series D with fair market value of $343,748 at date of grant as additional loan origination fee, the Company also paid $30,102 of the loan principal.
    727,954       -  
                 
Series B unsecured debenture loans owed to an officer of the Company, including $49,777 in loan origination fees, payable in 36 monthly installments, maturing December 2015 and January 2016.  $371,547 of the debentures were issued to settle two Series A debentures and $135,000 of accrued liabilities.  The original Series A debentures had a total outstanding balance of $202,098 and $672 of related accrued interest.  The loan bears interest at 12% and is convertible into common stock after 180 days. The holder is entitled to the royalty rights, subject to termination upon conversion and the Company's buy-out rights as described above.  During the quarter ended March 31, 2013, the Company paid $24,517 of the loan principal.
    523,029       -  
 
 
14

 
 
 
 
 
 
 
March 31,
2013
   
September 30,
2012
 
Series A debenture loans from a former CEO and Chairman of the Company, secured by current customer contracts, payable in 36 monthly installments, maturing September and December 2015.  The loans bear interest at 12% and are convertible into common stock after 180 days. The holder is also entitled to the royalty rights, subject to termination upon conversion and the buy-out rights of the Company as described in Note 9, above.  During the quarter ended March 31, 2013, the Company paid $41,682 of the loan principal.
  $ 327,514     $ 244,196  
                 
Series A debenture loan from an officer of the Company, secured by current customer contracts, payable interest only in the first 6 months and interest plus principal in the next 30 monthly installments, maturing January 2016.   The loan bears interest at 12% and is convertible into common stock after 180 days. The holder is also entitled to the royalty rights, subject to termination upon conversion and the buy-out rights of the Company as described in Note 9, above.
    250,000       -  
                 
Series A debenture loan from an officer of the Company, secured by current customer contracts, payable in 36 monthly installments, maturing December 2015.  The debenture was issued to settle a related-party note payable with an outstanding balance of $300,000 and $14,992 of related accrued interest.  The loan bears interest at 12% and is convertible into common stock after 180 days. The holder is also entitled to the royalty rights, subject to termination upon conversion and the buy-out rights of the Company as described in Note 9, above.   During the quarter ended March 31, 2013, the Company paid $14,698 of the loan principal.
    300,294       -  
                 
Unsecured notes payable to an entity controlled by an officer of the Company, including $7,500 of loan origination fees added to the principal, interest at 12%, due August 2012. The note is convertible into common stock at 50% of fair market value or $0.04 per share, whichever is less. During the three months ended March 31, 2012, the lender agreed to extend the loan maturity date to June 2013 with 5,600 shares of Series D with fair market value of $56,252 at date of grant as loan origination fee.
    82,500       543,278  
 
 
15

 
 
   
March 31,
2013
   
September 30,
2012
 
Series A debenture loan from an entity controlled by an officer of the Company, secured by current customer contracts, payable in 36 monthly installments, maturing December 2015.  The debenture was issued to settle a related-party note payable with a total outstanding balance of $51,000 and $3,186 of related accrued interest.  The loan bears interest at 12% and is convertible into common stock after 180 days. The holder is also entitled to the royalty rights, subject to termination upon conversion and the buy-out rights of the Company as described in Note 9, above.  During the quarter ended March 31, 2013, the Company paid $2,528 of the loan principal.
  $ 51,657     $ -  
                 
Unsecured notes payable to an entity controlled by an officer of the Company,  annual interest at 3%, due July 2013.  After maturity date, the annual interest rate increases to 18% and the note is convertible into common stock at 50% of fair market value or $0.04 per share, whichever is less.
    300,000       -  
                 
Note payable to an officer of the Company including a $3,000 loan origination fee, interest at 15%, due June 2012.  The note is convertible into common stock at 50% of fair market value or $0.05 per share, whichever is less.  The Company received a forbearance agreement from the lender agreeing not to exercise the conversion right earlier than April 15, 2013.
    33,000       33,000  
                 
Unsecured notes payable to a lender under the control of the Company’s CEO with a line of credit borrowing capacity of $2,000,000, interest at 12%, due July 2013. The notes were convertible into common stock at any time at $0.05 per share.  In connection with the notes payable, the Company issued 80,000 shares of Series D preferred stock (valued at $240,000).  The Company granted warrants to purchase 341,000 shares of common stock as a loan origination fee. These warrants vested immediately and are exercisable at $0.44 per share through November 3, 2016. The fair value of the warrants was $107,130, and was measured using a binomial valuation model with the following assumptions: exercise price $0.44; risk-free interest rate of .39%; expected life of 2.5 years; expected dividend of zero; a volatility factor of 134.57%; and market price on date of grant of $0.44.  During the fiscal year ended September 30, 2012, the Company re-priced the exercise price of the warrants from $0.44 to $0.10 per share.  During the three months ended December 31, 2012, the Company issued a Series A debenture payable to the lender in satisfaction of the outstanding balance of $620,687 plus $21,585 of accrued interest.  Upon the conversion of the note, the Company immediately recognized the unamortized debt discount of $209,143.
    -       620,687  
                 
Note payable to an entity controlled by an officer of the Company, interest at 12%, due December 2012.  This note was secured by real estate.  During the three months ended December 31, 2012, the Company issued a Series A debenture payable to the entity in satisfaction of the outstanding balance of $300,000 plus $14,992 of accrued interest.
    -       300,000  
 
 
16

 
 
   
March 31,
2013
   
September 30,
 2012
 
Unsecured note payable to an entity controlled by an officer of the Company, including a $7,500 loan origination fee, interest at 12%, due August 2012.  The note was convertible into common stock at 50% of fair market value or $0.04 per share, whichever is less.  During the three months ended December 31, 2012, the Company issued a Series A debenture payable to the entity in satisfaction of the outstanding balance of $82,500 plus $3,716 of accrued interest.
  $ -     $ 82,500  
                 
Unsecured note payable to an entity controlled by an officer of the Company, including a $7,500 loan origination fee, interest at 12%, due September 2012. The note was convertible into common stock at 50% of fair market value or $0.04 per share, whichever was less.  During the three months ended December 31, 2012, the Company issued a Series A debenture payable to the entity in satisfaction of the outstanding balance of $82,500 plus $3,173 of accrued interest.
    -       82,500  
                 
Notes payable to an entity controlled by an officer of the Company, including a $26,000 loan origination fee which was convertible into Series D preferred stock at any time at $2.00 per share, interest at 15%, due December 2012.  This note was secured by real estate.  During the three months ended December 31, 2012, the Company issued a Series A debenture payable to the entity in satisfaction of the outstanding balance of $51,000 plus $3,186 of accrued interest.  Upon the conversion of the note, the Company immediately recognized the unamortized debt discount of $14,238.
    -       51,000  
                 
Total before discount and current portion
    4,110,167       1,957,161  
Less discount
    (591,859 )     (223,381 )
                 
Total notes payable, related-party
    3,518,308       1,733,780  
Less current portion
    (1,410,597 )     (1,563,923 )
                 
Total  notes payable, related-party, net of current portion
  $ 2,107,711     $ 169,857  
 
11.
Derivatives Liability
 
The derivative liability was $0 and $4,015,855 as of March 31, 2013 and September 30, 2012, respectively.  The decrease in the derivative liability was due to the decrease in the convertibility of the Company’s “freestanding instruments.”  On March 25, 2013, the Company held an annual meeting of stockholders.  During the meeting, the stockholders approved a reverse stock split of 10 shares of common stock to 1 share of common stock.  The reverse stock split, when effective, decreases the number of outstanding shares and convertible shares of “freestanding instruments.”  It also allows the Company to reserve sufficient shares to settle “freestanding instruments.”
 
