Share-based Compensation Expense
During the year ended September 30, 2011, we granted 4,000,000 shares of common stock and 3,000,000 shares of common stock purchase warrants to our chief executive officer at an expense of $657,859. These and any future stock warrant grants increased our compensation expense in fiscal year 2011 and will increase our share-based compensation expense in future fiscal years compared to fiscal year 2011. See “Critical Accounting Policies” below.
Fiscal Year 2011 Compared to Fiscal Year 2010
Revenues
During the fiscal year ended September 30, 2011, we had net revenues of $771,000 compared to net revenues of $548,000 for the fiscal year ended September 30, 2010, an increase of $223,000 or 41%. Revenues from monitoring services for the fiscal year ended September 30, 2011 totaled $334,000, compared to $74,000 for the prior fiscal year. This increase is due to the introduction of the ActiveOne™ device and the monitoring revenues associated with it. Revenues from stains and reagents for the fiscal year ended September 30, 2011 were $437,000, compared to $474,000 for the fiscal year 2010, resulting in an decrease of $37,000. This decrease of $37,000 is primarily due to a decrease of diagnostic equipment sales and freight income.
Cost of Revenues
During the fiscal year ended September 30, 2011, cost of revenues totaled $1,055,000, compared to cost of revenues during the fiscal year ended September 30, 2010 of $670,000, an increase of $385,000. The increase in cost of revenues resulted primarily from expenses related to the CareCenter for the monitoring of the ActiveOne™ product. Monitoring costs of revenue were $686,000 and stains and reagents costs of revenues were $369,000.
Research and Development Expenses
Research and development expenses decreased to $321,000 in fiscal year 2011, from $458,000 in the year ended September 30, 2010. The decrease in research and development expenses in 2011 was primarily due to less expense related to the development of our ActiveOne+™ devices.
Selling, General and Administrative Expenses
During the fiscal year ended September 30, 2011, selling, general and administrative expenses decreased to $6,959,000, compared to $9,327,000 in the prior fiscal year. The most significant components of the decrease were tied directly to the following:
| | • | Decrease in amortization expense related to the completion of the acquisition of HG Partners, Inc. of approximately $654,000 during fiscal year 2010; |
| | • | Decrease in noncash bonus expense of approximately $347,000, which was used for exercising outstanding stock purchase warrants during the prior fiscal year; |
| | • | Decrease in consulting expense of approximately $813,000 compared to the prior fiscal year, all of which was due to noncash expense related to accelerated vesting of warrants to officers and Board of Directors during fiscal year 2010; and |
| | • | Decrease in investment relations expense of approximately $766,000, all of which was non-cash expense, paid with issuance of common stock. |
All of these decreases, which total $2,580,000, were offset by an increase in advertising and marketing expense of $178,000 and an increase in depreciation expense of $41,000.
Other Income and Expense
Derivative gain was $0 and $444,000 in fiscal years 2011 and 2010, respectively. There were no convertible debt instruments that are recorded as derivative liabilities during fiscal year ended September 2011. Interest expense was $335,000 and $1,420,000 in the fiscal year ended September 30, 2011 and 2010, respectively. The decrease in fiscal year 2011 was due to non-cash expense related to the amortization of Series A and Series B preferred stock discount incurred during the fiscal year ended September 30, 2010. Other income during fiscal year 2011 was $5,000 compared to other expense of $343 for the fiscal year ended September 30, 2010. The other income was increased due to the gain on payable forgiveness of $55,000, and was offset by impairment of the investment in Vista Therapeutics of $50,000 during the fiscal year ended September 30, 2011. Loss on disposal was $6,000 and $425 in the fiscal year ended September 30, 2011 and 2010, respectively. The increase was due to obsolete asset disposal during the fiscal year 2011.
Net Loss
Net loss for the year ended September 30, 2011 decreased to $7,899,000 from a net loss of $11,639,000 in fiscal year 2010, due primarily to the items described above.
Liquidity and Capital Resources
Our primary sources of liquidity are the proceeds from the sale of our equity securities and from borrowing. We have not historically financed operations from cash flows from operating activities. We anticipate that we will continue to seek funding to supplement revenues from the sale of our products and services through the sale of selling securities until we begin to have positive cash flows from operating activities under our new business plan.
As of September 30, 2011, we had unrestricted cash of $178,000, compared to cash of $1,714,000 as of September 30, 2010. As of September 30, 2011, we had a working capital deficit of $1,149,000, compared to working capital of $855,000 as of September 30, 2010. The decrease of cash and working capital was due to less cash proceeds from financing activities during the fiscal year ended September 30, 2011 compared to the year ended September 30, 2010.
Operating activities used cash of $3,082,000 in fiscal year 2011, compared to $2,150,000 in fiscal year 2010. The increased cash used in operating activities was due to increased marketing and distribution of our products and services and decreased non-cash expenses during the year ended September 30, 2011 compared to the year ended September 30, 2010.
Investing activities for the year ended September 30, 2011 used cash of $336,000, compared to $356,000 of cash used by investing activities in the year ended September 30, 2010. The decreased use of cash in investing activities was due to the addition of leased equipment and investment purchased during the fiscal year ended September 30, 2010.
Financing activities in fiscal year 2011 provided $1,882,000 of net cash, compared to $3,389,000 of net cash provided by financing activities in the year ended September 30, 2010. The decrease cash provided is due to less capital raised during fiscal year 2011.
As of September 30, 2011, we had an accumulated deficit of $24,936,000 compared to $17,038,000 at September 30, 2010. Stockholders’ equity at September 30, 2011 was a deficit of $541,000, compared to stockholder’s equity of $1,485,000 at September 30, 2010. These changes were due to continued negative cash flow from operating activities during the fiscal year ended September 30, 2011.
Fiscal Year 2010 Compared to Fiscal Year 2009
Revenues
During the fiscal year ended September 30, 2010, we had net revenues of $548,000 compared to net revenues of $452,000 for the fiscal year ended September 30, 2009, an increase of $96,000 or 21%. Revenues from monitoring services for the fiscal year ended September 30, 2010 totaled $74,000, compared to $0 for the prior fiscal year. This increase is due to the introduction of the ActiveOne™ device and the monitoring revenues associated with it. Revenues from stains and reagents for the fiscal year ended September 30, 2010 were $474,000, compared to $452,000 for the fiscal year 2009, resulting in an increase of $22,000. This increase of $22,000 is primarily due to an increase in the sale of hematology stains and reagents.
Cost of Revenues
During the fiscal year ended September 30, 2010, cost of revenues totaled $670,000, compared to cost of revenues during the fiscal year ended September 30, 2009 of $396,000, an increase of $274,000. The increase in cost of revenues resulted primarily from expenses related to the CareCenter for the monitoring of the ActiveOne™ product. Monitoring costs of revenue were $305,000 and stains and reagents costs of revenues were $365,000.
Research and Development Expenses
Research and development expenses increased to $458,000 in fiscal year 2010, from $375,000 in the year ended September 30, 2009. The increase in research and development expenses in 2010 was primarily related to the development of our ActiveOne+™ devices and payments required under our agreement with Vista.
Selling, General and Administrative Expenses
Fiscal year 2010 was a significant year of development for us. Among other important accomplishments, our common stock began trading in the over-the-counter market, we launched our ActiveOne™ product and CareCenter services, and we entered into key agreements for research and development as well as marketing and distribution of our products and services. The primary emphasis was to establish a platform for building brand awareness and introducing our product to the market, which we believe will lead to increased sales and revenues in future periods.
As a result of the emphasis on bringing our products, services, and brand to the market, selling, general and administrative expenses increased during fiscal year 2010 from the amounts expended in fiscal year 2009. Selling, general and administrative expense in the year ended September 30, 2010, totaled $9,327,000, compared to $2,032,000 of expense in fiscal year 2009. The most significant components of these expenses were tied directly to the efforts described above in bringing our products and services to market and included the following increases:
| | • | Increase in advertising and marketing expense of approximately $375,000 due to the cost of advertising and marketing of the ActiveOne+™ device; |
| | • | Increase in amortization expense related to the completion of the acquisition of HG Partners, Inc. of approximately $654,000; |
| | • | Increase in bonus expense of approximately $355,000, $350,000 of which was paid by the cashless exercise of outstanding stock purchase warrants; |
| | • | Increase in consulting expense of approximately $3,901,000, all of which was non-cash, paid with issuance of common stock and warrants, and the amortization of warrant expense. This includes the accelerated vesting of warrants to officers and board of directors; |
| | • | Increase in board fees of approximately $20,000; |
| | • | Increase in insurance expense of approximately $43,000; |
| | • | Increase in investment relations expense of approximately $1,015,000, all of which was non-cash expense, paid with issuance of common stock; |
| | • | Increase in payroll of approximately $698,000 for services paid by issuance of common stock and warrants to employees; |
| | • | Increase in telephone expenses of $25,000 due to business expansion; and |
| | • | Increase in travel expenses of $140,000 due to development and marketing of ActiveOne+™ device. |
Other Income and Expense
Derivative gain was $443,735 and $0 in fiscal years 2010 and 2009, respectively. Expense related to refinancing and vesting of warrants, and interest expense increased to $1,420,000 for the fiscal year 2010 compared to $100,000 of interest expense in fiscal year 2009. These expenses were incurred in 2010 due to the loss on conversion of preferred stock and warrants, as well as dividends paid for preferred stock and non-cash expense related to shares issued in payment of loan origination fees.
Net Loss
Net loss for the year ended September 30, 2010 increased to $11,639,000 from a net loss of $2,416,000 in fiscal year 2009, due primarily to the higher selling, general and administrative expenses incurred in 2010 as described above.
Off Balance Sheet Arrangements
We are not a party to any off balance sheet arrangements.
Impact of Inflation
Our results of operations and financial condition are presented based on historical cost. While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we believe the effects of inflation, if any, on our results of operations and financial condition have been immaterial.
Recent Accounting Pronouncements
In June 2009, the FASB issued accounting guidance on the consolidation of variable interest entities (“VIEs”). This guidance revised previous guidance by eliminating the exemption for qualifying special purpose entities, by establishing a new approach for determining who should consolidate a variable-interest entity and by changing when it is necessary to reassess who should consolidate a variable-interest entity. This guidance was effective at the beginning of the first fiscal year beginning after November 15, 2009. We adopted this guidance on October 1, 2010. The application of this guidance did not have a material impact on our financial statements.
In September 2009, the FASB issued guidance that changes the existing multiple-element revenue arrangements guidance currently included under its Revenue Arrangements with Multiple Deliverables codification. The revised guidance primarily provides two significant changes: 1) eliminates the need for objective and reliable evidence of the fair value for the undelivered element in order for a delivered item to be treated as a separate unit of accounting, and 2) eliminates the residual method to allocate the arrangement consideration. In addition, the guidance also expands the disclosure requirements for revenue recognition. This was effective for the first annual reporting period beginning on or after June 15, 2010, with early adoption permitted provided that the revised guidance is retroactively applied to the beginning of the year of adoption. We adopted this guidance effective October 1, 2010 and recognized $25,456 of deferred revenue.
In October 2009, the FASB issued guidance on share-lending arrangements entered into on an entity’s own shares in contemplation of a convertible debt offering or other financing. This guidance was effective for fiscal years beginning on or after December 15, 2009, and interim periods within those fiscal years for arrangements outstanding as of the beginning of those years. We adopted this guidance on October 1, 2010. The application of this guidance did not have a material impact on our financial statements.
