UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 6-K

REPORT OF FOREIGN ISSUER PURSUANT TO RULE 13A-16 AND L5D-16

UNDER THE SECURITIES EXCHANGE ACT OF 1934

(October 26, 2012)

DIVERSINET CORP.

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(Name of Registrant)

2235 Sheppard Avenue East, Suite 1700, Toronto, Ontario M2J 5B5

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(Address of principal executive offices)

1.

Press Release - Quarter ended September 30, 2012

2.

Financial Statements for the Three Months and Nine Months ended September 30, 2012

3.

Management’s Discussion and Analysis of Financial Condition and Results of Operations - Quarter ended September 30, 2012

Indicate by check mark whether the Registrant files or will file annual reports under cover of Form 20-F or Form 40-F

Form 20-F  X

Form 40-F

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Indicate by check mark whether the Registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934

YES

NO   X

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Form 6-K to be signed on its behalf by the undersigned, thereunto duly authorized

DIVERSINET CORP.

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(REGISTRANT)

DATE: October 26, 2012

BY:    /S/ DAVID HACKETT

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DAVID HACKETT, CHIEF FINANCIAL OFFICER

Diversinet Reports Third Quarter 2012 Financial Results

TORONTO, October 26, 2012 – Diversinet Corp. (TSX Venture: DIV, OTCQB: DVNTF), a leader in secure mobile health that “Powers Care Coordination through Mobility,” reported its third quarter 2012 results for the period ended September 30, 2012. All dollar amounts are in U.S. dollars.

Financial Highlights

Revenues for the third quarter of 2012 increased 35% to $451,000 from $333,000 in the same year-ago period. Revenues for the nine months ended September 30, 2012 increased 27% to $1.2 million from $0.9 million in the same period in 2011.

Revenues in the third quarter of 2012 included $181,000 from the Company’s license and reseller agreement with Mihealth Global Systems and $138,000 from the University of Nebraska.

Net loss in the third quarter totalled $0.7 million or $(0.02) per share, an improvement from a net loss of $1.1 million or $(0.03) per share in the same period last year. Net loss for the nine months ended September 30, 2012 was $3.2 million or $(0.07) per share, an improvement from a net loss of $3.9 million or $(0.09) per share in the same period in 2011.

Cash used in operations for the third quarter was $0.8 million compared with $1.1 million in the same period last year. Cash and cash equivalents were $4.3 million at September 30, 2012 as compared to $7.4 million at December 31, 2011.

Operational Highlights

•

During the third quarter, Diversinet received a one-year renewal from the U.S. Army’s Telemedicine and Advanced Technology Research Center (part of the U.S. Army Medical Research and Materiel Command) mCare telehealth-outreach program for members of the military recovering from mild traumatic brain injuries and other wounds.

•

In July 2012, Diversinet appointed Bret Jorgensen as chairman of the board. Jorgensen succeeded Albert Wahbe, who retired as chairman but remains a member of the board. Jorgensen brings more than 20 years of experience as a healthcare entrepreneur and corporate transformation executive to Diversinet.

•

Diversinet’s CEO, Dr. Hon Pak, was interviewed by mHealth Zone at American Telemedicine Association 2012 Fall Forum. He discussed his views about the emerging mHealth market and recent developments of Diversinet’s MobiSecure® technology, an enterprise-level mhealth platform that enables care coordination and patient engagement through building and configuring applications. The broadcast is available for replay here.

“Our secure and flexible mobile platform uses a unique system based approach to design, build and customize enterprise-level applications that drive patient engagement and care coordination,” said Dr. Pak. “We currently support 12,000+ users across our existing customer base and look forward to adding new customer relationships this quarter.”

Financial Summary

For complete financial statements, including the notes and management’s discussion and analysis, please visit our website at www.diversinet.com/FinancialReports.html.

About Diversinet

Diversinet Corp. (TSX Venture: DIV, OTCQB: DVNTF) is answering the challenges of today’s healthcare landscape with a secure enterprise mobile healthcare platform and integrated solutions. This technology can be leveraged and customized quickly to meet the ever-changing needs of healthcare organizations and patients – driving patient-provider and payer communications and improving outcomes while lowering costs.  Learn more about Diversinet at www.diversinet.com.