The Company recognized $7,360 in derivative gain during the quarter ended March 31, 2013.  The Company estimated the fair value of the embedded derivatives using a binomial option-pricing model with the following assumptions: conversion price of $0.16 per share according to the agreements; risk free interest rate of 0.14%; expected life of 0.69 to 1.00 years; expected dividend of zero; a volatility factor of 233%; and a stock price (as of March 25, 2013) of $0.16.  The expected lives of the instruments are 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 U.S. 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.
 
 
17

 
 
12.
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.
 
Series C Convertible Preferred Stock
 
On October 4, 2011, the Company issued 480,000 shares of Series C convertible preferred stock (“Series C preferred stock”) in connection with the patent license agreement settlement (see Note 8).  The par value of the Series C is $0.00001 per share.  The Series C preferred stock is non-voting stock.  Each share of Series C preferred stock may be converted into 10 shares of common stock, provided, however, that a holder may not convert shares of Series C preferred stock which, upon conversion, would result in the holder becoming the beneficial owner of more than 4.99% of the issued and outstanding common stock of the Company.
 
During fiscal year 2012, the Company amended the rights and preferences of the Series C preferred stock as follows:
 
·
Required payment of dividends at a rate of 8% per annum in either cash or common stock at the Company’s discretion.  If paid in common stock, the price of the common stock is the average closing price of the last 10 trading days of each quarter; and
   
·
Permitted conversion of the Series C preferred stock into common stock at any time after June 30, 2012.
 
During the six months ended March 31, 2013, the Company accrued $26,921 of dividends associated with outstanding shares of Series C preferred stock and settled the balance by issuing 5,195 shares of Series D preferred stock.
 
Series D Convertible Preferred Stock
 
On October 4, 2011, the Board of Directors designated 1,000,000 shares of preferred stock as Series D convertible preferred stock (“Series D preferred stock”).  As originally designated, the Series D preferred stock was to be vested immediately upon issuance, and each share of Series D preferred stock was convertible into 10 shares of common stock.  The original designation also provided that the Series D preferred stock would be non-voting and would not pay a dividend.  In addition, conversion of the Series D preferred stock was limited to not more than 4.99% of the issued and outstanding common stock.
 
During fiscal year 2012, the Board of Directors approved the following amendments to the designation of the rights and preferences of the Series D preferred stock prior to the issuance of any of the shares:
 
·
Changed the conversion ratio from 10 shares of common stock for one share of Series D preferred stock to 50 shares of common stock for one share of Series D preferred stock;
   
·
Added an annual dividend rate of 8%, payable quarterly beginning April 1, 2012;
   
·
Changed the shares from non-voting to voting, on an as-converted basis;
   
·
Eliminated the 4.99% conversion limitation;
   
·
Permitted conversion of the Series D preferred stock, commencing April 1, 2012;
   
·
Permitted the Company, at its option, to redeem the Series D preferred shares at a redemption price equal to 120% of the original purchase with 15 days notice.
 
 
18

 
 
During the six months ended March 31, 2013, the Company issued the following shares of Series D preferred stock:
 
·
74,174 shares for $657,363 in loan origination fees;
   
·
71,800 shares for future advisory services through December 2014, the value on the date of grant was $230,800;
   
·
20,000 shares for future consulting services through December 2013, the value on the date of grant was $60,000;
   
·
52,913 shares for $150,000 in previously accrued Board of Directors’ fees and $61,652 of additional compensation for past services;
   
·
24,300 shares for a bonus to an officer for past services, the value on the date of grant was $97,200;
   
·
5,195 shares for dividends on Series C preferred stock, the value on the date of grant was $13,610;
   
·
1,658 shares for dividends on Series D preferred stock, the value on the date of grant was $4,116;
   
·
95,400 shares for past consulting services by an entity controlled by an officer of the Company, which were previously accrued in the amount of $333,902;
   
·
30,000 shares for a bonus to an entity controlled by an officer of the Company for consulting services, the value on the date of grant was $105,000;
   
·
80,000 shares for a bonus to the CEO of the Company for signing an employment agreement with the Company, the value at the date of grant was $320,000, which cannot convert to common stock until the Company has 20,000 subscribers.
 
During the six months ended March 31, 2013, the Company accrued $102,506 of dividends on shares of Series D preferred stock and settled $8,490 of the balance by issuing 1,658 shares of Series D preferred stock.  As of March 31, 2013, the Company had a remaining balance of $116,885 of accrued dividends.
 
Liquidation Preference
 
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 C preferred stock and Series D 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 respectively entitled.
 
13.
Common Stock
 
During the six months ended March 31, 2013, the Company issued 337,500 shares to employees. Of this issuance, 276,500 shares were issued as bonuses valued at the date of grant at $39,824.  The remaining 61,000 shares, valued at $82,350, were issued in accordance with the following restricted stock agreement:
 
During fiscal year 2010, the Company awarded certain employees non-vested common stock totaling 679,000 shares, valued at $916,650, or $1.35 per share, in connection with their employment agreements.  During fiscal year 2011, the Company reduced the non-vested stock by 42,000 shares due to the change of employment status of several individuals.  During the three months ended March 31, 2013, the Company reduced the non-vested stock by an additional 174,000 shares due to the change of employment status of several individuals.  During the three months ended March 31, 2013 and 2012, the Company recognized $5,211 and $39,062 of compensation expense as these shares vested.  During the six months ended March 31, 2013 and 2012, the Company recognized $10,421 and $78,125 of compensation expense as these shares vested.  As of March 31, 2013 and September 30, 2012, the unrecognized stock-based compensation was $56,725 and $245,952, respectively, and will be recognized over the remaining estimated lives of the performance measures.  The weighted average remaining term of the grant is 1.13 years.  During the quarter ended December 31, 2012, the Company issued 61,000 restricted shares to employees due to the Company meeting a milestone according to the agreement with the employees.  The 61,000 shares issued were valued at $82,350 at the date of grant.
 
During the six months ended March 31, 2013, the Company also issued 150,000 shares of common stock to a lender as a loan origination fee.  The common stock issued had a fair market value of $24,000 at the date of grant.
 