Critical Accounting Policies
The following summary includes accounting policies that we deem to be most critical to our business. Management considers an accounting estimate to be critical if:
| | · | It requires assumptions to be made that were uncertain at the time the estimate was made, and |
| | · | Changes in the estimate or different estimates that could have been selected could have a material impact on its consolidated results of operations or financial condition. |
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements requires management to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses during the reporting period. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. On an on-going basis, we evaluate our estimates, including those related to bad debts, inventories, intangible assets, warranty obligations, product liability, revenue recognition, and income taxes. We base our estimates on historical experience and other facts and circumstances that are believed to be reasonable and the results provide a basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and these differences may be material.
We believe our accounting policies in respect to concentration of credit risk, allowances for doubtful accounts receivable, inventories, impairment of assets, and revenue recognition are critical to an understanding of our financial results and condition as described below.
Concentration of Credit Risk
We have cash in bank accounts that, at times, may exceed federally insured limits. We have not experienced any losses in such accounts.
In the normal course of business, we provide credit terms to our customers. Accordingly, we perform ongoing credit evaluations of customers’ financial condition and require no collateral from customers. We maintain an allowance for uncollectable accounts receivable based upon the expected collectability of all accounts receivable.
Accounts Receivable
Accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Specific reserves are estimated by management based on certain assumptions and variables, including the customer’s financial condition, age of the customer’s receivables and changes in payment histories. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received. A trade receivable is considered to be past due if any portion of the receivable balance has not been received by the contractual pay date. Interest is not charged on trade receivables that are past due.
Inventories
Inventories are recorded at the lower of cost or market, cost being determined on a first-in, first-out (“FIFO”) method. Reagent inventories consist of raw materials, work-in-process, and finished goods. Care Services inventory consist of ActiveOne™ inventories. Provisions, when required, are made to reduce excess and obsolete inventories to their estimated net realizable values. Due to competitive pressures and technological innovation, it is possible that estimates of the net realizable value could change in the near term.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are determined using the straight-line method over the estimated useful lives of the assets, typically three to seven years. Leasehold improvements are amortized over the shorter of the estimated useful lives of the asset or the term of the lease. Expenditures for maintenance and repairs are expensed while renewals and improvements over $500 are capitalized. When property and equipment are disposed, any gains or losses are included in the results of operations.
Leased Equipment
Our leased equipment is stated at cost less accumulated depreciation and amortization. We amortize the cost of leased equipment on the straight line method over thirty six months, which is the estimated useful life of the equipment. Amortization of leased equipment is recorded as cost of sales.
Revenue Recognition
Our revenue has historically been from two sources: (i) sales from Care Services; (ii) sales of medical diagnostic stains from reagents.
Care Services
“Care Services” include lease contracts in which we provide Care Services and lease devices to distributors or end users and retain ownership of the leased device. We typically lease devices on a month-to-month contract with customers (members) that use our Care Services. However, these contracts may be cancelled by either party at anytime with 30 days notice. Under our standard contract, the leased device becomes billable on the date the member orders the product, and remains billable until the device is returned. We recognize revenue on leased devices at the end of each month that Care Services have been provided. In those circumstances in which we receive payment in advance, these payments are recorded as deferred revenue.
Customers order our products by phone or website. We do not enter into long-term contracts.
In connection with GAAP, to qualify for the recognition of revenue at the time of sale, we note the following:
| | · | The price to the buyer is fixed or determinable at the date of sale. |
| | · | The buyer has paid or the buyer is obligated to pay within 30 days, and the obligation is not contingent on resale of the product. |
| | · | The buyer’s obligation would not be changed in the event of theft or physical destruction or damage of the product. |
| | · | The buyer acquiring the product for resale has economic substance apart from that provided by the Company. |
| | · | We do not have significant obligations for future performance to directly bring about resale of the product by the buyer. |
| | · | The amount of future returns can be reasonably estimated and they are negligible. |
Accounting standards state that, “an enterprise shall report revenues from external customers for each product and service or each group of similar products and services unless it is impractical to do so.” In the Care Services revenue line, the vast majority of our sales are Care Service revenues. Because Care Service equipment sales are not material to the financial statements, we disclose sales as one line item.
Our revenue recognition policy for sales to distributors is the same as the policy for sales to end-users.
A customer qualifies as a distributor by completing a distributor application and proving its sales tax status. Upon qualifying as a distributor, a customer receives a discount from retail prices or receives commission per sale according to the contract. Our distributors are not required to maintain specified amounts of inventory on hand, and distributors are not required to make minimum purchases to maintain distributor status. Distributors have no stock rotation rights or additional rights of return. Sales to distributors are recorded net of discounts.
Sales returns have been negligible, and any and all discounts are known at the time of sale. Sales are recorded net of sales returns and sales discounts. There are no significant judgments or estimates associated with the recording of revenues.
The majority of our revenue transactions do not have multiple elements. On occasion, we have revenue transactions that have multiple elements (such as device sales to distributors). In these situations, we provide the distributor with the ActiveOne™ device and a monthly monitoring service, which are both included in the contracted pricing. In these multiple element revenue arrangements, we consider whether: (i) the deliverables have value on a standalone basis to the distributors, and (ii) the distributors have a general right of return. We have determined that these elements do have standalone value to distributors and that the performance of undelivered items is probable and substantially within our control. Therefore, in accordance with accounting standards, we have determined that these revenue elements should be considered as separate units of accounting. Accounting standards state that arrangement consideration shall be allocated at the inception of the arrangement to all deliverables on the basis of their relative selling price. When applying the relative selling price method, the selling price for each deliverable shall be determined using vendor-specific objective evidence of selling price, if it exists; otherwise, third-party evidence will be used to determine the selling price. If neither vendor-specific objective evidence nor third-party evidence of selling price exists for a deliverable, the vendor shall use its best estimate of the selling price for that deliverable.
We do not currently sell, nor do we have intentions to sell the ActiveOne™ device separately from the monthly monitoring service, therefore we are not able to determine vendor-specific objective evidence of selling price. We are unable to determine third-party evidence of selling price, because there is not a similar product in the market. The ActiveOne™ device is the only device in the market with fall detection technology. We are therefore required to determine our best estimate of selling price in order to determine the relative selling price of the separate deliverables in our revenue arrangements. In order to determine the best estimate of selling price of the ActiveOne™ device, we included the following cost components in its estimate: production costs, development costs, PTCRB certification costs, and estimated gross margin. In order to determine the best estimate of the monthly monitoring service, we included the following components in its estimate: monthly communication cost, monitoring labor costs, PSAP database and monthly maintenance costs, and estimated gross margin. We allocate the arrangement costs based on these best estimates of selling price. The relative selling price allocated to the sale of the ActiveOne™ device is recognized when the device is delivered to the distributor. The relative selling price of the monitoring service is recognized monthly when the services have been provided.
Reagents
We recognize medical diagnostic stains revenue when persuasive evidence of an arrangement with the customer exists, title passes to the customer, prices are fixed or determinable and collection is reasonably assured. Shipping and handling fees are included as part of net sales. The related freight costs and supplies directly associated with shipping products to customers are included as a component of cost of goods sold. Neither the sale of diagnostic equipment nor the sale of medical diagnostic stains contains multiple deliverables.
Customers order the diagnostic stain product lines by purchase order. We do not enter into long-term contracts. The medical diagnostic stain sales were $437,489 for the fiscal year ended September 30, 2011. All of these sales were made with net 30-day payment terms.
Under GAAP we recognize revenue from our diagnostic stain products at the time of sale by applying the following principles:
| | · | The price to the buyer is fixed or determinable at the date of sale. |
| | · | The buyer has paid or the buyer is obligated to pay within 30 days, and the obligation is not contingent on resale of the product. |
| | · | The buyer’s obligation would not be changed in the event of theft or physical destruction or damage of the product. |
| | · | The buyer acquiring the product for resale has economic substance apart from that provided by the Company. |
| | · | We do not have significant obligations for future performance to directly bring about resale of the product by the buyer. |
| | · | The amount of future returns can be reasonably estimated and they are negligible. |
| | · | Customers may return diagnostic equipment within 30 days of the purchase date. Customers may return the medical diagnostic stains within 30 days of the purchase date provided that the stain’s remaining life is at least eight months. Customers must obtain prior authorization for a product return. |
Our diagnostic stain products have not been modified significantly for several years. There is significant history on which to base our estimates of sales returns. These sales returns have been negligible.
We have approximately 70 types of products based on the number of individual stock-keeping units (“SKUs”) in the inventory. Most of these 70 SKUs are for medical diagnostic stain inventory. For example, certain medical diagnostic stains are packaged in different sizes, and each packaged size (i.e. 16 oz., 32 oz., and 48 oz.) has a unique SKU in inventory.
Accounting standards state that, “an enterprise shall report revenues from external customers for each product and service or each group of similar products and services unless it is impractical to do so.” The vast majority of our sales are of medical diagnostic stains, with a minimal portion of sales being diagnostic equipment.
Although not the focus of our new business model, we also sell diagnostic devices in certain situations. We recognize device sales revenue when persuasive evidence of an arrangement with the customer exists, title passes to the customer and the customer cannot return the devices, prices are fixed or determinable and collection is reasonably assured. Because diagnostic equipment sales are not material to the financial statements, we disclose the sales as one line item for reagents in the statement of operation.
Our revenue recognition policy for sales to distributors is the same as the policy for sales to end-users.
A customer qualifies as a distributor by completing a distributor application and proving its sales tax status. Upon qualifying as a distributor, a customer receives a 35% discount from retail prices, and the distributor receives an additional 5% discount when product is purchased in case quantities. The distributors are not required to maintain specified amounts of product on hand, and distributors are not required to make minimum purchases to maintain distributor status. Distributors have no stock rotation rights or additional rights of return. Sales to distributors are recorded net of discounts.
Sales returns have been negligible, and any and all discounts are known at the time of sale. Sales are recorded net of sales returns and sales discounts. There are no significant judgments or estimates associated with the recording of revenues.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplemental data required by this item are included in Part IV, Item 15.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective. During the audit process, we identified material weaknesses discussed below in the Report of Management on Internal Control over Financial Reporting.
Report of Management on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
| | (i) | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; |
| | (ii) | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and |
| | (iii) | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement to our annual or interim financial statements will not be prevented or detected.
In the course of the management's assessment, it has identified the following material weaknesses in internal control over financial reporting:
Control Environment
We did not maintain an effective control environment for internal control over financial reporting. Specifically, we concluded that we did not have appropriate controls in the following areas:
| · | Ineffective controls over period end financial disclosure and reporting processes. |
| · | Ineffective controls over communication of material transactions between management and accounting personnel. |
Financial Reporting Process
We did not maintain an effective financial reporting process to prepare financial statements in accordance with generally accepted accounting principles. Specifically, we initially failed to appropriately account for and disclose the valuation and recording of certain equity and financing arrangements.
We are in the process of improving our internal control over financial reporting in an effort to eliminate these material weaknesses through improved supervision and training of our staff, but additional effort and staffing is needed to fully remedy these deficiencies. Our management, audit committee, and directors will continue to work with our auditors and outside advisors to ensure that our controls and procedures are adequate and effective.
Item 9B. Other Information
None.