The Private Securities Litigation Reform Act of 1995 and Canadian securities laws provide a “safe harbour” for forward-looking statements. Certain information included in this press release (as well as information included in oral statements or other written statements made or to be made by the company) contains statements that are forward-looking, such as statements relating to the success of current product offerings. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, such results may differ materially from those expressed in any forward-looking statements made by or on behalf of the company. For a description of additional risks and uncertainties, please refer to the company’s filings with the Securities and Exchange Commission available at www.sec.gov and Canadian securities regulatory authorities available at www.sedar.com.

The TSX Venture Exchange has not reviewed and does not accept responsibility for the adequacy or accuracy of this release. MobiSecure is a registered trademark of Diversinet Corp.

Company Contact

Investor Relations

Diversinet Corp.

Liolios Group, Inc.

David Hackett

Ron Both

Chief Financial Officer

Managing Director

416-756-2324 ext. 275

949-574-3860 ext 1710

dhackett@diversinet.com

DVNTF@liolios.com

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis (“MD&A”), is intended to help the reader understand the results of operations and financial condition of Diversinet Corp. (“Diversinet” or the “Company”).  The MD&A should be read in combination with our unaudited condensed consolidated financial statements and the accompanying notes.  We report our unaudited condensed consolidated financial statements in accordance with United States generally accepted accounting principles (“GAAP”).  All dollar amounts in this MD&A are in U.S. dollars unless otherwise stated.

Certain statements in this MD&A contain words such as “could”, “expects”, “may”, “anticipates”, “believes”, “intends”, “estimates”, “plans”, and other similar language and are considered forward-looking statements or information under applicable securities laws.  These statements are based on our current expectations, estimates, forecasts and projections about the operating environment, economies and markets in which we operate which we believe are reasonable but which are subject to important assumptions, risks and uncertainties and may prove to be inaccurate.  Consequently, our actual results could differ materially from our expectations set out in this MD&A.  In particular, see the Risk and Uncertainties section of this report, our Annual Report for the year ended December 31, 2011, and our Quarterly Report for the period ended September 30, 2012, for factors that could cause actual results or events to differ materially from those contemplated in forward-looking statements.  Unless required by applicable securities laws, we disclaim any intention or obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.  You are cautioned not to place undue reliance on these statements, which speak only as of the date of this report which is as at October 26, 2012.

EXECUTIVE OVERVIEW

Our Business and Strategy

Diversinet Corp. provides patented and proven products that enable healthcare organizations to rapidly deploy HIPAA-compliant mobile healthcare (mHealth) applications to “power care coordination through mobility”.

Founded in 1997 and based in Toronto, with a sales office in Dallas, Diversinet has invested heavily in its core technology and has built a sizable patent portfolio.  Diversinet deploys an experienced professional services team for application development, consulting, training and technical support.

With increasing pressures on the healthcare industry to reduce costs, increase efficiency and reduce medical errors there are opportunities for secure mHealth applications that focus on care coordination.  mHealth gives the healthcare industry the ability to manage the increasing number of patients afflicted by one or more chronic conditions, while improving overall quality of care, outcomes and containing costs.

The Health Insurance Portability and Accountability Act of 1996 (HIPAA) addresses the need for security standards to protect the confidentiality and integrity of individually identifiable health information.  HIPAA security rules require a risk-based security assessment and the implementation of appropriate authentication for access to electronic Protected Health Information (ePHI).

Diversinet’s MobiSecure® technology helps healthcare payers and providers, pharmaceutical companies, application developers and other healthcare organizations address the increasing need for secure messaging, as well as safe, convenient storage and sharing of personal health data.  Diversinet-powered solutions support healthcare reform by enabling healthcare organizations to improve quality of care while reducing costs.

MobiSecure is based on Open AuTHentication (OATH) standards for authentication and was designed specifically to prevent unauthorized access to confidential data.  Coupled with Diversinet’s encryption architecture, MobiSecure enables providers, insurers, patients and other users to securely connect with critical healthcare information with protection against identity theft or fraud.

MobiSecure Communicator is a secure application that enables healthcare organizations to rapidly deploy HIPAA compliant “mHealth Apps” to anyone, anywhere, on any mobile device.  MobiSecure Communicator offers secure communication and management of critical data and personal information, from a mobile phone, tablet or desktop computer, directly over the Internet and wireless networks.  It also supports advanced secure data messaging such as alerts, question/response and advanced questionnaires.