 
19

 
 
14.
Stock Options and Warrants
 
The fair value of each stock option or warrant grant 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 warrants is based on the U.S. Treasury yield curve in effect at the time of grant.  The dividend yield is zero.
 
During fiscal years 2013 and 2012, the Company measured the fair value of the warrants using a binomial valuation model with the following assumptions:
 
 
 Six Months Ended
 
 March 31,
 
2013
 
2012
Exercise price
 $0.10 - $0.15
 
 $0.40 - $0.50
Expected term (years)
2.5 - 5
 
2.5
Volatility
223% - 298%
 
104% - 135%
Risk-free rate
0.35% - 0.88%
 
0.39% - 0.68%
Dividend rate
0%
 
0%
 
During the six months ended March 31, 2013, the Company recorded stock-based compensation expense relating to the following stock options and warrants:
 
·
Options to purchase 4,333,333 shares were granted to each of three employees of 4G as part of their employment agreements dated June 21, 2012, 13,000,000 in aggregate, with an exercise price of $0.10 per share.  These options vest as described in Note 4.  The options expire in June 2017.  The value of the options at the date of grant was $1,147,163.  The Company has been amortizing the expense based on expectation dates of the milestones.  During the six months ended March 31, 2013, the Company recognized $557,284 of the total compensation expense. Options for 2,600,000 shares have vested as of March 31, 2013.
   
·
Options to purchase 10,000,000 shares were granted to the Company’s CEO for services as part of his employment agreement dated July 2012, with an exercise price of $0.10 per option.  One tenth (1,000,000 shares) of the options vest for each milestone of 5,000 additional members added to the Company since the beginning of his employment in July 2012 until fully vested, as similarly described in Note 4.  The options expire in July 2017.  The Company has been amortizing the expense based on expectation dates of the milestones.  During the six months ended March 31, 2013, the Company recognized $489,490 of the total compensation expense.  Options for 4,000,000 shares have vested as of March 31, 2013 due to the Company reaching certain milestones according to the contract.
   
·
Options to purchase 2,125,000 shares were granted to each of the two key managers of GWire, 4,250,000 in aggregate, with an exercise price of $0.10 per option.  Under the option agreements, the only method of exercise requires the employee to submit up to 2,125,000 shares of GWire stock, awarded as part of the employment agreements dated November 1, 2012, to the Company in exchange for equivalent shares of the Company’s common stock, up to $425,000 in total.  The options are fully vested upon issuance and expire in October 2022.  Subsequent to March 31, 2013, the two key managers converted these options together with 4,250,000 shares of GWire stock into 4,250,000 shares of the Company’s common stock.  As a result, the Company owns 100% of GWire.
   
 
The following table summarizes information about stock options and warrants outstanding as of March 31, 2013:

             
Options and Warrants
 
Number of Options
and Warrants
   
Weighted-Average
 Exercise Price
 
                 
Outstanding as of October 1, 2012
    23,865,871     $ 0.15  
Granted
    17,503,000       0.10  
Exercised
    -       -  
Forfeited
    -       -  
Outstanding as of March 31, 2013
    41,368,871       0.13  
Exercisable as of March 31, 2013
    2,355,871       0.58  
 
As of March 31, 2013, the outstanding options and warrants have an aggregate intrinsic value of $1,353,506, and the weighted average remaining term of the warrants is 4.25 years.
 
For the six months ended March 31, 2013 and 2012, the Company recognized non-cash expense of $1,249,346 and $2,576,709, respectively, related to the vesting and re-pricing of all stock options and warrants granted in current and prior years.
 
 
20

 
 
15.
Segment Information
 
The Company operates with three business segments based primarily on the nature of the Company’s products. The Reagents segment is engaged in the business of manufacturing and marketing medical diagnostic stains, solutions and related equipment to hospitals and medical testing labs. The CareServices segment is engaged in the business of developing, distributing and marketing mobile health monitoring and concierge services to distributors and consumers.  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 self-insured companies.
 
Additionally, 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 for the three and six months ended March 31, 2013 and 2012:
 
   
Corporate
   
CareServices
   
Stains and Reagents
   
Chronic Illness
Monitoring
   
Total
 
Three months ended March 31, 2013
                             
Sales to external customers
  $ -     $ 457,113     $ 130,029     $ 4,256,011     $ 4,843,153  
Segment income (loss)
    (2,011,486 )     (914,966 )     20,731       455,392       (2,450,329 )
Interest expense
    (767,391 )     -       -       -       (767,391 )
Segment assets
    20,816       3,255,691       161,064       7,517,626       10,955,197  
Property, equipment and leased equipment purchases
    -       132,993       888       -       133,881  
Depreciation and amortization
    179       278,557       3,211       28,610       310,557  
                                         
Three months ended March 31, 2012
                                       
Sales to external customers
    -       62,740       114,457       3,118       180,315  
Segment loss
    (1,571,030 )     (108,152 )     (50,575 )     (78,225 )     (1,807,982 )
Interest expense, net
    (145,270 )     -       -       -       (145,270 )
Segment assets
    42,383       1,138,858       241,706       593,118       2,016,065  
Property, equipment and leased equipment purchases
    -       1,224       -       -       1,224  
Depreciation and amortization
    179       43,821       14,050       -       58,050  
 
                               
   
Corporate
   
CareServices
   
Stains and Reagents
   
Chronic Illness
Monitoring
   
Total
 
Six months ended March 31, 2013
                             
Sales to external customers
  $ -     $ 876,801     $ 254,499     $ 6,209,615     $ 7,340,915  
Segment income (loss)
    (4,302,830 )     (1,958,743 )     6,370       224,157       (6,031,046 )
Interest expense, net
    (1,790,983 )     -       -       -       (1,790,983 )
Segment assets
    20,816       3,255,691       161,064       7,517,626       10,955,197  
Property, equipment and leased equipment purchases
    -       261,528       888       -       262,416  
Depreciation and amortization
    357       548,190       6,451       57,220       612,218  
                                         
Six months ended March 31, 2012
                                       
Sales to external customers
    -       124,627       221,738       3,118       349,483  
Segment loss
    (5,581,813 )     (206,078 )     (101,339 )     (78,225 )     (5,967,455 )
Interest expense, net
    (235,816 )     -       -       -       (235,816 )
Segment assets
    42,383       1,138,858       241,706       593,118       2,016,065  
Property, equipment and leased equipment purchases
    -       7,729       -       -       7,729  
Depreciation and amortization
    357       114,460       29,123       -       143,940  
                                         
 
 
21

 
 
16.
Lease Commitments
 
The Company leases office space under non-cancelable operating leases.  The Company also has several equipment operating lease contracts.  Future minimum rental payments under non-cancelable operating leases as of March 31, 2013 were as follows:
 
       
Years Ending September 30,
     
2013
  $ 162,403  
2014
    365,456  
2015
    395,501  
2016
    333,550  
Total
  $ 1,256,910  
 
The rent expense for the Company’s facilities held under non-cancelable operating leases was $107,225 and $71,333 for the six months ended March 31, 2013 and 2012, respectively.
 