Item 10. Directors, Executive Officers and Corporate Governance
Set forth below are the name, age, position and a description of the business experience of each of our executive officers, directors and other key employees as of September 30, 2011.
| Name | | Age | | Position |
| | | | | |
| James J. Dalton | | 69 | | Chairman (Director) and Chief Executive Officer |
| James G. Carter | | 72 | | Director |
| William K. Martin | | 68 | | Director |
| Jack J. Johnson | | 69 | | Director |
| Robert J. Welgos | | 73 | | Director |
| Michael G. Acton | | 48 | | Chief Financial Officer, Secretary-Treasurer |
James J. Dalton – Chief Executive Officer and Chairman
Mr. Dalton joined us as a director on October 1, 2004. He was our Chief Executive Officer and Chairman from June 16, 2008 until October 17, 2011. Mr. Dalton was a director and President of SecureAlert from August 2003 until June 2008. Prior to joining SecureAlert, Mr. Dalton was the owner and President of Dalton Development, a real estate development company. He served as the President and coordinated the development of The Pinnacle, an 86-unit condominium project located at Deer Valley Resort in Park City, Utah. Mr. Dalton also served as the president of Club Rio Mar in Puerto Rico, a 680-acre beach front property that includes 500 condominiums, beach club, numerous restaurants, pools and a Fazio-designed golf course. He was also a founder and owner of the Deer Valley Club, where he oversaw the development of 25 high-end condominiums with a “ski-in and ski-out” feature. We believe that Mr. Dalton’s prior experience as a president and director of a public company, and in particular, of our former parent, SecureAlert, provides him with unique understanding of and experience with our business development and objectives. This background qualifies him to serve on our board and provides him with insight into the specific challenges facing smaller public companies. We believe that his experience helps him as he directs our response to meet the needs of our business, including our need to access capital markets and sources of financing. Mr. Dalton’s real estate development and sales experience also prepared him to advise us in the development and marketing of our ActiveOne™ solutions and products and related services.
James G. Carter - Director
Mr. Carter joined our board in September 2008. He is the founder and principal of J. Carter Wine & Spirits, Inc. (1989-2002) and is a director and former president of White Beeches Golf & Country Club since 1990. Mr. Carter’s business experience includes Vice President of Sales & Marketing (North America and Caribbean) for Suntory International Corp. (1981-1989), National Sales Director Wines for Austin Nichols & Company, Inc. (1975-1980). He is a former Councilman and Council President for the Township of Washington (Bergen County, New Jersey). He retired in 2000. Mr. Carter attended Villanova University. Mr. Carter has a very strong sales and marketing background with Suntory International Corp and Austin Nichols & Company. We believe that Mr. Carter’s experiences in starting, owning, and operating his own business and his extensive sales experience, qualify him to serve as a member of our Board of Directors as we continue to develop our distribution networks and design our marketing and sales programs.
William K. Martin - Director
Mr. Martin joined our board in September 2008. He is a founder/partner/broker of Commerce CRG, and has served as its managing director from 1993 through the present, as well as acting as the Associate Broker in the firm’s Park City, Utah, office since 2007. Commerce CRG is a commercial real estate and management business, and is an independently owned and operated member of the Cushman & Wakefield Alliance, which focuses on commercial real estate and management. Mr. Martin has also been a board member of a number of national and international real estate service firms. Mr. Martin has also been active in industry organizations and is currently a member of the Economic Development Corporation of Utah and sits on that organization’s executive board. Mr. Martin has a Bachelor of Science degree from Utah State University in Applied Statistical and Computer Science and has earned the rank of Captain in the United States Air Force (retired). Mr. Martin has a very strong sales and marketing background with Commerce CRG and Cushman Wakefield. Mr. Martin’s qualifications to serve on our board include his past experience as a member of the State of Utah’s Economic Development board which give him insight into governmental affairs and government relations, and his sales experience, assisting as we begin to bring our products and services to market and establish our distribution channels.
Jack J. Johnson – Director
Mr. Johnson joined our board in October 2008. In 1976, he founded the Jack Johnson Company, a land planning, civil engineering and architectural company specializing in residential and resort communities. He has served as President of that company since its inception. He also formed Land Equity Partners, a residential subdivision development company, and Resort Development Services, a company focusing on development of hotels and condominiums. He received a degree in Civil Engineering from the University of Illinois in the late 1960s, and is a licensed civil engineer in several states. His qualifications to serve on our board include his engineering background, which will help as we enter into research and development contracts related to our products and service solutions. He is also well qualified as a result of his extensive business experience and sales expertise.
Robert J. Welgos – Director
Mr. Welgos joined our Board of Directors in June 2009. He has a BS in engineering from the Newark College of Engineering (1962), and worked for 38 years with Allied Signal Corp (now Honeywell International), in various technical department management positions, including being responsible for operations of Customer Technical Service Dept., Design Engineering, Testing Laboratories, and Process Laboratories. He also served as the Manager, North American Distributor Sales and Director of International Operations, where he established distribution networks throughout Pacific Rim and South America. During this period, he was instrumental in the creation of joint ventures with Lucky Goldstar in Korea and Japan Synthetic Rubber in Japan. Mr. Welgos retired from Allied Signal Corp in 2000. Mr. Welgos is the Chairman of our board’s Audit Committee. Among other things, Mr. Welgos’ education and extensive experience in the industries described above qualify him to advise our company in our research and development agenda and customer service solutions. In addition, his experience in Asia is important as we source our products and manufacturing.
Michael G. Acton – Secretary, Treasurer and Chief Financial Officer
Mr. Acton joined us as Secretary-Treasurer at the time of our incorporation. He has been our Chief Financial Officer since June 2008. From 1999 until June 2008, Mr. Acton was the Secretary-Treasurer of SecureAlert. He also served as that company’s Chief Financial Officer from March 2001 until June 2008. Mr. Acton is a Certified Public Accountant in the State of Utah.
New Chief Executive Officer
On October 17, 2011, we engaged David S. Boone as our new Chief Executive Officer. Mr. Boone assumed the post previously occupied by James J. Dalton, whose resignation took effect with the appointment of Boone. Mr. Dalton continues to serve as the Chairman of our Board of Directors. Mr. Boone’s appointment and the change in Mr. Dalton’s role were approved by the Board of Directors on October 4, 2011, contingent upon the execution of Mr. Boone’s employment agreement and acceptance, which occurred on October 17, 2011.
Mr. Boone, age 47, graduated from the University of Illinois, cum laude, in 1983 majoring in accounting. He received his master’s degree in business administration from Harvard in 1989. From 1990-1991 he worked for the Director of Channel Strategy and Finance for Kraft General Foods. From 1991-1992 he worked as the Director of Business Development and Strategy for Sears Specialty Merchandising. From 1992-1999 he worked for Frito-Lay in various positions, including: Area CFO Frito Lay SOCAL, Finance Director/CFO Direct Division, and Vice President of Business Development. From 1999-2000 he was the Chief Financial Officer and Vice President for Intira Corporation. From 2000-2001 he served as the Vice President of Corporate Development for Safeway Corporation. From 2001-2005 he was the Sr. Vice President of Finance for Belo Corporation. Most recently, Mr. Boone was CEO, President and Director of American CareSource Holdings from 2005 to 2011.
Compensatory Arrangement with New Principal Executive Officer
On October 17, 2011, we entered into a written Employment Agreement containing compensation and other terms related to Mr. Boone’s appointment as our Chief Executive Officer. The term of the Employment Agreement is two years. The term and the employment of Mr. Boone will continue for successive two-year periods unless terminated prior to the expiration of the current term by either the Company or Mr. Boone.
The compensation payable to Mr. Boone under the Employment Agreement includes a base salary of $325,000 per year, a bonus, in the discretion of the Compensation Committee of the Board of Directors, which, if declared, will not exceed 60% of the base salary. The Employment Agreement also includes the grant of an option to purchase 3,000,000 shares common stock at an exercise price of $0.44 per share. One-third of the option vested upon grant, and 55,000 shares vest monthly during the term of the agreement until the maximum of 3,000,000 shares is vested. The option is exercisable for a three-year period. The executive also participates in medical and other benefit plans offered generally by the Company to our employees.
In the event of a change of control (as defined in the Employment Agreement), unvested options held by Mr. Boone will immediately vest and be exercisable. In addition, in the event of a termination of Mr. Boone within 12 months following a change of control, we are required to pay Boone a lump sum payment equal to 12 months of his base salary.
In the event of a termination resulting from disability or illness or without cause, or in the event of a voluntary termination of employment by Mr. Boone for good reason as defined in the Employment Agreement, we are to pay monthly payments equal to his base compensation and benefits for a period of 12 months following termination. Mr. Boone is prohibited from competing with the Company for 24 months following any termination of his employment.
Director Compensation
Each of our independent (non-employee) directors is paid a director’s fee of $30,000 per year. In addition, in June 2009, each outside director received a common stock purchase warrant for the purchase of up to 125,000 shares of our common stock at a price of $1.25 per share, exercisable for five years from the date of grant.
The table below summarizes the compensation we paid to our outside directors for their services as directors for the fiscal year ended September 30, 2011.
Name (a) | | | Fees Earned or Paid in Cash ($) (b) | | | Stock Awards ($) (c) | | | | Option Awards ($) (d) | | | | Non-Equity Incentive Plan Compensation ($) (e) | | | | Change in Pension Value and Nonqualified Deferred Compensation Earnings ($) (f) | | | | All Other Compensation ($) (g) | | | | Total ($) (h) | |
| James J. Dalton (1) | | | -- | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | |
| James G. Carter | | $ | 30,000 | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | | | $ | 30,000 | |
| William K. Martin | | $ | 30,000 | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | | | $ | 30,000 | |
| Robert J. Welgos | | $ | 30,000 | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | | | $ | 30,000 | |
| Jack Johnson | | $ | 30,000 | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | | | $ | 30,000 | |
| | (1) | Mr. Dalton is Chairman of the Board of Directors. He previously served as our Chief Executive Officer, until October 2011. Mr. Dalton received 4,000,000 restricted shares of our common stock in lieu of cash compensation and warrants to purchase 3,000,000 shares of our common stock for services provided as our Chief Executive Officer. Mr. Dalton did not receive additional compensation for his service on the Board of Directors. His compensation for the year ended September 30, 2011 is disclosed in the Summary Compensation Table on page 28 below. |
Item 11. Executive Compensation
Chief Executive’s Management Agreement
During the fiscal year ended September 30, 2011, we entered into a four-year management contract with our Chief Executive Officer, James J. Dalton, with an effective term of October 1, 2010 through September 30, 2014. Under that agreement, we paid Mr. Dalton for his services as follows:
| · | 4,000,000 restricted shares of common stock were granted to Mr. Dalton at a price of $0.46 per share, which vested immediately; and |
| · | Warrants for the purchase of 3,000,000 shares of common stock at a price of $0.50 per share. |
The compensation payable to our new Chief Executive Officer, Mr. Boone, is described above on page 27.
Section 162(m) Compliance
Section 162(m) of the Internal Revenue Code, or “Code”, limits us to a deduction for federal income tax purposes of no more than $1 million of compensation paid to certain executive officers in a taxable year. Compensation above $1 million may be deducted if it is “performance-based compensation” within the meaning of the Code.
Our Board of Directors has determined that the stock purchase warrants granted under Mr. Dalton’s management contract as described above, with an exercise price at least equal to the fair value of our common stock on the date of grant should be treated as “performance-based compensation.” Our Board of Directors believes that we should be able to continue to manage our executive compensation program for our Chief Executive Officer and Chief Financial Officer (collectively, our “Named Executive Officers”) so as to preserve the related federal income tax deductions, although individual exceptions may occur.