MobiSecure Gateway SDK provides the security and mobile provisioning functionality necessary to allow developers to meet the stringent healthcare regulatory requirements for offering secure mHealth solutions.  The security functionality includes encryption and OATH-standards based One Time Password for strong authentication.

MobiSecure key advantages include:

1.

Built in security features that meet/exceed HIPAA regulations and support strong authentication,

2.

Support for a wide range of smart, feature phones and tablets,

3.

Flexible integrated products:

a.

Rapidly enabling multiple mobile healthcare applications in messaging, publishing & case management

b.

Highly scalable solutions that can support large number of users

c.

Agility and on the fly customization of mobile user interface

d.

Consumer friendly patented resident mobile application with OTA provisioning

4.

Allows online and offline data access from mobile devices

2012 Quarterly Highlights

During January 2012, Diversinet received Canadian patent No. 2,387,328 “Mobile Terminal System”.  This patent is a system, apparatus and method for enabling interaction between a mobile device and a dynamic list of remotely hosted applications.  A mobile device is provided with a removable module implementing a virtual machine defined by a set of instructions.  The mobile device requests an initial application from an application server.  The application server generates executable code that is then forwarded to the mobile device for execution.  The mobile device interprets the executable code and runs it, possibly causing text or a menu to be displayed.  In another embodiment, an application server initiates a communication by transmitting a set of commands causing one or more actions on the mobile device, such as the sounding of an audio alarm, the display of text, et cetera.

During February 2012, Dr. Hon Pak, who had been serving as the interim CEO since December 2011, was formally appointed as the Company’s Chief Executive Officer and to the Company’s Board of Directors.  Prior to his role as interim CEO, he was a member of Diversinet’s executive advisory board since September 2011.

During the first quarter the Company delivered a secure technology platform that supports and enables care coordination through mobility. Components of the technology include a Care Coordination Engine, providing a “configure once-deploy many” capability for clients who need a HIPAA-compliant mobile engagement tool for consumers/patients and providers/staff.  Diversinet’s new tag line is “Powering Care Coordination Through Mobility”.

During February 2012, AirStrip Technologies, Inc. selected Diversinet’s government-certified MobiSecure SDK solution for the crucial security validation needed to offer mobile healthcare applications to military and other U.S. government agencies.  Integrating MobiSecure will enable AirStrip applications to provide levels of authentication and encryption necessary for use in such government organizations as military hospitals.

During the first quarter of 2012, the Board of Regents of the University of Nebraska d/b/a the University of Nebraska Medical Center (U of N) started using our MobiSecure SDK on a non-commercial basis to determine if the SDK could be utilized to interface with the U of N’s preoperative treatment algorithms.  Under the agreement, Diversinet hosted a ‘sandbox’ environment until September 2012 that allowed the U of N to gain familiarity with the MobiSecure platform and to determine if it wants to acquire a permanent license for the software.  

During March 2012, Diversinet expanded its intellectual property portfolio with the award of a U.S. patent No. 8,130,961 “Method and system for client-server mutual authentication using event-based OTP”. This patent defines a method of protecting client-server communications and is the foundation of the MobiSecure messaging protocol. It provides authentication services through the use of one-time passwords (OTPs), and encryption services through the use of a unique key per-transaction encryption scheme.

During April 2012, Diversinet received Canadian Patent No. 2,556,464 “A Method For Device Auto-Detection And Classification”.  The patent consists of a method of automatically detecting and classifying a device, comprising: a) receiving information from the device; b) looking up the information in a device directory to identify the device; c) applying a series of identity rules if the information is not found in the device directory; and d) identifying the device from the identity rules.

During July 2012, Bret Jorgensen was appointed to the company’s Board of Directors and appointed Chairman.  Mr. Jorgensen was most recently the CEO of MDVIP, a personalized healthcare company that was sold to Procter & Gamble in 2010.  Previously, as CEO, he restructured InSight Health, a diagnostic-imaging business and was co-founder and president of TheraTx Health Services, a large, fast-growing healthcare services company.  Mr. Jorgensen also currently serves as chairman of Crossover Health, an innovative worksite health provider, and is a board member of the Kravis Leadership Institute.  He is a strategic advisor to Qualcomm Life and Hello Health and has served as a director of several other public and private healthcare companies.