17.
Fair Value Measurements
 
US GAAP establishes a fair value hierarchy that prioritizes the inputs used to measure fair values. The Company measured the fair values using the hierarchy levels as follows:
 
Level 1
The Company does not have any fair value balances classified as Level 1.
   
Level 2
The Company’s embedded derivatives are measured on a recurring basis using Level 2 inputs.
   
Level 3
The Company’s goodwill is measured using Level 3 inputs (see note 4).
 
The Company’s embedded derivatives liability is re-measured to fair value at each reporting date until the contingency is resolved.  See Notes 4 and 11 above for more information about this liability and the inputs used for calculating fair value.
 
18.
Subsequent Events
 
Subsequent to March 31, 2013, the Company entered into the following agreements and transactions:
 
(1)
During April 2013, the Company issued three Series A debentures, secured by current customer contracts, payable to three unrelated parties in the amount of $250,000.  Each debenture is payable in 36 monthly payments and matures in April 2016.  The debentures bear interest at 12% and are convertible into common stock after 180 days. (See Note 9 for description of royalty and buy-out provisions of the Series A debentures).
   
(2)
During April 2013, the Company issued a note payable to an entity that is controlled by an officer.  The note is in the principal amount of $200,000.  The Company issued 4,000 shares of Series D preferred stock with fair market value of $34,000 at the date of grant as a loan origination fee.  The loan matures in May 2013.  The loan bears annual interest at a rate of 12% and the interest rate increases to 18% after default.  The loan is convertible into common stock after default at $0.04 per share or 50% of the average market price of the preceding five trading days, whichever is less.  The loan is currently in default.
   
(3)
During April 2013, the Company issued a note payable to an officer of the Company.  The note is in the principal amount of $250,000 with annual interest rate of 12%.  The loan matures on May 30, 2013.  The annual interest rate after maturity date will be 18% and it is convertible to common shares at the lesser of $0.04 or 50% of the average closing price of the preceding five trading days.
   
(4)
In May 2013, the Company entered into a service contract with a third-party company.  The Company agreed to pay a retainer fee of $25,000 in the form of shares of restricted common stock priced at the average of the closing price of the Company’s common stock for the five trading days prior to the date of signing the agreement.
   
(5)
At the annual meeting of stockholders on March 25, 2013, the stockholders of the Company approved a 10-for-1 reverse stock split.  Because the Company has not yet taken the steps to effect this reverse split, the share amounts in the financial statements do not reflect any impact from this reverse split.
 
19.
Reclassifications
 
During the six months ended March 31, 2013, the Company reclassified $104,660 to research and development expense that was previously reported as selling, general and administrative expense for the three months ended December 31, 2012.

 
22

 
 
Item 2.                      Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader better understand 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, 2012 and 2011, and the accompanying notes thereto, contained in our Annual Report on Form 10-K. Unless otherwise indicated, the terms “ActiveCare,” the “Company,” “we,” and “our” refer to ActiveCare, Inc., a Delaware corporation.
 
Overview
 
Historically, our core business has been the manufacture, distribution and sale of medical diagnostic stains and solutions.  In February 2009, we were spun off from our former parent, SecureAlert, Inc. (SCRA.BB).  In connection with the spin-off, we acquired from SecureAlert the exclusive license rights to certain technology, including patent rights utilizing GPS and cellular communication and monitoring technologies for use in the healthcare and personal security markets.  Our business plan is to develop and market a new product line for monitoring and providing assistance to mobile and homebound seniors and the chronically ill, including those who may require a personal assistant to check on them during the day to ensure their safety, well-being and location. 
 
Our emphasis in fiscal year 2012 was focused on addressing the chronic conditions and disease states markets.  During fiscal year 2012, we received valuable feedback through sales and focus groups reaching thousands of patients.  We launched an additional product line focused on technology for assisting the chronically ill.  We also successfully acquired 4G Biometrics, LLC (“4G”) and Green Wire, LLC, Green Wire Outsourcing, Inc., Orbit Medical Response, LLC, and Rapid Medical Response, LLC (collectively, “Green Wire”).  These acquisitions greatly increased our customer base and capacity as well as our abilities to include telehealth and other monitoring services in our product offerings.  The focus in fiscal year 2013 is to further develop and execute on our existing business plan.
 
Recent Developments
 
We have financed operations primarily through long-term and short-term debt.  If our revenues continue to be insufficient to meet our needs, we will attempt to secure additional financing through financial institutions or through the sale of our equity or debt securities.  However, because of our early stages of business and our current financial condition, our attempts may be unsuccessful in obtaining the necessary financing to continue to implement our plan of operations.  There can be no assurance that we will be able to obtain financing on satisfactory terms or at all.  In addition, if we only have nominal funds with which to conduct our business activities, it will negatively impact the results of our operations and our financial condition.
 
On March 8, 2012, we acquired 4G.  Pursuant to the acquisition agreement, we acquired 100% of the member interests of 4G and 4G is now operated as a wholly owned subsidiary of the Company.
 
Under the purchase method of accounting, the purchase price was allocated to 4G’s assets and assumed liabilities based on their estimated fair values as of the closing date of the acquisition.  The excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill.  The purchase price for 4G reflects total consideration paid of $1,040,000, of which $825,894 was allocated to goodwill and $214,106 was allocated to customer contracts.
 
During the year ended September 30, 2012, we established GWire Corporation (“GWire”) as a subsidiary.  Effective September 1, 2012, GWire acquired the net assets and interests of Green Wire.  We entered into employment agreements with two of Green Wire’s operating managers on November 1, 2012. These two individuals were granted 27% ownership in GWire; ActiveCare owned the remaining 73%.
 
The purchase price for Green Wire reflects total consideration paid of $2,276,737, which has been allocated as $12,215 of cash, $13,976 of accounts receivable, $92,022 of property and equipment, $16,964 of deposits and other assets, $229,249 of leased equipment, $2,155,776 of customer contracts, $154,206 of accounts payable, $55,117 of accrued expenses, and $34,142 of deferred revenue.
 
Subsequent to March 31, 2013, the GWire operating managers surrendered the 27% ownership in GWire to the Company by exercising the GWire options to acquire shares of the Company’s common stock.  ActiveCare now owns 100% of GWire.
 
 
23

 
 
Research and Development Program
 
ActiveOne+
 
ActiveOne+ is the second-generation PAL (“Personal Assistance Link”) handset, which includes one button connection to the CareCenter, GPS locating and fall detection technology; all in one unit.  The ActiveOne+ features enhanced fall detection technology to better detect when a fall occurs as well as enhanced locating technology that combines both GPS and cellular triangulation and allows our CareCenter to locate a member within several meters, 24 hours per day, 7 days a week, to better respond to any emergency condition.  In addition, the ActiveOne+ has built-in receptors utilizing Bluetooth technologies to accommodate body-worn devices that can communicate vital sign data to the CareCenter.  We have obtained FCC certification for ActiveOne+.
 