Summary Compensation Table
The following table sets forth certain information with respect to compensation for the year ended September 30, 2011 earned by, awarded or paid to our Named Executive Officers.
| Name and principal position | Year | | | | | | | | | | | | | | | | | Nonqualified | | | All other | | | | |
| (a) | (b) | | (c) | | | (d) | | | (e)(3) | | | (f)(4) | | | (g) | | | (h) | | | (i) | | | (j) | |
James J. Dalton,(2) | 2011 | | $ | - | | | $ | - | | | $ | 1,840,000 | | | $ | 791,434 | | | $ | - | | | $ | - | | | $ | 7,325 | | | $ | 2,638,759 | |
| Principal Executive | 2010 | | $ | 50,000 | | | $ | - | | | $ | 540,000 | | | $ | 2,323,464 | | | $ | - | | | $ | - | | | $ | 23,933 | | | $ | 2,937,397 | |
| Officer | 2009 | | $ | - | | | $ | - | | | $ | 190,000 | | | $ | 571,540 | | | $ | - | | | $ | - | | | $ | 6,717 | | | $ | 768,257 | |
| Michael G. Acton, | 2011 | | $ | 78,895 | | | $ | - | | | $ | 411,426 | | | $ | - | | | $ | - | | | $ | - | | | $ | 29,258 | | | $ | 519,579 | |
| Principal Financial | 2010 | | $ | 60,000 | | | $ | 300 | | | $ | 326,628 | | | $ | - | | | $ | - | | | $ | - | | | $ | 20,744 | | | $ | 407,672 | |
| Officer | 2009 | | $ | 72,309 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 4,944 | | | $ | 77,253 | |
| | (1) | Column (i) includes long-term care insurance and other personal benefits. The amounts included in that column, representing premiums paid by us for the applicable insurance policies, include the following: |
| | | |
| | | Term Life | | | Health | | | Dental | | | Vision | |
| Name | | Insurance | | | Insurance | | | Insurance | | | Insurance | |
| James J. Dalton | | $ | 103 | | | $ | 6,300 | | | $ | 670 | | | $ | 252 | |
| Michael G. Acton | | $ | 4,727 | | | $ | 23,194 | | | $ | 1,085 | | | $ | 252 | |
| | (2) | All amounts paid under the management agreement described above. All amounts except those reported in column (c) and column (i) are non-cash amounts and represent stock or option grants. |
| | (3) | Amounts in this column represent non-cash compensation expense of stock grants based on the market value of the stock on the grant date. The aggregate grant date fair value of stock awards to Mr. Dalton in the three-year period was $2,570,000. During the fiscal year ended September 30, 2010, we granted Mr. Acton $222,750 of the restricted stock awards vest pursuant to certain performance conditions. As of September 30, 2011, none of the performance conditions were met. During the fiscal year ended September 30, 2011, we recognized $66,426 of expense associated with the restricted stock grants. During the fiscal year ended September 30, 2011, the aggregate grant date fair value of stock awards issued to Mr. Acton was $345,000. The total stock base compensation we recognized for Mr. Acton during the three-year period is $738,054. |
| | (4) | Amounts in this column represent non-cash compensation expense based on the fair value of options granted, calculated using the Black-Scholes option-pricing model. During the period, the options granted to Mr. Dalton have an aggregate grant date fair value of $791,434 using the following assumptions: exercise price of $0.50; risk-free interest rate of 0.68%; expected life of two and a half years; expected dividend of 0%; and a volatility factor of 104%. |
Outstanding Equity Awards at Fiscal Year-End
The following table summarizes information regarding options and other equity awards owned by the Named Executive Officers as of September 30, 2011.
| | | Option Awards | | | Stock Awards | |
Name (a) | | Number of Securities Underlying Unexercised Options (#) Exercisable (b) | | | Number of Securities Underlying Unexercised Options (#) Unexercisable (c) | | | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) (d) | | | Option Exercise Price ($) (e) | | | Option Expira-tion Date (f) | | | Number of Shares or Units of Stock That Have Not Vested (#) (g) | | | Market Value of Shares or Units of Stock That Have Not Vested ($) (h) | | | Equity Incentive Plan Awards: Number of Unearned Shares, Units, or Other Rights That Have Not Vested (#) (i) | | | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units, or Other Rights That Have Not Vested ($) (j) | |
James J. Dalton, President and Chief Executive Officer | | | 3,000,000 | | | | 0 | | | | 0 | | | $ | 0.50 | | | 6/21/2016 | | | | 0 | | | $ | 0 | | | | 0 | | | $ | 0 | |
| | | 4,002,000 | | | | 0 | | | | 0 | | | $ | 0.25 | | | 5/11/2014 | | | | 0 | | | $ | 0 | | | | 0 | | | $ | 0 | |
| Michael G. Acton, Chief Financial Officer | | | 0 | | | | 0 | | | | 0 | | | $ | 0 | | | | 0 | | | | 0 | | | $ | 0 | | | | 0 | | | $ |
Options Exercised and Vested
During the fiscal year ended September 30, 2010, 1,060,000 warrants vested in February 2010 and at the discretion of the Board of Directors, vesting of 4,000,000 and 8,440,000 options was accelerated in April and July 2010 respectively. During the fiscal year ended September 30, 2011, 3,000,000 warrants were vested, and 5, 082,000 options were exercised.
Indemnification of Officers and Directors
Our certificate of incorporation provides that we will indemnify our directors and officers to the fullest extent permitted by the Delaware General Corporation Law, or DGCL. We expect to obtain directors’ and officers’ liability insurance that insures such persons against the costs of defense, settlement or payment of a judgment under certain circumstances.
In addition, our certificate of incorporation provides that our directors will not be liable for monetary damages for breach of fiduciary duty.
We entered into indemnification agreements with each of our executive officers and directors. The indemnification agreements provide the executive officers and directors with contractual rights to indemnification, expense advancement and reimbursement, to the fullest extent permitted under the DGCL.
There is no pending litigation or proceeding naming any of our directors or officers to which indemnification is being sought, and we are not aware of any pending or threatened litigation that may result in claims for indemnification by any director or officer.
Board of Directors
Election and Vacancies
Directors hold office until the next annual meeting of the stockholders and until their successors have been elected or appointed and duly qualified. Vacancies on the board which are created by the retirement, resignation or removal of a director may be filled by the vote of the remaining members of the board, with such new director serving the remainder of the term or until his successor shall be elected and qualify.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth information as of December 23, 2011 by:
| | · | each person or group who is known by us to own beneficially more than 5% of our outstanding shares of common stock; |
| | · | each of our Named Executive Officers; |
| | · | each of our directors; and |
| | · | all of the executive officers and directors as a group. |
Beneficial ownership for the purposes of the following table is determined in accordance with the rules and regulations of the SEC. These rules generally provide that a person is the beneficial owner of securities if such person has or shares the power to vote or direct the voting thereof, or to dispose or direct the disposition thereof or has the right to acquire such powers within 60 days. Common stock subject to options that are currently exercisable or exercisable within 60 days of December 23, 2011, is deemed to be outstanding and beneficially owned by the person holding the options. These shares, however, are not deemed outstanding for the purposes of computing the percentage ownership of any other person. Percentage of beneficial ownership is based on 38,568,160 shares of common stock outstanding as of September 30, 2011. Except as disclosed in the footnotes to this table and subject to applicable community property laws, we believe that each stockholder identified in the table possesses sole voting and investment power over all shares of common stock shown as beneficially owned by the stockholder. Unless otherwise indicated in the table or footnotes below, the address for each beneficial owner is c/o ActiveCare, Inc., 5095 West 2100 South, West Valley City, Utah 84120.
5% Stockholders: Title of Class | Name and address of Beneficial Owner | | Amount and Nature Of Beneficial Ownership | | | Percent of Class | |
| | | | | | | | |
| Common | Harborview Master Fund LP (1) 850 Third Avenue, Suite 1801 New York, NY 10022 | | | 3,041,568 | | | | 7.67 | % |
| | | | | | | | | | |
| Common | Gemini Master Fund LTD (2) 135 Liverpool Drive, Suite C Cardiff, CA 92007 | | | 2,340,820 | | | | 5.93 | % |
| | | | | | | | | | |
| Common | Pacific Capital S.ar.l.(3) 28 Boulevard d’Avranches L-1160 Luxembourg | | | 2,000,000 | | | | 5.19 | % |
| Executive Officers and Directors: | | | | | | | |
| Title of Class | Name of Beneficial Owner | | Amount and Nature of Beneficial Ownership | | | Percent of Class | |
| Common | James J. Dalton(4) | | | 14,756,417 | | | | 30.01 | % |
| Common | David S. Boone(5) | | | 1,111,110 | | | | 2.80 | % |
| Common | James G. Carter(6) | | | 307,932 | | | | * | |
| Common | William K. Martin(7) | | | 764,178 | | | | 1.98 | % |
| Common | Robert J. Welgos(8) | | | 272,593 | | | | * | |
| Common | Jack Johnson(9) | | | 140,000 | | | | * | |
| Common | Michael G. Acton(10) | | | 1,215,310 | | | | 3.15 | % |
All executive officers and directors as a group (6 persons)(11) | | | 18,567,540 | | | | 39.80 | % |
* Represents beneficial ownership of less than one percent (1%) of our outstanding common stock.
| (1) | Includes 1,972,261 shares and 1,069,307 warrants owned of record by Harborview Master Fund LP. |
| (2) | Includes 1,409,857 shares and 930,963 warrants owned of record by Gemini Master Fund LTD. |
| (3) | Includes 2,000,000 shares owned of record by Pacific Capital S.a.r.l. |
| (4) | Mr. Dalton is a member of our Board of Directors and until October 17, 2011 served as our CEO. This amount includes 4,154,417 shares and 7,002,000 warrants owned of record by Mr. Dalton. |
| (5) | Mr. Boone became our Chief Executive Officer on October 17, 2011. This amount includes 1,111,110 warrants vested among the 3,000,000 warrants granted according to the employment agreement. |
| (6) | Mr. Carter is a director. Includes 230,932 shares and 77,000 warrants owned of record by Mr. Carter. |
| (7) | Mr. Martin is a director. Includes 93,000 shares and 77,000 warrants owned of record by Mr. Martin. Also, includes 594,178 shares held in the name of Zenith Holding, LTD, an entity controlled by Mr. Martin. |
| (8) | Mr. Welgos is a director. Includes 171,593 shares and 101,000 warrants owned of record by Mr. Welgos. |
| (9) | Mr. Johnson is a director. Includes 75,000 shares and 65,000 warrants owned of record by Mr. Johnson. |
| (10) | Mr. Acton is our Chief Financial Officer and Secretary-Treasurer. |
| (11) | Duplicate entries eliminated. |
Item 13. Certain Relationships and Related Transactions, and Director Independence
Related Party Transactions
Related Party Note Payable
During the year ended September 30, 2011, the Company owed $25,000 to one of its officers. The note had an annual interest rate of 12% and was due on demand. The Company repaid the loan together with $1,915 of interest during the quarter ended December 31, 2010.
Indemnification Agreements
We have entered into indemnification agreements with each of our current directors and executive officers. These agreements require us to indemnify these individuals to the fullest extent permitted under Delaware law against liabilities that may arise by reason of their service to us, and to advance expenses incurred as a result of any proceeding against them as to which they could be indemnified. We also intend to enter into indemnification agreements with our future directors and executive officers.
Procedures for Related Party Transactions
Under our code of business conduct and ethics adopted in June 2009, our employees, officers and directors are discouraged from entering into any transaction that may cause a conflict of interest for us. In addition, they must report any potential conflict of interest, including related party transactions, to their managers or our corporate counsel who then reviews and summarizes the proposed transaction for our audit committee. Pursuant to its charter, our audit committee is required to then approve any related-party transactions, including those transactions involving our directors. In approving or rejecting such proposed transactions, the audit committee will be required to consider the relevant facts and circumstances available and deemed relevant to the audit committee, including the material terms of the transactions, risks, benefits, costs, availability of other comparable services or products and, if applicable, the impact on a director’s independence. Our audit committee will approve only those transactions that, in light of known circumstances, are in, or are not inconsistent with, our best interests, as our audit committee determines in the good faith exercise of its discretion. A copy of our code of business conduct and ethics and audit committee charter are available on our corporate website at www.activecare.com.