During October 2012, Diversinet was awarded Federal Information Processing Standards (FIPS) 140-2 validation by the National Institute of Standards and Technology (NIST) for its MobiSecure® technology.  This certification validates the security technology underpinning Diversinet’s MobiSecure mobile health platform.  The milestone marks Diversinet’s mHealth platform as the first with built-in FIPS 140-2-grade security. FIPS 140-2 specifications exceed HIPAA requirements.  NIST has validated Diversinet’s Java cryptographic module and Java Crypto Module for Mobile under FIPS 140-2, Security Requirements for Cryptographic Modules – a rigorous testing program administered by NIST and the Communications Security Establishment Canada (CSEC).  The FIPS 140-2 validation, a recognized North American standard for proper use of encryption, is required for use in U.S. and Canadian government communications systems to protect sensitive data.

RESULTS OF OPERATIONS

Revenues

For the three months ended September 30, 2012, we reported revenues of $451,000 compared to revenues of $333,000 for the quarter ended September 30, 2011.  Revenue for the nine months ended September 30, 2012 were $1,152,000 compared to $909,000 for the same period in 2011.

During the three months ended September 30, 2012, the Company generated $256,000 (2011 - $217,000) from consulting services and $195,000 (2011 – $116,000) from licensing.  For the three months ended September 30, 2012, consulting revenues included delivery of $6,000 to MiHealth, $5,000 to Intersections, $12,000 in support to Janssen Research & Development, L.L.C. through its Janssen Healthcare Innovation team (“Janssen”), $138,000 in services and statement of work to University of Nebraska and $71,000 in services and support to the U.S. Army’s Telemedicine and Advanced Technology Research Center (part of the U.S. Army Medical Research and Materiel Command) mCare telehealth-outreach program.  For the three months ended September 30, 2011 services revenues included delivery of $52,000 in support to MiHealth, $40,000 in statement of work to Janssen, $88,000 in service and support to U.S Army’s Telemedicine and Advanced Technology Research Center and $5,000 to Intersections. License revenues were comprised of $15,000 from INTX, $7,000 from HealthPartners and $100,000 from U.S. Army.  During the third quarter of 2012, Janssen indicated to the Company that it will not be continuing its medication adherence platform with Diversinet beyond the fourth quarter of 2102.  

During the nine months ended September 30, 2012, the Company generated $569,000 (2011 - $365,000) from consulting services and $583,000 (2011 – $545,000) from licensing.  For the nine months ended September 30, 2012, consulting revenues included delivery of $26,000 in support and statement of work to MiHealth, $15,000 to Intersections, $69,000 in support and statement of work to Janssen, $220,000 in services and statement of work to University of Nebraska and $165,000 in services and support to the mCare telehealth-outreach program. Licence revenues were comprised of $525,000 from MiHealth, and $58,000 from INTX. For the nine months ended September 30, 2011 services revenues included delivery of $130,000 in support and statement of work to MiHealth, $40,000 in statement of work to Janssen, $94,000 in service and support to mCare and $15,000 to Intersections. License revenues were $369,000 from MiHealth, 33,000 from INTX, $43,000 from HealthPartners and $100,000 from U.S. Army.

The Company currently generates its revenues from a small number of customers.  The timing of signing customer contracts and the revenue recognition associated with the customer contracts results in volatility in our revenues and operating income.  We derived 54% of our revenues from the U.S. market and 40% from the Canadian market for the three months ended September 30, 2012 (37% and 16% respectively for 2011).  We derived 46% of our revenues from the U.S. market and 48% from the Canadian market for the nine months ended September 30, 2012 (37% and 55% respectively for 2011).  For the three month period ended September 30, 2012, three customers contributed 40%, 31%, and 16% of total revenue (two customers contributed 56%, and 12% of total revenue, for the same period in 2011).  For the nine month period ended September 30, 2012, three customers contributed 48%, 19%, and 14% of total revenue (two customers contributed 55% and 21% of total revenue, for the same period in 2011).

Cost of Revenues

Our cost of revenues primarily represents the direct costs associated with customer support, training and implementation, and consulting services related to services performed under contract with our customers.  There are no significant costs associated with the manufacturing of our software.  The Company does not allocate any indirect costs such as facilities, sales commissions and administrative costs to cost of revenues.