During the six months ended March 31, 2013, we spent $215,982, compared to $48,901 for the same period in 2012, on research and development (“R&D”) related to the ActiveOne+, a one-button actuated GPS/Cellular communications device (“Companion Device”) that links to our CareCenter.  This device includes fall detection, Geo Fencing, automatic calls to the CareCenter, text messaging, hands free speakerphone and other features.  The ActiveOne+ is a water resistant wrist device that includes fall detection, speakerphone, vibration alerts, audible alerts, and LED’s for status monitoring.  It communicates through Bluetooth with the Companion Device. Our goal is to develop this wristwatch-size monitoring device primarily for senior citizens.  The watch is universal for women and men with an adjustable strap.  The expanded CareCenter and the related products will be developed by our team.  We have identified and are working with several vendors for services that will further our objectives.  
 
Chronic Illness Monitoring
 
Chronic illness monitoring involves the use of biometric monitoring devices in combination with proprietary data and algorithms to assess and predict 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 are 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 devices, (2) medical and claims data aggregation, and (3) algorithms for the analysis of the data.  Biometric monitoring devices are provided by numerous medical hardware providers, and provide 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 to and capture data from any 510(k) or HL7 compliant monitoring device (see “Regulatory Matters”).  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 six months ended March 31, 2013, we spent $252,731, compared to $0 for the same period in 2012, on R&D for chronic illness monitoring related to the development of prototype methods and systems for the capture and analysis of data, as well as the development of scalable architectures to migrate to production applications and deployments.  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. 
 
Critical Accounting Policies
 
The following summary includes accounting policies that we deem to be most critical to our business.  Management considers an accounting estimate to be critical if:
 
·
It requires assumptions to be made that were uncertain at the time the estimate was made, and
   
·
Changes in the estimate or different estimates that could have been selected could have a material impact on our consolidated results of operations or financial position.
 
Use of Estimates in the Preparation of Financial Statements
 
We have prepared and included with this report condensed consolidated unaudited financial statements in conformity with US GAAP.
 
The preparation of financial statements requires management to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses during the reporting period.  By their nature, these estimates and judgments are subject to an inherent degree of uncertainty.  On an on-going basis, we evaluate our estimates, including those related to bad debts, inventories, intangible assets, warranty obligations, product liability, revenue recognition, and income taxes.  We base our estimates on historical experience and other facts and circumstances that are believed to be reasonable and the results provide a basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions, and these differences may be material.
 
 
24

 
 
Material accounting policies that we believe are critical to an understanding of our financial results and conditions are described below.
 
Concentration of Credit Risk
 
We have cash in bank accounts that, at times, may exceed federally insured limits.  We have not experienced any losses in such accounts.
 
In the normal course of business, we provide credit terms to our customers.  Accordingly, we perform ongoing credit evaluations of customers’ financial condition and require no collateral from customers.  We maintain an allowance for uncollectable accounts receivable based upon their expected collectability.
 
Accounts Receivable
 
Accounts receivable are carried at the original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis.  Specific reserves are estimated by management based on certain assumptions and variables, including the customer’s financial condition, age of the customer’s receivables and changes in payment histories.  Trade receivables are written off when deemed uncollectible.  Recoveries of trade receivables previously written off are recorded when received.  A trade receivable is considered to be past due if any portion of the receivable balance has not been received by the contractual pay date.  Interest is not charged on trade receivables that are past due.
 
Inventories
 
Inventories are recorded at the lower of cost or market, cost being determined using the first-in, first-out (“FIFO”) method. Reagent inventories consist of raw materials, work-in-process, and finished goods.  CareServices inventory consists of ActiveHome inventories.  Chronic Illness Monitoring inventory consists of diabetic supplies.  Provisions, when required, are made to reduce excess and obsolete inventories to their estimated net realizable values.  Due to competitive pressures and technological innovation, it is possible that estimates of the net realizable value could change in the near term. 
 
Property and Equipment
 
Property and equipment are stated at cost, less accumulated depreciation and amortization.  Depreciation and amortization are determined using the straight-line method over the estimated useful lives of the assets, typically three to seven years.  Leasehold improvements are amortized over the shorter of the estimated useful lives of the assets or the term of the leases.  Expenditures for maintenance and repairs are expensed while renewals and improvements over $500 are capitalized.  When property and equipment are sold or otherwise disposed of, any gains or losses are included in the results of operations.
 
Equipment Leased to Customers
 
Our leased equipment is stated at cost less accumulated depreciation and amortization.  We amortize the cost of leased equipment using the straight-line method over 36 months, which is the estimated useful life of the equipment.  Amortization of leased equipment is recorded as cost of revenues.
 
Revenue Recognition
 
Our revenue has historically been from three sources: (i) sales from Chronic Illness Monitoring services and supplies; (ii) sales from CareServices; and (iii) sales of medical diagnostic stains from our Reagents segment.
 
Chronic Illness Monitoring
 
We began sales through 4G upon our acquisition of the company in the quarter ended March 31, 2012.  We recognize Chronic Illness Monitoring revenue when persuasive evidence of an arrangement with the customer exists, title passes to the customer, prices are fixed or determinable and collection is reasonably assured.
 
Shipping and handling fees are included as part of net revenues.  The related freight costs and supplies directly associated with shipping products to customers are included as a component of cost of revenues.  Sales of Chronic Illness Monitoring products and services do not contain multiple deliverables.
 
We enter into agreements with self-insured companies to lower medical expenses by distributing diabetic testing supplies to their employees (members) and monitoring their test results.  The self-insured companies are obligated to pay for the supplies that we distribute to the members on a quarterly basis.  The term of these contracts is one year and, unless terminated by either party, will automatically renew for another year.  All of our Chronic Illness Monitoring sales are made with net 30-day payment terms.
 
 
25

 
 
With respect to Chronic Illness Monitoring revenues, to qualify for the recognition of revenue under US GAAP at the time of sale, the following must be present:
 
·
The price to the contracted self-insured company is fixed or determinable at the date of sale.
   
·
The self-insured company has paid, or is obligated to pay us within terms.
   
·
The self-insured company’s obligation to the Company would not be changed in the event of theft or physical destruction or damage of the product.
   
·
Once the product is shipped, the end user does not have the right of return.
 
CareServices
 
“CareServices” include contracts in which we provide monitoring services to end users and sell devices to distributors.  We typically enter into contracts on a month-to-month basis with customers (members) that use our CareServices.  However, these contracts may be cancelled by either party at any time with 30-days notice.  Under our standard contract, the device becomes billable on the date the customer (member) orders the product, and remains billable until the device is returned to us.  We recognize revenue on devices at the end of each month that CareServices have been provided.  In those circumstances in which we receive payment in advance, the Company records these payments as deferred revenue.
 