Corporate Governance and Director Independence
Board Composition
Our business and affairs are managed under the direction of our Board of Directors. Our Board of Directors is comprised of five directors, four of whom (Mr. Carter, Mr. Martin, Mr. Johnson, and Mr. Welgos) are independent within the meaning of the Nasdaq Marketplace Rules. This means that the Board of Directors has determined that those directors (1) are not officers or employees of ActiveCare or its subsidiary and (2) have no direct or indirect relationship with ActiveCare that would interfere with the exercise of their independent judgment in carrying out the responsibilities of a director. We have determined that it is in our best interest to have directors who would meet the requirements of being “independent” under the rules of the Nasdaq Stock Market.
Board Committees
Our Board of Directors has established an audit committee and a compensation committee. The composition and responsibilities of each committee are described below. Members serve on these committees until their resignation or until otherwise determined by our Board of Directors.
Our audit committee is comprised of two of our independent directors: Mr. Welgos and Mr. Martin. Mr. Welgos serves as chair of the audit committee and is considered to be the financial expert on that committee. Our audit committee has responsibility for, among other things:
| · | selecting and hiring our independent registered public accounting firm, and approving the audit and non-audit services to be performed by and the fees to be paid to our independent registered public accounting firm; |
| · | evaluating the qualifications, performance and independence of our independent auditors; |
| · | monitoring the integrity of our financial statements and our compliance with legal and regulatory requirements as they relate to financial statements or accounting matters; |
| · | reviewing the adequacy and effectiveness of our internal control policies and procedures; |
| · | discussing the scope and results of the audit with the independent registered public accounting firm and reviewing with management and the independent registered public accounting firm our interim and year-end operating results; and |
| · | preparing the audit committee report required by the SEC, to be included in our annual proxy statement. |
As indicated above, our Board of Directors has affirmatively determined that Mr. Welgos and Mr. Martin meet the definition of “independent directors” for purposes of serving on an audit committee under applicable SEC rules, and we intend to comply with these independence requirements within the time periods specified. In addition, the Board of Directors has determined that Mr. Welgos meets the standards established by the SEC to qualify as a “financial expert” under Item 407 of Regulation S-K under the Securities Act. Our Board of Directors has adopted a written charter for our audit committee, which is available on our corporate website at www.activecaresys.com.
Our compensation committee consists of two independent directors, Mr. Johnson and Mr. Carter. Mr. Johnson is the chairman of our compensation committee. The compensation committee is responsible for, among other things:
| · | reviewing and approving compensation of our executive officers including annual base salary, annual incentive bonuses, specific goals, equity compensation, employment agreements, severance and change in control arrangements, and any other benefits, compensations or arrangements; |
| · | reviewing succession planning for our executive officers; |
| · | reviewing and recommending compensation goals, bonus and stock compensation criteria for our employees; |
| · | preparing the compensation committee report required by the SEC to be included in our annual proxy statement; and |
| · | administering, reviewing and making recommendations with respect to our equity compensation plans. |
Our Board of Directors has adopted a written charter for our compensation committee, which is available on our corporate website at www.activecaresys.com.
Compensation Committee Interlocks and Insider Participation
None of our executive officers currently serves, or in the past year has served, as a member of the Board of Directors or compensation committee of any entity that has one or more executive officers serving on our Board of Directors or compensation committee.
Code of Business Conduct and Ethics
We have adopted a code of business conduct and ethics applicable to our principal executive, financial and accounting officers and all persons performing similar functions. A copy of that code is available on our corporate website at www.activecaresys.com. We expect that any amendments to such code, or any waivers of its requirements, will be disclosed on our website.
Meetings of the Board of Directors and Committees
The Board of Directors is elected by and is accountable to our stockholders. The Board establishes policy and provides our strategic direction, oversight, and control. The Board met two times during fiscal year 2011. All directors attended 100% of the meetings of the Board and the Board committees of which they are members.
Item 14. Principal Accounting Fees and Services
Audit Fees
Audit services consist of the audit of our annual consolidated financial statements, and other services related to filings and registration statements filed by us and other pertinent matters. Audit fees paid to Hansen Barnett & Maxwell, P.C. for fiscal years 2011 and 2010 totaled approximately $73,000 and $60,000, respectively.
Audit Related Fees, Tax Fees, Audit Related Fees, and All Other Fees
Hansen Barnett & Maxwell, P.C. has not provided to us any consulting services, including tax consulting and compliance services or any financial information systems design and implementation services in fiscal years 2011 and 2010.
The audit committee of the Board of Directors considered and authorized all services provided by and fees paid to Hansen Barnett & Maxwell, P.C.
Auditor Independence
Our audit committee considered that the work done for us in fiscal 2011 by Hansen Barnett & Maxwell, P.C. was compatible with maintaining Hansen Barnett & Maxwell, P.C.’s independence.
Report of the Audit Committee
The Audit Committee oversees the Company’s financial reporting process on behalf of the Board of Directors. Management has the primary responsibility for the financial statements and the reporting process, including the systems of internal controls. The directors who serve on the Audit Committee are all independent for purposes of applicable SEC Rules. The Audit Committee operates under a written charter that has been adopted by the Board of Directors.
We have reviewed and discussed with management the Company’s audited financial statements as of and for the year ended September 30, 2011.
We have discussed with the independent registered public accountant of the Company, Hansen Barnett & Maxwell, P.C., the matters that are required to be discussed by Statement on Auditing Standards No. 114, The Auditors Communication with Those Charged with Governance, as amended, by the Auditing Standards Board of the American Institute of Certified Public Accountants, which includes a review of the findings of the independent registered public accountant during its examination of the Company’s financial statements.
We have received and reviewed written disclosures and the letter from Hansen Barnett & Maxwell, P.C., which is required by Independence Standard No. 1, Independence Discussions with Audit Committees, as amended, by the Independence Standards Board, and we have discussed with Hansen Barnett & Maxell, P.C. their independence under such standards. We have concluded that the independent registered public accountant is independent from the Company and its management.
Based on our review and discussions referred to above, we have recommended to the Board of Directors that the audited financial statements of the Company be included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2011, for filing with the Securities and Exchange Commission.
Respectfully submitted by the members of the Audit Committee:
| | Robert J. Welgos, Chair |
| | William K. Martin |
Item 15. Exhibits, Financial Statement Schedules
(a) The following documents are filed as part of this Form:
| Report of Independent Registered Public Accounting Firm |
| Consolidated Balance Sheets |
| Consolidated Statements of Earnings |
| Consolidated Statements of Stockholders’ Equity and Comprehensive Income |
| Consolidated Statements of Cash Flows |
| Notes to the Consolidated Financial Statements |
| | 2. | Financial Statement Schedules. [Included in the Consolidated Financial Statements or Notes thereto.] |
| | 3. | Exhibits. The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the Commission: |
| | Title of Document |
| | | |
| (10)(x) | | Office Lease Agreement between the Company and Reef Parkway, LLC (filed previously as exhibit to report on Form 10-Q, filed February 10, 2011).* |
| | |
| (10)(xi) | Lease Addendum between the Company and Reef Parkway, LLC (filed previously as exhibit to report on Form 10-Q, filed February 10, 2011).* |
| | |
| (10)(xii) | Office Lease Agreement between the Company and Phoenix 2006 Partners, LLC (filed previously as exhibit to report on Form 10-Q, filed February 10, 2011).* |
| | | |
| (10)(xiii) | | Employment Contract with James Dalton, Chief Executive Officer dated June 22, 2011.* |
| | |
| (10)(xiv) | Common Stock Purchase Warrant Agreement with James Dalton dated June 22, 2011.* |
| | |
| (10)(xv) | | Employment Agreement with David S. Boone dated October 17, 2011* |
| | | |
| (11) | | Computation of Statement of Earnings (included in financial statements filed herewith)* |
| | | |
| (31)(i) | | Certifications of Chief Executive (Principal) Executive Officer under Rule 13a-14(a)/15d-14(a)* |
| | | |
| (31)(ii) | | Certifications of Chief Financial (Principal Financial and Accounting) Officer under Rule 13a-14(a)/15d-14(a)* |
| | | |
| 31.1 | | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | | |
| 31.2 | | Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | | |
| 32.1 | | Certification of Chief Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C.Section 1350 |
| | | |
| 101.Ins | | XBRL Instance |
| 101.Sch | | XBRL Schema |
| 101.Cal | | XBRL Calculation |
| 101.Def | | XBRL Definition |
| 101.Lab | | XBRL Label |
| 101.Pre | | XBRL Presentation |
* Previously filed.
ActiveCare, Inc.
Financial Statements
September 30, 2011 and 2010
Index to Financial Statements
| | Page |
| | |
Report of Independent Registered Public Accounting Firm | F-3 |
| | |
| Balance Sheets as of September 30, 2011 and 2010 | F-4 |
| | |
Statements of Operations for the Years Ended September 30, 2011 and 2010 | F-6 |
| | |
| Statements of Stockholders’ Equity/ (Deficit) for the Years Ended September 30, 2010 and 2011 | F-7 |
| | |
| Statements of Cash Flows for the Years Ended September 30, 2011 and 2010 | F-8 |
| | |
| Notes to Financial Statements | F-10 |
| | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and the Shareholders
ActiveCare, Inc.
We have audited the accompanying balance sheets as of September 30, 2011 and 2010 and the related statements of operations, stockholders' equity and cash flows of ActiveCare, Inc., (the Company), for the years ended September 30, 2011 and 2010. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ActiveCare, Inc. as of September 30, 2011 and 2010 and the results of their operations and cash flows for the years ended September 30, 2011 and 2010 in conformity with U.S. generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has incurred recurring operating losses and has an accumulated deficit. These conditions raise substantial doubt about its ability to continue as a going concern. Management's plans regarding those matters are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
| | HANSEN, BARNETT & MAXWELL, P.C. |
Salt Lake City, Utah
December 23, 2011
ActiveCare, Inc.
Balance Sheets
September 30, 2011 and 2010
| | | September 30, 2011 | | | September 30, 2010 | |
| Assets | | | | | | |
| Current assets: | | | | | | |
| Cash | | $ | 178,131 | | | $ | 1,713,923 | |
| Accounts receivable, net of allowance for doubtful accounts of $6,820 and $3,000, respectively | | | 103,044 | | | | 106,142 | |
| Inventories, net of inventory valuation of $4,404 and $4,326, respectively | | | 116,010 | | | | 41,516 | |
| Prepaid expenses and other assets | | | 2,217 | | | | 243,882 | |
| Total current assets | | | 399,402 | | | | 2,105,463 | |
| | | | | | | | | |
| Property and equipment, net of accumulated depreciation of $464,276 and $427,827, respectively | | | 232,182 | | | | 88,455 | |
| Deposits | | | 30,831 | | | | 128,883 | |
| Domain name, net of amortization of $1,430 and $715 respectively | | | 12,870 | | | | 13,585 | |
| Leased equipment, net of amortization of $54,549 and $21,921, respectively | | | 112,955 | | | | 96,544 | |
| License agreement, net of amortization of $81,310 and $47,664, respectively | | | 218,690 | | | | 252,336 | |
| Investment, net of impairment of $50,000 and $0, respectively | | | - | | | | 50,000 | |
| | | | | | | | | |
| Total assets | | $ | 1,006,930 | | | $ | 2,735,266 | |
See accompanying notes to financial statements.
ActiveCare, Inc.