Cost of revenues for the three months ended September 30, 2012 were $92,000 (or gross margin of 80%) compared with $53,000 (or gross margin of 84%) for the three months ended September 30, 2011 and $177,000 (or gross margin of 85%) for the nine months ended September 30, 2012 compared with $90,000 (or gross margin of 90%) for the nine months ended September 30, 2011.  This represents the direct costs, including salaries, associated with completing consulting services revenue.

Research and Development

Research and development expenses includes compensation of software development teams working on the continued enhancement of our products, quality assurance and testing activities as well as legal costs incurred for patent registration activities and direct administrative costs incurred by the department.  The Company does not include an allocation of general operating expenses to its research and development expenses.

Research and development expenses were $191,000 in the three months ended September 30, 2012 compared to $539,000 in the three months ended September 30, 2011 and $1,685,000 in the nine months ended September 30, 2012 compared to $1,990,000 for the similar period in 2011.  The development department redeployed part of its resources to perform professional services work to customize our products as required under our statements of work and customer agreements.  As a result, during the 2012 year, development costs of $173,000 (Q1 - $17,000; Q2 - $64,000; Q3 - $92,000), compared to 2011 of $69,000 (Q1 - $4,000; Q2 - $22,000; Q3 - $43,000) were allocated to cost of revenues.  The decrease in research and development costs in the first nine months of 2012 compared to the same period in 2011 was mainly due to the recording of $153,000 in tax credits recoverable, a $32,000 decrease in professional services and a $113,000 decrease in overall salaries and contractors’ fees.  The decrease in research and development cost in the three months ended September 30, 2012 was mainly due to the recording of $153,000 in tax credits recoverable, decreases of $10,000 in travel expenses, $29,000 in professional fees, and $115,000 in overall salaries and contractors fees.  During the third quarter, we received $205,000 (2011 - $205,000) of Ontario Innovation Tax Credit (“OITC”) refunds.

The Company is eligible for non-refundable tax credits under the Scientific Research and Experimental Development (“SRED”) program in Canada.  Under this federal program, we are only eligible to claim a non-refundable investment tax credit (“ITC”), which can be offset against taxes payable at such time that we have an income tax liability.  Diversinet does, however, remain eligible for refundable tax credits under the OITC program.  

Based on historical evidence of collection of amounts claimed as filed, we have determined that there is reasonable assurance in this period and going forward that these OITC’s will be recoverable as filed, and accordingly, the Company has recorded a tax credit recoverable related to expenditures incurred, with a corresponding reduction to the related research and development expenses that were incurred to earn the tax credit.

Sales and Marketing

Sales and marketing expenses include compensation of sales and marketing personnel, public relations and advertising, trade shows, marketing materials and direct operating expenses incurred by the sales and marketing department.  The Company does not include an allocation of general operating expenses in its sales and marketing expenses.

Sales and marketing expenses were $327,000 for the three months ended September 30, 2012 compared to $385,000 for the three months ended September 30, 2011 and $1,003,000 in the nine months ended September 30, 2012 compared with $1,281,000 for the nine months ended September 30, 2011.  The decrease of $278,000 in the nine months ended September 30, 2012 is partially due to decreases of $81,000 in travel expenses $95,000 in professional services, $71,000 in salaries and $38,000 in marketing expenses.  The decrease of $58,000 in the three months ended September 30, 2012 is partially due to decreases of $25,000 in travel expenses, $25,000 in marketing expenses, and $53,000 in overall salaries, offset by a $49,000 increase in consulting services.

General and Administrative

General and administrative expenses include compensation expenses for corporate personnel and other general and administrative expenses such as facilities, travel and professional costs.  Corporate personnel include executive officers, business development, financial planning and control, legal, human resources and corporate administrative staff.

General and administrative expenses were $482,000 for the third quarter of 2012 compared to $409,000 during the similar period of 2011.  General and administrative expenses were $1,476,000 for the nine months ended September 30, 2012 compared to $1,413,000 for the same period in 2011.  The increase in general and administrative expenses in the third quarter of 2012 is partially due to a $93,000 increase in cash compensation for our new CEO and a $31,000 increase in professional services, offset by a decrease of $71,000 in stock based compensation.  The increase in the general and administrative expenses for the nine months ended September 30, 2012 is partially due to a $235,000 increase in salaries relating to our CEO and $32,000 in travel expenses, offset by a decrease of $33,000 in professional fees, and $165,000 in stock-based compensation.