We recognize CareServices revenue when persuasive evidence of an arrangement with the customer exists, title passes to the customer, prices are fixed or determinable and collection is reasonably assured.  Shipping and handling fees are included as part of net revenues.  The related freight costs and supplies directly associated with shipping products to customers are included as a component of cost of revenues.  Customers order our products by phone or website.  All CareServices sales are made with net 30-day payment terms.
 
In connection with US GAAP, to qualify for the recognition of revenue at the time of sale, the following must be present:
 
·
The Company’s price to the buyer is fixed or determinable at the date of sale.
   
·
The buyer has paid the Company, or the buyer is obligated to pay the Company within terms, and the obligation is not contingent on resale of the product.
   
·
The buyer’s obligation to the Company would not be changed in the event of theft or physical destruction or damage of the product.
   
·
The buyer acquiring the product for resale has economic substance apart from that provided by the Company.
   
·
The Company does not have significant obligations for future performance to directly bring about resale of the product by the buyer.
   
·
The amount of future returns can be reasonably estimated and they are not significant.
 
The vast majority of sales for CareServices are service revenues.  Because equipment sales are not material, we disclose services and equipment sales together in the accompanying financial statements.
 
Our revenue recognition policy for sales to distributors of CareServices is the same as the policy for sales to end-users.
 
A customer qualifies as a distributor by completing a distributor application and proving its sales tax status.  Our distributors are not required to maintain specified amounts of product on hand, and distributors are not required to make minimum purchases to maintain distributor status.  Distributors have no stock rotation rights or additional rights of return.  Revenues from products sold with long-term service contracts are recognized ratably over the expected life of the contract.  Sales to distributors are recorded net of discounts.
 
Sales returns have been negligible, and any and all discounts are known at the time of sale.  Sales are recorded net of sales returns and sales discounts.  There are no significant judgments or estimates associated with the recording of revenues.
 
The majority of our CareServices revenue transactions do not have multiple elements.  On occasion, we have revenue transactions that have multiple elements (such as device sales to distributors).  In these situations, we provide the distributor with the ActiveOne™ device and a monthly monitoring service, which are both included in the contracted pricing.  In these multiple element revenue arrangements, we will consider whether: (i) the deliverables have value on a standalone basis to the distributors, and (ii) the distributors have a general right of return.  We determined that these elements do have standalone value to distributors and that the delivery of undelivered items is probable and substantially within our control.  Therefore these revenue elements should be considered as separate units of accounting.  Consideration is to be allocated at the inception of the arrangement to all deliverables on the basis of their relative selling prices.  When applying the relative selling price method, the selling price for each deliverable is determined using vendor-specific objective evidence of selling price, if it exists; otherwise, third-party evidence of the selling price is used to determine the selling price.  If neither vendor-specific objective evidence nor third-party evidence of the selling price exists for a deliverable, then the best estimate of the selling price is used for that deliverable.
 
 
26

 
 
We do not currently sell, nor do we intend to sell the ActiveOne™ device separately from the monthly monitoring service, therefore we are not able to determine vendor-specific objective evidence of selling price.  We are also unable to determine third-party evidence of selling price, because there is not a similar product in the market.  The ActiveOne™ device is the only device in the market with fall detection technology.  We are therefore required to determine the best estimate of its selling price in order to determine the relative selling price of the separate deliverables in the revenue arrangements.  In order to determine the best estimate of selling price of the ActiveOne™ device, we included the following cost components in our estimate: production costs, development costs, PTCRB certification costs, and estimated gross margin.  In order to determine the best estimate of the monthly monitoring service, we included the following components in our estimate: monthly communication costs, monitoring labor costs, Public Safety Access/Answering Point (“PSAP”) database and monthly maintenance costs, and estimated gross margin.  The relative selling price allocated to the sale of the ActiveOne™ device is recognized when the device is delivered to the distributor.  The relative selling price of the monitoring service is recognized monthly when the services have been provided.
 
Reagents
 
We recognize Reagents revenue when persuasive evidence of an arrangement with the customer exists, title passes to the customer, prices are fixed or determinable and collection is reasonably assured.
 
Shipping and handling fees are included as part of net revenues.  The related freight costs and supplies directly associated with shipping products to customers are included as a component of cost of revenues.  Neither the sale of diagnostic equipment nor the sale of medical diagnostic stains contains multiple deliverables.
 
With respect to Reagents revenues, to qualify for the recognition of revenue under US GAAP at the time of sale, the following must be present:
 
·
The price to the buyer is fixed or determinable at the date of sale.
   
·
The buyer has paid, or the buyer is obligated to pay the Company within terms, and the obligation is not contingent on resale of the product.
   
·
The buyer’s obligation to the Company would not be changed in the event of theft or physical destruction or damage of the product.
   
·
The buyer acquiring the product for resale has economic substance apart from that provided by the Company.
   
·
The Company does not have significant obligations for future performance to directly bring about resale of the product by the buyer.
   
·
The amount of future returns can be reasonably estimated and they are not significant.
 
Our diagnostic stain products have not been modified significantly for several years.  There is significant history on which to base our estimates of sales returns.  These sales returns have been negligible.
 
Because diagnostic equipment sales are not material to the financial statements, we disclose equipment and stains sales together for Reagents.
 
Our revenue recognition policy for Reagents sales to distributors is the same as the policy for sales to end-users.
 
A customer qualifies as a distributor by completing a distributor application and proving its sales tax status.  Upon qualifying as a distributor, a customer receives a 35% discount from retail prices, and the distributor receives an additional 5% discount when product is purchased in case quantities.  Our Reagents distributors are not required to maintain specified amounts of product on hand, and distributors are not required to make minimum purchases to maintain distributor status.  Distributors have no stock rotation rights or additional rights of return.  Sales to distributors are recorded net of discounts.
 
Sales returns have been negligible, and any and all discounts are known at the time of sale.  Sales are recorded net of sales returns and sales discounts.  There are no significant judgments or estimates associated with the recording of revenues.
 
 
27

 
 
Results of Operations
 
Three Months Ended March 31, 2013 and 2012
 
Net Revenues
 
For the fiscal quarter ended March 31, 2013, we generated net revenues of $4,843,153, compared to $180,315 for the fiscal quarter ended March 31, 2012.  Reagents revenues accounted for $130,029 and $114,457 for the quarters ended March 31, 2013 and 2012, respectively.  CareServices revenues, including revenue for the ActiveOne™ service, accounted for $457,113 and $62,740 of the total revenues for the quarters ended March 31, 2013 and 2012, respectively.  Chronic Illness Monitoring revenues accounted for $4,256,011 and $3,118 for the quarters ended March 31, 2013 and 2012, respectively.  The primary reason for the total revenue increase is the new sales generated by 4G and Green Wire.
 