Balance Sheets
September 30, 2011 and 2010 (Cont.)
| | | September 30, 2011 | | | September 30, 2010 |
| Liabilities and Stockholders’ Equity / (Deficit) | | | | | |
| Current liabilities: | | | | | |
| Accounts payable | | $ | 452,034 | | | $ | 639,568 | |
| Accrued expenses | | | 494,919 | | | | 236,219 | |
| Deferred revenue | | | 1,365 | | | | 25,921 | |
| Related party notes payable | | | - | | | | 25,000 | |
| Note payable, net of discount of $93,103 and $6,164, respectively | | | 300,000 | | | | 23,836 | |
| Accrued payable on license agreement | | | 300,000 | | | | 300,000 | |
| Total current liabilities | | | 1,548,318 | | | | 1,250,544 | |
| Total liabilities | | | 1,548,318 | | | | 1,250,544 | |
| | | | | | | |
| Stockholders’ equity / (deficit) | | | | | | |
| Preferred stock; $.00001 par value, 10,000,000 shares authorized; 0 shares issued and outstanding | | | - | | | | - | |
| Common stock, $.00001 par value, 50,000,000 shares authorized; 38,568,160 and 25,039,160 shares issued and outstanding, respectively | | | 386 | | | | 251 | |
| Additional paid in capital | | | 24,394,501 | | | | 18,522,033 | |
| Accumulated deficit | | | (24,936,275 | ) | | | (17,037,562 | ) |
| Total stockholders’ equity / (deficit) | | | (541,388 | ) | | | 1,484,722 | |
| Total liabilities and stockholders’ equity / (deficit) | | $ | 1,006,930 | | | $ | 2,735,266 | |
See accompanying notes to financial statements.
ActiveCare, Inc.
Statements of Operations
For the Years Ended September 30, 2011 and 2010
| | | 2011 | | | 2010 | |
| | | | | | | |
| Revenues: | | | | | | |
| Care Services | | $ | 333,902 | | | $ | 74,258 | |
| Reagents | | | 437,489 | | | | 474,066 | |
| Total revenues | | | 771,391 | | | | 548,324 | |
| | | | | | | | | |
| Cost of Revenue | | | | | | | | |
| Care Services | | | 685,729 | | | | 305,305 | |
| Reagents | | | 369,392 | | | | 364,804 | |
| Total cost of revenues | | | 1,055,121 | | | | 670,109 | |
| Gross margin | | | (283,730 | ) | | | (121,785 | ) |
| | | | | | | | | |
| Operating expenses | | | | | | | | |
| Research and development (including $15,300 and $69,870, respectively, of paid in stock or stock options/warrants) | | | 321,245 | | | | 458,047 | |
| Selling, general and administrative (including $4,232,450 and $6,648,114, respectively, of compensation expense paid in stock or as a result of amortization of stock options/warrants) | | | 6,958,693 | | | | 9,327,156 | |
| | | | | | | | | |
| Loss from operations | | | (7,563,668 | ) | | | (9,906,988 | ) |
| | | | | | | | | |
| Other income (expenses): | | | | | | | | |
| Gain (loss) on derivative liability | | | - | | | | 443,735 | |
| Warrants refinancing expense | | | - | | | | (754,385 | ) |
| Interest expense (including $306,015 and $1,289,074, respectively, of non cash expenses) | | | (334,706 | ) | | | (1,420,389 | ) |
| Loss on disposal of equipment | | | (6,193 | ) | | | (425 | ) |
| Interest income | | | 782 | | | | - | |
| Impairment of Investment | | | (50,000 | ) | | | - | |
| Gain on accounts payable forgiveness | | | 55,072 | | | | (343 | ) |
| | | | | | | | | |
| Net loss | | $ | (7,898,713 | ) | | $ | (11,638,795 | ) |
| | | | | | | | | |
| Net loss per common share – basic and diluted | | $ | (0.27 | ) | | $ | (0.81 | ) |
| | | | | | | | | |
| Weighted average shares – basic and diluted | | | 28,974,350 | | | | 14,296,000 | |
See accompanying notes to financial statements.
ActiveCare, Inc.
Statements of Stockholders’ Equity / (Deficit)
For the Years Ended September 30, 2010 and 2011
| | | Common Stock | | | Additional | | | Accumulated | | | | |
| | | Shares | | | Amount | | | Paid-in Capital | | | Deficit | | | Total | |
| | | | | | | | | | | | | | | | |
| Balance at September 30, 2009 | | | 11,768,196 | | | $ | 119 | | | $ | 5,330,651 | | | $ | (5,398,767 | ) | | $ | (67,997 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Issuance of common stock for: | | | | | | | | | | | | | | | | | | | | |
| Cash | | | 3,484,000 | | | | 35 | | | | 2,612,965 | | | | - | | | | 2,613,000 | |
| Options/warrants exercised for cash | | | 2,528,000 | | | | 25 | | | | 631,975 | | | | - | | | | 632,000 | |
| Services | | | 3,648,750 | | | | 35 | | | | 2,935,239 | | | | - | | | | 2,935,274 | |
| Preferred stock dividends | | | 44,714 | | | | 1 | | | | 45,161 | | | | - | | | | 45,162 | |
| Connection with loans | | | 77,500 | | | | 1 | | | | 60,624 | | | | - | | | | 60,625 | |
| Options/warrants exercised for services | | | 1,568,000 | | | | 16 | | | | 559,984 | | | | - | | | | 560,000 | |
| Options | | | - | | | | - | | | | 1,910,902 | | | | - | | | | 1,910,902 | |
| Amortization of deferred financing fees | | | - | | | | - | | | | 50,500 | | | | - | | | | 50,500 | |
| Amortization of warrants issued for services | | | - | | | | - | | | | 3,220,256 | | | | - | | | | 3,220,256 | |
| Conversion feature of preferred stock | | | 1,920,000 | | | | 19 | | | | 1,163,776 | | | | - | | | | 1,163,795 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | - | | | | - | | | | - | | | | (11,638,795 | ) | | | (11,638,795 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Balance at September 30, 2010 | | | 25,039,160 | | | | 251 | | | | 18,522,033 | | | | (17,037,562 | ) | | | 1,484,722 | |
| | | | | | | | | | | | | | | | | | | | | |
| Issuance of common stock for: | | | | | | | | | | | | | | | | | | | | |
| Cash | | | 2,032,500 | | | | 20 | | | | 812,980 | | | | - | | | | 813,000 | |
| Options/warrants exercised for cash | | | 4,770,000 | | | | 48 | | | | 1,192,452 | | | | - | | | | 1,192,500 | |
| Services | | | 6,189,500 | | | | 62 | | | | 1,370,988 | | | | - | | | | 1,371,050 | |
| Options/warrants exercised for services | | | 312,000 | | | | 3 | | | | 89,997 | | | | - | | | | 90,000 | |
| Connection with loans | | | 225,000 | | | | 2 | | | | 93,101 | | | | - | | | | 93,103 | |
| Finance fee | | | - | | | | - | | | | (161,750 | ) | | | - | | | | (161,750 | ) |
| Options | | | - | | | | - | | | | 39,572 | | | | - | | | | 39,572 | |
| Amortization of warrants issued for services | | | - | | | | - | | | | 663,103 | | | | - | | | | 663,103 | |
| Amortization of stocks issued for services | | | - | | | | - | | | | 1,772,025 | | | | - | | | | 1,772,025 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | - | | | | - | | | | - | | | | (7,898,713 | ) | | | (7,898,713 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Balance at September 30, 2011 | | | 38,568,160 | | | $ | 386 | | | $ | 24,394,501 | | | $ | (24,936,275 | ) | | $ | (541,388 | ) |
See accompanying notes to financial statements.
ActiveCare, Inc.
Statements of Cash Flows
For the Years Ended September 30, 2011 and 2010
| | | 2011 | | | 2010 | |
| | | | | | | |
| Cash flows from operating activities: | | | | | | |
| Net loss | | $ | (7,898,713 | ) | | $ | (11,638,795 | ) |
| Adjustments to reconcile net loss to net cash used | | | | | | | | |
| in operating activities: | | | | | | | | |
| Depreciation and amortization | | | 203,708 | | | | 779,172 | |
| Stock based compensation expense | | | 4,118,178 | | | | 6,561,028 | |
| Warrants issued for services | | | 39,572 | | | | 42,294 | |
| Loss on impairment of investment | | | 50,000 | | | | - | |
| Amortization of debt discount as interest expense | | | 99,265 | | | | 1,243,911 | |
| Finance expense on equity issuance | | | 206,750 | | | | - | |
| Common stock issued for interest | | | - | | | | 45,163 | |
| Gain on derivative liability | | | - | | | | (443,735 | ) |
| Loss on disposal of property & leased equipment | | | 6,193 | | | | 4,482 | |
| Warrants refinancing expense | | | - | | | | 754,385 | |
| Changes in operating assets and liabilities: | | | | | | | | |
| Accounts receivable | | | 3,098 | | | | (42,673 | ) |
| Inventories | | | (74,494 | ) | | | 7,449 | |
| Prepaid expenses and other assets | | | 339,717 | | | | (170,813 | ) |
| Accounts payable | | | (187,534 | ) | | | 391,016 | |
| Accrued expenses | | | 36,701 | | | | 291,675 | |
| Deferred revenue | | | (24,556 | ) | | | 25,921 | |
| Net cash used in operating activities | | | (3,082,115 | ) | | | (2,149,520 | ) |
| | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | |
| Purchase of assets for operations | | | (211,159 | ) | | | (41,566 | ) |
| Purchase of leased equipment | | | (124,520 | ) | | | (251,037 | ) |
| Purchase of investment | | | - | | | | (50,000 | ) |
| Purchase of intangibles | | | - | | | | (13,585 | ) |
| Net cash used in investing activities | | | (335,679 | ) | | | (356,188 | ) |
| | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | |
| Proceeds from sale of common stock, net of commissions | | | 444,500 | | | | 2,101,700 | |
| Proceeds from related-party note payable | | | - | | | | 25,000 | |
| Proceeds from note payable and associated stock issuance | | | 300,002 | | | | 30,000 | |
| Issuance of Series B preferred stock | | | - | | | | 600,000 | |
| Payment to related-party note payable | | | (25,000 | ) | | | - | |
| Payment to note payable | | | (30,000 | ) | | | - | |
| Proceeds from exercise of warrants | | | 1,192,500 | | | | 632,000 | |
| Net cash provided by financing activities | | | 1,882,002 | | | | 3,388,700 | |
| | | | | | | | | |
| Net decrease in cash | | | (1,535,792 | ) | | | 882,992 | |
| Cash, beginning of period | | $ | 1,713,923 | | | $ | 830,931 | |
| | | | | | | | | |
| Cash, end of period | | $ | 178,131 | | | $ | 1,713,923 | |
See accompanying notes to financial statements.
ActiveCare, Inc.
Statements of Cash Flows
For the Years Ended September 30, 2011 and 2010 (Cont.)
| | | 2011 | | | 2010 | |
| Supplemental Cash Flow Information: | | | | | | |
| Cash paid for income taxes | | $ | - | | | $ | - | |
| Cash paid for interest | | $ | 11,684 | | | $ | 64,565 | |
| | | | | | | | | |
| Non-Cash Investing and Financing: | | | | | | | | |
| Conversion of derivative liability | | $ | - | | | $ | 2,831,611 | |
| Exercise of warrants for settlement of accrued board fees | | $ | 15,000 | | | $ | 210,000 | |
| Issuance of stock for settlement of accrued board fees | | $ | 75,000 | | | $ | - | |
See accompanying notes to financial statements.
ActiveCare, Inc.