Depreciation

Depreciation expense was $13,000 for the second quarter of 2012 compared to $16,000 in the second quarter of 2011.  Depreciation expense for the nine months ended September 30, 2012 was $41,000 compared to $47,000 in the nine months ended September 30, 2011.  During the second quarter of 2012 property and equipment additions of $700 related to computer equipment.

Foreign Exchange and Interest Income

We have reported a foreign exchange loss of $4,000 for the three months ended September 30, 2012 compared to a foreign exchange loss of $9,000 for the similar period in 2011.  Foreign exchange loss of $10,000 was reported for nine months ended September 30, 2012 compared to a foreign exchange gain of $20,000 for the same period in 2011.  Canadian/U.S. dollar currency exchange rates have fluctuated from 0.9822 on June 30, 2012 to 1.0171 on September 30, 2012 and from 1.0368 in Q2 2011 to 0.9540 in Q3 2011.  We earned interest and other income of $3,000 during second quarter of 2012 compared to $5,000 for the same period in 2011 through investing our excess cash.  Interest income was $11,000 for the nine months ended September 30, 2012, compared to $18,000 earned during the nine months ended September 30, 2011.  Current interest rates for short term investment grade investments remain low.

Net Loss

We reported a net loss of $655,000, or $(0.02) per share based on a basic weighted average of 43,293,000 common shares for the three months ended September 30, 2012 compared to a net loss of $1,074,000 or $(0.03) per share based on a weighted average 42,672,000 common shares in the prior year’s third quarter.  The net loss for the nine months ended September 30, 2012 was $3,229,000, or $(0.07) per share based on a weighted average 43,161,000 common shares outstanding compared to a net loss of $3,873,000, or $(0.09) per share based on a weighted average 42,569,000 common share outstanding for the nine months ended September 30, 2011.  

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents at September 30, 2012 were $4,319,000 compared with $7,397,000 at December 31, 2011.  The net change in cash and cash equivalents for the third quarter of 2012 was $(780,000) compared to $(1,132,000) for the third quarter of 2011.  The net change in cash and cash equivalents for the nine months ended September 30, 2012 was $(3,078,000) compared to $(3,800,000) for the same period in 2011.

The cash used during the three and nine months ended September 30, 2012 is mainly due to operating activities, which used cash in an amount of $792,000 and $3,085,000 respectively.  Cash used in investing activities for the first nine months in 2012 and 2011 is the result of the purchase of property and equipment of $7,200 and $83,500, respectively.

Our ability to raise funds in the future will be dependent principally upon our ability to achieve profitability in our operating activities.  We have posted net losses in three of our past five years, including the most recent fiscal year just ended.  In addition, period-to-period operating results are significantly dependent upon the sale of license agreements and our success in providing professional services.  In this regard, the purchase of our solutions often requires our customers to make a significant capital investment, which customers may view as a discretionary cost and, therefore, a purchase that can be deferred or cancelled due to budgetary or other business reasons.  We do not currently have any debt financing from which our operations may be funded.

Should revenue from our operations, together with our existing cash and cash equivalents, prove inadequate to meet our short-term working capital requirements during the next twelve months, we may need to raise additional amounts to meet our working capital requirements.  Possible sources of funding include private or public financings, strategic relationships or other arrangements to support our operations beyond the next twelve months.  However, additional funding may not be available on terms attractive to us, or at all.  If we enter into strategic relationships to raise additional funds, we may be required to relinquish rights to certain of our technologies.  Ultimately, there can be no assurance that we will be successful in obtaining additional financing or generating positive cash flows from operations.  As detailed in note 1 to the September 30, 2012 consolidated interim condensed financial statements, our failure to either raise capital when needed or to generate profitable operations could leave us with insufficient resources in the future to sustain our operations over the next twelve months.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any off-balance sheet arrangements that have had, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

RELATED PARTY TRANSACTIONS

In May 2011, the Company appointed Mr. Alan Portela, CEO of Airstrip Technologies Inc., to the Company’s board of directors.  The consulting firm founded by Mr. Portela, Hybrid Clinical Transformation LLC (“Hybrid”), had been retained by Diversinet to provide sales and business development services until April 2012.  During the three and nine months ended September 30, 2012, the Company paid Hybrid $0 and $40,000, respectively.  The Company has transacted these services at the exchange amount.