Cost of revenues
 
Cost of revenues totaled $3,941,473 for the fiscal quarter ended March 31, 2013, compared to $270,304 for the quarter ended March 31, 2012.  During the fiscal quarter ended March 31, 2013, of the total cost of revenues, Reagents accounted for $71,739, CareServices accounted for $746,097, and Chronic Illness Monitoring accounted for $3,123,637.  In comparison, for the fiscal quarter ended March 31, 2012, Reagents accounted for $98,132, CareServices accounted for $170,892, and Chronic Illness Monitoring accounted for $1,280.  The increase of the total cost of revenues for the fiscal quarter ended March 31, 2013, is primarily due to the increase of sales generated by 4G and Green Wire.
 
Research and Development Expenses
 
For the fiscal quarter ended March 31, 2013, we incurred research and development expenses of $266,672, compared to $28,210 in research and development expenses for the fiscal quarter ended March 31, 2012.  Research and development expenses for the fiscal quarter ended March 31, 2013, increased compared to the prior year period primarily due to the development of the Chronic Illness Monitoring operation system.
 
Selling, General and Administrative Expenses
 
For the three months ended March 31, 2013, selling, general and administrative expenses totaled $2,293,419, compared to $1,519,257 for the same period of the prior year.  The increase is primarily due to the expenses incurred by 4G and Green Wire during the quarter ended March 31, 2013.
 
Other Income and Expense
 
Gain on derivatives was $7,360 for the quarter ended March 31, 2013, compared to a loss on derivatives of $25,256 for the quarter ended March 31, 2012.  We have borrowed increasing amounts under convertible debt instruments, some of which are recorded as derivative liabilities.  Interest expense was $767,391 and $145,272 for the quarters ended March 31, 2013 and 2012, respectively.  The increase was due to the increase of notes payable during the current period.
 
Net Loss
 
We incurred a net loss for the three months ended March 31, 2013 totaling $2,405,329, compared to a net loss of $1,807,982 for the same period of the prior year.  This increase in net loss was primarily due to the increase of interest expense.  The net loss per share was $0.05 per share for the three months ended March 31, 2013 and 2012.  The net loss per share remained the same due to the increase of weighted average common shares outstanding for the quarter ended March 31, 2013 compared to the same period in 2012.
 
Dividends on Preferred Stock
 
We accrued $74,432 of dividends on Series C and Series D preferred stock for the three months ended March 31, 2013, compared to $26,784 for the same period of the prior year.  The increase in dividends was due to the increased number of shares of Series D preferred issued and outstanding during the current period.
 
Six Months Ended March 31, 2013 and 2012
 
Net Revenues
 
For the six months ended March 31, 2013, we had net revenues of $7,340,915, compared to $349,483 for the six months ended March 31, 2012.  Reagents revenues totaled $254,499 and $221,738 for the six months ended March 31, 2013 and 2012, respectively.  CareServices revenues, including revenue for the ActiveOne™ service, totaled $876,801 and $124,627 of the total revenues for the six months ended March 31, 2013 and 2012, respectively.  Chronic Illness Monitoring revenues totaled $6,209,615 and $3,118 for the six months ended March 31, 2013 and 2012, respectively.  The reason for the total revenue increase is primarily the new sales generated by 4G and Green Wire.
 
 
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Cost of revenues
 
Cost of revenues totaled $6,222,646 for the six months ended March 31, 2013, compared to $528,792 for the six months ended March 31, 2012.  For the six months ended March 31, 2013, of the total cost of revenues, Reagents accounted for $169,599, CareServices accounted for $1,467,624, and Chronic Illness Monitoring accounted for $4,585,423.  In comparison, for the six months ended March 31, 2012, Reagents accounted for $196,807, CareServices accounted for $330,705, and Chronic Illness Monitoring accounted for $1,280.  The increase of the total cost of revenues for the six months ended March 31, 2013, is primarily due to the increase of sales generated by 4G and Green Wire.
 
Research and Development Expenses
 
For the six months ended March 31, 2013, we incurred research and development expenses of $468,713, compared to $48,901 in research and development expenses for the six months ended March 31, 2012.  Research and development expenses for the six months ended March 31, 2013, increased compared to the prior year period primarily due to the development of the Chronic Illness Monitoring operation system.
 
Selling, General and Administrative Expenses
 
For the six months ended March 31, 2013, selling, general and administrative expenses totaled $4,950,754, compared to $5,478,174 for the same period of the prior year.  The decrease is due to the lower non-cash expenses incurred for the six months ended March 31, 2013 compared to the prior year period.
 
Other Income and Expense
 
Gain on derivatives was $45,697 for the six months ended March 31, 2013, compared to a loss on derivatives of $25,256 for the six months ended March 31, 2012.  We have borrowed increasing amounts under convertible debt instruments, some of which are recorded as derivative liabilities.  Interest expense was $1,791,007 and $235,897 for the six months ended March 31, 2013 and 2012, respectively.  The increase was due to the increase of notes payable during the current period.
 
Net Loss
 
We incurred a net loss for the six months ended March 31, 2013 totaling $6,031,046, compared to a net loss of $5,967,456 for the same period of the prior year.  The net loss per share for the six months ended March 31, 2013 was $0.13, compared to a net loss per share of $0.15 for the same period of prior year.  The weighted average common shares increased in the six months ended March 31, 2013, compared to the same period in 2012.  The improvement in operations in the six months ended March 31, 2013 was offset by an increase of interest expense.
 
Dividends on Preferred Stock
 
We accrued $133,974 of dividends on Series C and Series D preferred stock for the six months ended March 31, 2013, compared to $26,784 for the same period of the prior year.  The increase in dividends was due to the increased number of shares of Series D preferred stock issued and outstanding during the current period.
 
Liquidity and Capital Resources
 
Our primary sources of liquidity are the proceeds from the sale of our equity securities and from borrowing.  We have not been in a position to finance operations from cash flows from operating activities.  We anticipate that we will continue to seek equity and debt funding to supplement revenues from the sale of our products and services until we begin to have positive cash flows from operating activities.
 
As of March 31, 2013, we had cash of $42,066, compared to cash of $529,839 as of September 30, 2012.  The decrease in cash was due to increased cash used in operating activities during the six months ended March 31, 2013, compared to the fiscal year ended September 30, 2012. As of September 30, 2012, we had a working capital deficit of $10,143,700, compared to a working capital deficit of $5,550,715 as of March 31, 2013.  The decrease in working capital deficit is primarily due to the increase of accounts receivable.
 