Notes to Financial Statements
September 30, 2011 and 2010
1. Organization and Nature of Operations
ActiveCare, Inc. (the “Company” or “ActiveCare”) was formed March 5, 1998 as a wholly owned subsidiary of SecureAlert, Inc. [OTCBB: SCRA.OB], a Utah corporation formerly known as RemoteMDx, Inc. (“SecureAlert”). During the twelve months ended September 30, 2008, the ownership interest of SecureAlert in ActiveCare was reduced through (a) the sale of shares of its common stock by the Company to investors in private transactions and (b) the sale and transfer of shares of its common stock by SecureAlert in private transactions. SecureAlert completed its divestiture of ActiveCare in February 2009, through the distribution of approximately 1,421,667 shares of the Company’s common stock to the shareholders of SecureAlert. Each shareholder of SecureAlert received one share of ActiveCare common stock for every 117 shares of SecureAlert common stock owned of record on January 30, 2009. The distribution date was February 27, 2009. Following the distribution of its shares of the Company SecureAlert retained no ownership interest in ActiveCare. Effective July 15, 2009, the Company changed its name to ActiveCare, Inc., and its state of incorporation to Delaware.
The Company’s revenue has historically been from two sources: (i) sales from Care Services (Care Services are the monitoring services the Company provides to customers who use the ActiveOne PAL); (ii) diagnostic equipment product sales and sales of medical diagnostic stains from reagents.
The Company incurred a net loss and has negative cash flows from operating activities for the years ended September 30, 2011, and 2010. 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, the Company must generate positive cash flows from operations and obtain the necessary funding to meet its projected capital investment requirements. Management’s plans with respect to this uncertainty include the selling of the Company’s products and services as well as raising additional capital from the sale of the Company’s common stock. There can be no assurance that revenues will increase rapidly enough to offset operating losses and repay debts. 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.
2. Summary of Significant Accounting Policies
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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 accompanying financial statements for cash, accounts receivable, accounts payable, accrued liabilities, and other debt obligations approximate fair values because of the immediate or short-term maturities of these financial instruments.
Concentration of Credit Risk
The Company has cash in bank accounts that, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. As of September 30, 2011, the cash balance on the Company’s bank account did not exceed the federally insured limit.
In the normal course of business, the Company provides credit terms to its customers. Accordingly, the Company performs ongoing credit evaluations of its customers’ financial condition and requires no collateral from its customers. The Company maintains an allowance for uncollectable accounts receivable based upon the expected collectability of all accounts receivable.
During the fiscal year ended September 30, 2011, revenue from one customer of Care Services represents 25% of the Company’s consolidated revenue and revenue from one customer of Reagents represents 10% of the total revenue.
During the fiscal year ended September 30, 2010, revenue from one customer of Reagents represents 26% of the Company’s consolidated revenue.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and investments with original maturities to the Company of three months or less.
Accounts Receivable
Accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Specific reserves are estimated by management based on certain assumptions and variables, including the customer’s financial condition, age of the customer’s receivables and changes in payment histories. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received. A trade receivable is considered to be past due if any portion of the receivable balance has not been received by the contractual pay date. Interest is not charged on trade receivables that are past due.
Inventories
Inventories are recorded at the lower of cost or market, cost being determined on a first-in, first-out (“FIFO”) method. Reagent inventories consist of raw materials, work-in-process, and finished goods. Care Services inventory consist of ActiveHome inventories. Inventories as of September 30, 2011 and 2010 were as follows:
| | | 2011 | | | 2010 | |
| Care Services | | | | | | |
| ActiveHome | | $ | 68,264 | | | $ | - | |
| Reagents | | | | | | | | |
| Raw materials | | $ | 38,433 | | | $ | 35,127 | |
| Work in process | | $ | 7,131 | | | $ | 3,086 | |
| Finished goods | | $ | 6,586 | | | $ | 7,629 | |
| Reserve for inventory obsolescence | | $ | (329 | ) | | $ | (251 | ) |
| Inventory Valuation | | $ | (4,075 | ) | | $ | (4,075 | ) |
| Total inventory | | $ | 116,010 | | | $ | 41,516 | |
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.
Investments
On May 21, 2010, the Company entered into a “Co-Development and Exclusive Distribution Agreement” with Vista Therapeutics, Inc. (“Vista”) for the development and co-marketing of NanoBiosensor™ -based biomarker assessment products for use with the Company’s proprietary line of continuous patient monitoring products marketed to the elderly and senior market. In connection with the Co-Development Agreement, the Company made an investment in Vista’s Series B Preferred Stock in the amount of $50,000. The Vista Series B Preferred Stock is convertible into Common Stock of Vista under certain conditions and grants to the holder certain rights and preferences, subject to prior rights granted to the holders of Vista’s Series A-1 Preferred Stock and Series A-2 Preferred Stock. The Company impaired the full value of the investment during the year ended September 30, 2011.
Revenue Recognition
The Company’s revenue has historically been from three sources: (i) sales from Care Services; (ii) diagnostic equipment product sales and sales of medical diagnostic stains from reagents.
Care Services
“Care Services” include contracts in which the Company provides monitoring services to end users and sales of devices to distributors. The Company typically enters into contracts on a month-to-month basis with customers (members) that use the Company’s Care Services. However, these contracts may be cancelled by either party at anytime with 30 days notice. Under the Company’s standard contract, the device becomes billable on the date the customer (member) orders the product, and remains billable until the device is returned to the Company. The Company recognizes revenue on devices at the end of each month that Care Services have been provided. In those circumstances in which the Company receives payment in advance, the Company records these payments as deferred revenue.
The Company recognizes Care Services revenue when persuasive evidence of an arrangement with the customer exists, title passes to the customer, prices are fixed or determinable and collection is reasonably assured.
Shipping and handling fees are included as part of net sales. The related freight costs and supplies directly associated with shipping products to customers are included as a component of cost of goods sold.
Customers order the Company’s product lines by phone or website. The Company does not enter into long-term contracts. All of the Company Care Services sales are made with net 30-day payment terms.
In connection with generally accepted accounting principles to qualify for the recognition of revenue at the time of sale, the Company notes the following:
| · | 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 30 days, 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 negligible. |
Accounting standards state that, “an enterprise shall report revenues from external customers for each product and service or each group of similar products and services unless it is impractical to do so.” In the Care Services revenue line, the vast majority of the Company’s sales are Care Service revenue. Because Care Service equipment sales are not material to the financial statements, the Company discloses sales as one line item.
The Company’s revenue recognition policy for sales to distributors is the same as the policy for sales to end-users.
A customer qualifies as a distributor by completing a distributor application and proving its sales tax status. The Company’s 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 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, the Company provides the distributor with the ActiveOne™ device and a monthly monitoring service, which are both included in the contracted pricing. In these multiple element revenue arrangements, we consider whether: (i) the deliverables have value on a standalone basis to the distributors, and (ii) the distributors have a general right of return. The Company has determined that these elements do have standalone value to distributors and that the performance of undelivered items is probable and substantially within the control of the Company. Therefore, in accordance with accounting standards, the Company has determined that these revenue elements should be considered as separate units of accounting. Accounting standards state that arrangement consideration shall be allocated at the inception of the arrangement to all deliverables on the basis of their relative selling price. When applying the relative selling price method, the selling price for each deliverable shall be determined using vendor-specific objective evidence of selling price, if it exists; otherwise, third-party evidence will be used to determine the selling price. If neither vendor-specific objective evidence nor third-party evidence of selling price exists for a deliverable, the vendor shall use its best estimate of the selling price for that deliverable.
The Company does not currently sell, nor does it have intentions to sell the ActiveOne™ device separately from the monthly monitoring service, therefore the Company is not able to determine vendor-specific objective evidence of selling price. The Company is 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. The Company is therefore required to determine its best estimate of selling price in order to determine the relative selling price of the separate deliverables in its revenue arrangements. In order to determine the best estimate of selling price of the ActiveOne™ device, the Company included the following cost components in its estimate: production costs, development costs, PTCRB certification costs, and estimated gross margin. In order to determine the best estimate of the monthly monitoring service, the Company included the following components in its estimate: monthly communication cost, monitoring labor costs, PSAP database and monthly maintenance costs, and estimated gross margin. The Company allocates the arrangement costs based on these best estimates of selling price. The relative selling price allocated to the sale of the ActiveOne™ device is recognized when the device is delivered to the distributor. The relative selling price of the monitoring service is recognized monthly when the services have been provided.
Reagents
The Company recognizes medical diagnostic stains revenue when persuasive evidence of an arrangement with the customer exists, title passes to the customer, prices are fixed or determinable and collection is reasonably assured.
Shipping and handling fees are included as part of net sales. The related freight costs and supplies directly associated with shipping products to customers are included as a component of cost of goods sold. Neither the sale of diagnostic equipment nor the sale of medical diagnostic stains contains multiple deliverables.
Customers order the Company’s diagnostic stain product lines by purchase order. The Company does not enter into long-term contracts. Its diagnostic equipment sales were $3,150 for the year ended September 30, 2011 and its medical diagnostic stain sales were $434,339 the year ended September 30, 2011. All of the Company’s sales are made with net 30-day payment terms.
In connection with generally accepted accounting principles to qualify for the recognition of revenue at the time of sale, the Company notes the following:
| ● | 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 30 days, 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 negligible. |
| ● | Customers may return diagnostic equipment within 30 days of the purchase date. Customers may return the medical diagnostic stains within 30 days of the purchase date provided that the stain’s remaining life is at least 8 months. Customers must obtain prior authorization for a product return. |
The Company’s diagnostic stain products have not been modified significantly for several years. There is significant history on which to base the Company’s estimates of sales returns. These sales returns have been negligible.
The Company has 70 types of products based on the number of individual stock-keeping units (“SKUs”) in its inventory. Most of these 70 SKUs are for medical diagnostic stain inventory. For example, certain medical diagnostic stains are packaged in different sizes, and each packaged size (i.e. 16 oz., 32 oz., and 48 oz.) has a unique SKU in inventory. Accounting standards state that, “an enterprise shall report revenues from external customers for each product and service or each group of similar products and services unless it is impractical to do so.” The vast majority of the Company’s sales are of medical diagnostic stains, with a minimal portion of sales being diagnostic equipment. Because diagnostic equipment sales are not material to the financial statements, the Company discloses both types of sales as one line item.
The Company’s revenue recognition policy for sales to distributors is the same as the policy for sales to end-users.
A customer qualifies as a distributor by completing a distributor application and proving its sales tax status. Upon qualifying as a distributor, a customer receives a 35% discount from retail prices, and the distributor receives an additional 5% discount when product is purchased in case quantities. The Company’s 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.
Although not the focus of the Company’s new business model, the Company also sells diagnostic devices in certain situations. The Company recognizes product sales revenue when persuasive evidence of an arrangement with the customer exists, title passes to the customer and the customer cannot return the devices, prices are fixed or determinable and collection is reasonably assured. Because diagnostic equipment sales are not material to the financial statements, the Company discloses the sales as one line item for Reagents in the statement of operation.
Research and Development Costs
All expenditures for research and development are charged to expense as incurred. These expenditures in both 2011 and 2010 were for the development of a medical home monitoring device and associated services. For the years ended September 30, 2011 and 2010, research and development expenses were $321,245 and $458,047, respectively.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expenses for the years ended September 30, 2011 and 2010 were approximately $597,933 and $420,394, respectively. Virtually all of this advertising expense relates to the Company’s Care Service segment.
Income Taxes
The Company recognizes deferred income tax assets or liabilities for the expected future tax consequences of events that have been recognized in the financial statements or income tax returns. Deferred income tax assets or liabilities are determined based upon the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates expected to apply when the differences are expected to be settled or realized. Deferred income tax assets are reviewed periodically for recoverability and valuation allowances are provided as necessary. Interest and penalties related to income tax liabilities, when incurred, are classified in interest expense and income tax provisions, respectively.
Warrant Exercises
The Company issues common shares from warrant exercises once it has received verification of the funds deposited and has received an exercise letter from the warrant holder.