In December 2011, we appointed Dr. Hon Pak, as interim Chief Executive Officer.  The consulting firm founded by Dr. Pak, HSP Consulting (“HSP”) was retained by Diversinet to provide Dr. Pak’s services until February 10, 2012 when he became CEO.  In 2011, options to purchase 300,000 common shares at $0.18 per share, vesting equally in December 2011, June 2012 and December 2012 were granted to Dr. Pak upon his appointment to the position of interim CEO.  In September 2011, options to purchase 50,000 common shares at $0.41 per share, vesting in accordance with the Plan were granted to Dr. Pak upon his appointment to the Advisory Board.  Having transitioned from a consultant to an employee, the Company has adjusted the option accounting accordingly.  Dr. Pak, as part of his employment agreement in February 2012, received 1,400,000 options under the share option plan which was approved by shareholders in June 2012.  During the three months and nine months ended September 30, 2012, the Company paid HSP $0 and $42,000, respectively.  The Company has transacted these services at the exchange amount.

In July 2012, we appointed Bret Jorgensen to the Company’s board of directors and chairman.  The consulting firm founded by Mr. Jorgensen, Jorgensen Advisory Services (“JAS”), has been retained by Diversinet to provide certain business advisory services.  Under the agreement options were granted to purchase 863,562 common shares at $0.09 per share, vesting 25% on the date of grant and the remaining 75% quarterly in arrears over two years in accordance with the share option plan.  During the three and nine months ended September 30, 2012, the Company paid JAS $45,000 and $45,000, respectively.  The Company has transacted these services at the exchange amount.  

UNAUDITED QUARTERLY SELECTED FINANCIAL INFORMATION

The following table presents unaudited selected financial data for each of the last eight quarters ended September 30, 2012:

APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period.  Significant estimates are used in determining, but not limited to, the allowance for doubtful accounts, income tax valuation allowances, and stock based compensation. In making such estimates and assumptions, management consults with employees knowledgeable in the area; gathers relevant information; where appropriate, seeks advice from qualified third parties, and, makes judgments, which in their opinion at the time, represent fair, balanced and appropriate estimates and assumptions.  Actual results could differ from those estimates.

In our 2011 Annual MD&A, we have identified the accounting policies and estimates that are critical to the understanding of our business operations and our results of operations.  There are no changes to the critical accounting policies and estimates from those found in our 2011 Annual MD&A.

CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING

During the three and nine months ended September 30, 2012, we did not make any significant changes in, nor take any corrective actions regarding, our internal controls or other factors that could significantly affect these controls.  We periodically review our internal controls for effectiveness and conduct an evaluation of our disclosure controls and procedures annually.

RISKS AND UNCERTAINTIES

Our Company is subject to a number of risks and uncertainties that could cause actual results to differ materially from those predicted or anticipated.  These risks are described in our annual Form 20-F filed with the SEC in the United States at www.sec.gov and filed on SEDAR in Canada at www.sedar.com.  We encourage you to review these filings in order to evaluate an investment in our securities.  Some key risks that could cause actual results to differ materially from those predicted or anticipated are listed below.

Financial resources:  As detailed in note 1 to the unaudited interim condensed consolidated financial statements, the Company’s consolidated financial statements are prepared on a going concern basis that assumes that the Company will continue in operation in the foreseeable future and be able to realize its assets and discharge its liabilities in the normal course of business.  Although we have made progress in developing our solutions and have completed initial customer deployments, our revenue from operations has not been sufficient to cover our operating expenses at present.  We have historically obtained funding for operations from private placements, but there is no assurance we will be able to do so again in the future or on terms favourable to the Company, despite the progress of the business.  Our failure to either raise capital when needed or to generate revenues would leave us with insufficient resources to continue our business beyond 12 months.