For the six months ended March 31, 2013 and 2012, operating activities used cash of $4,745,947 and $1,167,552, respectively.  The increased cash used in operating activities was primarily due to increased accounts receivable and increased cash losses for the six months ended March 31, 2013, compared to the same period in 2012.  Investing activities for the six months ended March 31, 2013 and 2012 used cash of $267,410 and $207,728, respectively.  The increase of cash used in investing activities was due to increased purchasing of equipment leased to customers for the six months ended March 31, 2013.  Financing activities for the six months ended March 31, 2013 and 2012 provided cash of $4,525,584 and $1,305,000, respectively.  The increase was due to increased cash proceeds from notes payable issued for the six months ended March 31, 2013.
 
 
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For the six months ended March 31, 2013, we had a net loss of $6,031,046 and negative cash flows from operating activities totaling $4,745,947, compared to a net loss of $5,967,456 and negative cash flows from operating activities of $1,167,552 for the six months ended March 31, 2012.  The increase in net loss and increase in cash used for operating activities were due primarily to the increase in operational expenses and interest expenses for the six months ended March 31, 2013.
 
As of March 31, 2013, we had an accumulated deficit of $43,524,235 compared to $37,359,214 as of September 30, 2012.  Stockholders’ deficit as of March 31, 2013 was $6,825,426 compared to stockholders’ deficit of $7,715,390 as of September 30, 2012.  The decrease in stockholders’ deficit is primarily due to the increase of additional paid-in capital from the decrease of derivative liabilities (see Note 11).
 
Recent Accounting Pronouncements
 
We have reviewed all recently issued, but not yet effective, accounting pronouncements and do not believe the future adoptions of any such pronouncements will cause a material impact on our financial position or the results of operations.
 
Item 3.                      Quantitative and Qualitative Disclosures about Market Risk
 
Information about the Company’s exposure to market risk was disclosed in its Annual Report on Form 10-K for the year ended September 30, 2012, which was filed with the Securities and Exchange Commission on January 15, 2013. There have been no material quantitative or qualitative changes in market risk exposure since the date of that filing.
 
Item 4.                      Controls and Procedures
 
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 Securities and Exchange Commission (“SEC”) and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding any required disclosure.  In designing and evaluating these disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
 
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) under the Exchange Act). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of the end of the period, our disclosure controls and procedures were not effective, for the reasons discussed below.  
 
During the audit process for the year ended September 30, 2012, we identified material weaknesses in internal control over financial reporting as follows:
 
Control Environment
 
We did not maintain an effective control environment for internal control over financial reporting.  Specifically, we concluded that we did not have appropriate controls in the following areas:
 
·
Period end financial disclosure and reporting processes.
   
·
Communication of material transactions between management and accounting personnel.
 
Financial Reporting Process 
 
We did not maintain an effective financial reporting process to prepare financial statements in accordance with US GAAP.  Specifically, we initially failed to appropriately account for and disclose the valuation and recording of certain equity arrangements and financing transactions, as well as the accounting and disclosure of the acquisition of 4G.
 
Management has not made any correcting changes to our internal control over financial reporting and the above material weaknesses remained as of March 31, 2013.  Similar material weaknesses to those identified in the 4G acquisition were also identified in the Green Wire acquisition.
 
Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement to our annual or interim financial statements will not be prevented or detected.
 
 
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We are in the process of improving our internal control over financial reporting in an effort to eliminate these material weaknesses through improved supervision and training of our staff, but additional effort and staffing are needed to fully remedy these deficiencies. Our management, audit committee, and directors will continue to work with our auditors and outside advisors to ensure that our controls and procedures are adequate and effective.
 
Changes in Internal Control Over Financial Reporting
 
There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
PART II – OTHER INFORMATION
 
Item 1.                      Legal Proceedings
 
On December 18, 2012, iLife Technologies, Inc. filed a lawsuit against nine companies, including ActiveCare, for patent infringement in the District Court for the Northern District of Texas.  The lawsuit alleges infringement of seven patents owned by iLife purportedly related to the use of accelerometers in devices used to monitor the status of a user.  ActiveCare has engaged legal counsel to investigate the validity of the patent claims in the lawsuit as well as the merits of the claims of infringement.  That investigation is in its early stage.  Therefore, it is not possible to assess the likelihood and magnitude of liability to the Company, if any, at this time.  ActiveCare intends to vigorously defend all claims against its products.
 
Item 2.                      Unregistered Sales of Equity Securities and Use of Proceeds
 
Recent Sales of Unregistered Securities
 
 
During the six months ended March 31, 2013, we issued the following shares of common stock without registration under the Securities Act of 1933 (the “Securities Act”):
 
·
337,500 shares of common stock to the employees of the Company as bonus, 276,500 shares were valued at $39,824 at the date of grant, and 61,000 shares were valued at $82,350 at the date of grant (see Note 13).
   
·
150,000 shares of common stock to a lender as a loan origination fee.  The common stock issued has a fair market value of $24,000 at the date of grant.
 
We issued shares of preferred stock without registration under the Securities Act during the six months ended March 31, 2013, as follows:
 
·
74,174 shares of Series D preferred stock as loan origination fees with a value of $657,363 at the date of grant.
 
     
·
374,413 shares of Series D preferred stock as stock-based compensation with a value of $1,358,554 at the date of grant.
 
     
·
6,853 shares of Series D preferred stock for accrued dividends for Series C and Series D preferred stock.  The shares issued have a value of $35,411 at the date of grant.
 
 
The securities issued in the above transactions were not registered under the Securities Act in reliance upon exemptions from registration under Section 4(2) of the Securities Act and rules and regulations promulgated thereunder.
 
Item 3.                      Defaults Upon Senior Securities
 
As of the date of this report, notes payable in the principal amount of $2,425,000 owing to five unrelated parties are due and unpaid.  These loans were due in December 2012 and in March and April 2013.  In addition, $33,000 of a note payable to an officer of the Company was due in June 2012.  Subsequent to March 31, 2013, we obtained an additional $200,000 loan from an entity controlled by an officer and the loan due date was in April 2013.  These loans are currently unpaid and are in default (see notes 9, 10, and 19).
 
Item 5.                      Other Information
 
None.

 
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Item 6. Exhibits
 
Exhibit Number                                                                Description
 
10(x)
 
Employment Agreement with David Derrick, Chief Executive Officer.
 
   
10(xi)
 
Common Stock Purchase Warrant Agreement with David Derrick, Chief Executive Officer.
     
10(xii)
 
Office Lease Agreement between the Company and Countryview  Properties, LLC.
     
31.1
 
Certification of Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002
     
31.2
 
Certification of Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002
     
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Certification of Chief Executive Officer and Chief 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*
 
* The XBRL related information in Exhibit 101 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.
 
 
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SIGNATURES

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

     
 
     ActiveCare, Inc.
   
     
     
   
/s/  David G. Derrick
   
David G. Derrick
Chief Executive Officer (Principal Executive Officer) and
Chairman of the Board of Directors
 
Date: May 15, 2013
 
     
   
/s/  Michael G. Acton
   
Michael G. Acton
Chief Financial Officer (Principal Financial and Accounting Officer)
 
Date: May 15, 2013
 
 
 
 
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