Impact of commercial deployment: The Company is focused on the healthcare market, as such our ability to continue operations is also dependent on the acceptance of product and solution offerings.  Longer sales cycles and customer’s unwillingness to adopt new technologies could have an adverse affect and could also increase the Company’s financing costs, negatively affect profitability, limit access to capital markets and negatively impact the ability to maintain or attract customers.  The Company often enters into multi-year contracts with customers that often have minimum threshold amounts due to us.  These contracts, including the Mihealth agreement, have a risk of cancellation if there is slow customer adoption.  Certain contracts, including the contract with Janssen and mCare, do not have any minimum commitments.  During the third quarter of 2012, Janssen indicated to the Company that it will not be continuing its medication adherence platform with Diversinet beyond the fourth quarter of 2102.  Furthermore, our customers may default on their obligations under these agreements or seek to renegotiate certain of their financial obligations.  Moreover, the terms of our relationship with Airstrip have not yet been finalized.

The ability of the Company to continue operations is also dependent on the acceptance of its security, identity management solutions, secure application platform solutions in the health care market and the adoption of transaction-based applications over wireless networks as an accepted method of commerce in sufficient volume for us to generate enough revenues to fund our expenses and capital requirements.  The wireless mobile commerce market is in an early and volatile stage and it may not develop to a sufficient level to support our business.

Variability of performance:  Our quarterly and annual operating results have varied substantially in the past and are likely to vary substantially from quarter to quarter and year to year in the future due to a variety of factors.  In particular, our period-to-period operating results are significantly dependent upon the sale of license agreements and the continued success in providing professional services.  In this regard, the purchase of our solutions often requires our customers to make a significant capital investment, which customers may view as a discretionary cost and, therefore, a purchase that can be deferred or cancelled due to budgetary or other business reasons.  Furthermore, our ability to continue providing professional services is dependent upon being able to provide value added resources at reasonable rates.  Estimating future revenues is also difficult because we ship our products upon receipt of a signed license agreement and, therefore, we do not have a backlog.  Thus, quarterly and annual license revenues are heavily dependent upon agreements finalized and software shipped within the same quarter or year.  We expect these revenue patterns to continue for the foreseeable future, until recurring revenue becomes a significant portion of total revenue.  Despite the uncertainties in our revenue patterns, our operating expenses are incurred on an approximately rateable basis throughout the quarter.  As a result, if expected revenues are delayed or otherwise not realized in a quarter for any reason, our business, operating results and financial condition would be adversely affected in a significant way.

Liquidity of our common shares: If our common shares should become ineligible for continued quotation on the Over the Counter Bulletin Board or a public trading market does not continue for any reason, holders of our common shares may have difficulty selling their shares.  Our common shares may continue to be penny stock, which may adversely affect the liquidity of our common shares.  The United States Securities and Exchange Commission has adopted regulations that define a penny stock to be any equity security that has a market price, as defined in those regulations, of less than $5.00 per share, subject to certain exceptions.  Our common shares are currently penny stock.  In July 2008, our common shares were also posted for trading on the TSX Venture Exchange on Tier 1 as a technology issuer under the symbol DIV.

Dependence on key customers; concentration of credit: The loss of any key customer and our inability to replace revenues provided by a key customer may have a material adverse effect on our business and financial condition.  Our customer base includes large healthcare providers, financial institutions and security providers.  As a result, we may maintain individually significant receivable balances due from them.  If these customers fail to meet their payment obligations, our operating results and financial condition could be adversely affected.  As at September 30, 2012, three customers accounted for 48%, 19% and 14% of our consolidated revenues.  Our agreements with Mihealth and Intersections are currently our only long term agreements.

Foreign exchange:  Our functional currency is the U.S. dollar.  Sales generated outside Canada are generally denominated in U.S. dollars.  During fiscal 2012, we incurred a portion of our expenses in U.S. dollars and Canadian dollars.  Changes in the value of the Canadian currency relative to the U.S. dollar may result in currency losses that may have an adverse effect on our operating results.  During fiscal 2012 and 2011 we maintained a portion of our cash resources in both U.S. and Canadian dollar term deposits.  The Company does not have any foreign currency derivative instruments outstanding at September 30, 2012.

Litigation: Our Company has previously been named as a defendant in various proceedings arising in the course of our Company’s activities and arising from transactions relating to a previous business operated by our Company.  Litigation arising from these matters may be time consuming, distracting and expensive.  An adverse resolution to any of these proceedings may have a material adverse impact on our business and financial condition.

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