Net Loss Per Common Share
Basic net loss per common share (“Basic EPS”) is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period.
Diluted net loss per common share (“Diluted EPS”) is computed by dividing net loss by the sum of the weighted average number of common shares outstanding and the weighted-average dilutive common share equivalents then outstanding. The computation of Diluted EPS does not assume exercise or conversion of securities that would have an anti-dilutive effect.
Common share equivalents consist of shares issuable upon the exercise of common stock warrants, and shares issuable from restricted stock grants. As of September 30, 2011 and 2010, there were 11,309,000 and 12,604,000 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.
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (“FASB”) issued accounting guidance on the consolidation of variable interest entities (“VIEs”). This guidance revised previous guidance by eliminating the exemption for qualifying special purpose entities, by establishing a new approach for determining who should consolidate a variable-interest entity and by changing when it is necessary to reassess who should consolidate a variable-interest entity. This guidance was effective at the beginning of the first fiscal year beginning after November 15, 2009. The Company adopted this guidance on October 1, 2010. The application of this guidance did not have a material impact on the Company’s financial statements.
In September 2009, the FASB issued guidance that changes the existing multiple-element revenue arrangements guidance currently included under its Revenue Arrangements with Multiple Deliverables codification. The revised guidance primarily provides two significant changes: 1) eliminates the need for objective and reliable evidence of the fair value for the undelivered element in order for a delivered item to be treated as a separate unit of accounting, and 2) eliminates the residual method to allocate the arrangement consideration. In addition, the guidance also expands the disclosure requirements for revenue recognition. This was effective for the first annual reporting period beginning on or after June 15, 2010, with early adoption permitted provided that the revised guidance is retroactively applied to the beginning of the year of adoption. The Company adopted this guidance effective October 1, 2010 and recognized $25,456 of deferred revenue.
In October 2009, the FASB issued guidance on share-lending arrangements entered into on an entity’s own shares in contemplation of a convertible debt offering or other financing. This guidance was effective for fiscal years beginning on or after December 15, 2009, and interim periods within those fiscal years for arrangements outstanding as of the beginning of those years. The Company adopted this guidance on October 1, 2010. The application of this guidance did not have a material impact on the Company’s financial statements.
3. Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are determined using the straight-line method over the estimated useful lives of the assets, typically three to seven years. Leasehold improvements are amortized over the shorter of the estimated useful lives of the asset or the term of the lease. Expenditures for maintenance and repairs are expensed while renewals and improvements over $500 are capitalized. When property and equipment are disposed, any gains or losses are included in the results of operations.
Property and equipment consisted of the following as of September 30:
| | | 2011 | | | 2010 |
| Equipment | | $ | 229,229 | | | $ | 195,499 | |
| Software | | | 25,111 | | | | 20,032 | |
| Leasehold improvements | | | 402,016 | | | | 274,437 | |
| Furniture and fixtures | | | 40,102 | | | | 26,314 | |
| | | | 696,458 | | | | 516,282 | |
| Accumulated depreciation | | | (464,276 | ) | | | (427,827 | ) |
Property and equipment, net of accumulated depreciation | | $ | 232,182 | | | $ | 88,455 | |
Depreciation expense for the years ended September 30, 2011 and 2010 was $61,242 and $19,329, respectively.
4. Patent License Agreement
During the year ended September 30, 2009, the Company licensed the use of certain patents from a third party. This license agreement will aid the Company as it furthers its business plan. The Company is required to pay $300,000 plus a 5% royalty on the net sales of all licensed products and the Company has the right to purchase the underlying patents for 4,000,000 shares of common stock. The Company has capitalized the initial cost of the patent license agreement and is amortizing the cost over the remaining estimated useful life of nine years. The Company has recognized $33,645 of amortization expense for the years ended September 30, 2011 and 2010, respectively. The Company has also recognized $20,408 and $0, respectively, of royalty expense as of the year ended September 30, 2011 and 2010. The Company had not paid the $300,000 or the accrued royalty payable of $20,408 as of September 30, 2011. Subsequent to September 30, 2011, the Company agreed to settle this obligation by issuing 600,000 shares of common stock and 480,000 shares of Series C preferred stock.
Leased equipment at September 30 is as follows:
| | | 2011 | | | 2010 | |
| Leased equipment | | $ | 167,504 | | | $ | 118,465 | |
| Less accumulated depreciation | | | (54,549 | ) | | | (21,921 | ) |
| Leased Equipment, net | | $ | 112,955 | | | $ | 96,544 | |
The Company began leasing monitoring equipment to customers for Care Services in October 2009. The leased equipment is depreciated on the straight-line method over the estimated useful lives of the related assets over 3 years regardless if the equipment is leased to a customer or remaining in stock. Customers have the right to cancel the service agreements anytime. The leased equipment depreciation expense is recorded under Cost of Revenue for Care Services.
Leased Equipment depreciation expense for the years ended September 30, 2011 and 2010 was $62,898 and $21,921 respectively.
During the year ended September 30, 2011, the Company owed $30,000 and $300,000 to two unrelated parties. Both of the notes have an annual interest rate of 12% and were due on December 31, 2010 and June 30, 2011, respectively. The Company repaid the $30,000 loan together with $1,659 of interest during the quarter ended December 31, 2010. Any unpaid balance of the $300,000 loan after the due date of June 30, 2011 has an annual interest rate of 18%. The Company recognized $19,638 of interest expense during the year ended September 30, 2011. In connection with the $300,000 loan, the Company also issued 225,000 shares of common stock with a total value of $93,103 as a loan origination fee. The Company fully amortized the loan origination fee during the year ended September 30, 2011.
7. Related-Party Note Payable
During the year ended September 30, 2011, the Company owed $25,000 to one of its officers. The note had an annual interest rate of 12% and was due on demand. The Company repaid the loan together with $1,915 of interest during the quarter ended December 31, 2010.
During the year ended September 30, 2011, the Company issued the following shares of common stock:
| · | 2,032,500 shares for cash proceeds of $813,000, net of origination fee of $368,500; |
| · | 4,770,000 shares for warrants exercised for cash proceeds of $1,192,500; |
| · | 162,000 shares for accrued director fees of $90,000; |
| · | 225,000 shares in consideration for loan origination fee with value of $93,103; |
| · | 1,372,500 shares in consideration for services in connection with marketing and product branding service with value of $918,750; |
| · | 17,000 shares as payment for research and development services with value of $15,300; |
| · | 950,000 shares to company employees for services with value of $437,000; |
| · | 4,000,000 shares under a new employment contract with an officer for services to be rendered through September 2014. The value of these shares of common stock totaled $1,840,000. The Company has been amortizing the associated expense over the remaining period of the employment term. For the year ended September 30, 2011, the Company has recognized $460,000 of the related expense. |
In March 2010, the Company issued 2,000,000 shares of common stock with a fair value on the date of grant of $2,020,000 in connection with a 15-month consulting services agreement. The Company has been recognizing the associated consulting expense over a 15-month period starting March 2010 and ended May 2011. For the year ended September 30, 2011, the Company recognized $1,077,331 of consulting expense related to the issuance of these shares.
During 2010, the Company awarded selected officers and key employees restricted stock grants totaling 679,000 shares, valued at $916,650, or $1.35 per share, in connection with their employment agreements.
During the year ended September 30, 2011, the Company reduced the non-vested stock by 42,000 shares due to the change of employment status of several individuals. As of September 30, 2011, the unrecognized stock-based compensation was $401,900 and will be recognized over the remaining estimated lives of the performance measures. The weighted average remaining term of the grant is 2.7 years.
These grants vest under certain performance measures of the Company as follows:
| Vesting | | | | | % of | | | Price on | | | | |
| Criteria | | Shares | | | total shares | | | Grant Date | | | Value | |
| 1M Rev | | | 61,000 | | | | 10 | % | | $ | 1.35 | | | $ | 82,350 | |
| 5M Rev | | | 96,000 | | | | 15 | % | | | 1.35 | | | | 129,600 | |
| 10M Rev | | | 96,000 | | | | 15 | % | | | 1.35 | | | | 129,600 | |
| 15M Rev | | | 96,000 | | | | 15 | % | | | 1.35 | | | | 129,600 | |
| 20M Rev | | | 96,000 | | | | 15 | % | | | 1.35 | | | | 129,600 | |
| 25M Rev | | | 96,000 | | | | 15 | % | | | 1.35 | | | | 129,600 | |
| Profitability | | | 96,000 | | | | 15 | % | | | 1.35 | | | | 129,600 | |
| Total | | | 637,000 | | | | 100 | % | | | | | | $ | 859,950 | |
As of September 30, 2011, none of the performance measures had been met.
During the year ended September 30, 2011 and 2010, the Company recognized compensation expense regarding these grants totaling $234,694 and $200,242, respectively. The expense is included in general and administrative expense in the accompanying financial statements.
During September 2010, the Company issued warrants for the purchase of 500,000 shares of common stock under a 12-month consulting services agreement. The warrants vested immediately and are exercisable for the purchase of shares of the Company’s common stock at $1.00 per share through September 30, 2015. The fair value of the warrants issued at the date of grant was $507,538, and was measured using the Black-Scholes valuation model using the following assumptions: exercise price of the warrants at $1.00; risk free interest rate of 0.64%; expected life of 2.5 years; expected dividend of zero; a volatility factor of 129%; and market price on date of grant of $1.37. Expected volatilities are based on historical volatility of a peer 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 for periods within the contractual life of the warrants is based on the U.S. Treasury yield curve in effect at the time of grant. The Company has been recognizing the related consulting compensation expense over a 12-month period starting September 2010. During year ended September 31, 2011, the Company recognized $465,243 of consulting expense related to the grant of these warrants.
During June 2011, the Company entered into a new service contract with one of its officers for services to be rendered from October 2010 through September 2014. As part of this service contract, the Company issued warrants for the purchase of 3,000,000 shares of common stock to this officer, as payment for past and future services. These warrants vest over the service period through September 2014. During the year ended September 31, 2011, 750,000 warrants have been vested and the remaining 2,250,000 warrants will be vested over the remaining three years of service period. The fair value of the total warrants issued at the date of grant was $791,434, and it has been amortized over the service period through September 2014. During the year ended September 30, 2011, the Company has recognized $197,859 of the total expense related to the warrants and the remaining expense of $593,575 will be amortized over the remaining service period. During June 2011, the Company also issued warrants for the purchase of 150,000 shares of common stock to a consultant for marketing services previously provided. These warrants were vested immediately. The fair value of the warrants issued at the date of grant was $39,572. All of these warrants vested during the year ended September 31, 2011 are exercisable at a price of $0.50 per share through June 21, 2016. The fair value of all the warrants issued during the year ended September 30, 2011 was measured using the Black-Scholes valuation model using the following assumptions: exercise price of the warrants at $0.50; risk free interest rate of 0.68%; expected life of 2.5 years; expected dividend of zero; a volatility factor of 104%; and market price on date of grant of $0.46. Expected volatilities are based on historical volatility of a peer 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 for periods within the contractual life of the warrants is based on the U.S. Treasury yield curve in effect at the time of grant.
During the fiscal year ended September 30, 2011, one of the Company’s executive officers transferred 5,808,000 warrants to two entities owned by the founder of the Company’s former parent company. 2,980,000 shares of the warrants were exercised at $0.25 per share during the year ended September 30, 2011.
The following table summarizes information about stock options and warrants outstanding as of September 30, 2011:
| Options | | Number of Options and Warrants | | | Weighted-Average Exercise Price | |
| Outstanding as of September 30, 2009 | | | 14,642,856 | | | $ | 0.40 | |
| Granted | | | 3,200,000 | | | | 1.00 | |
| Exercised | | | (4,096,000 | ) | | | 0.29 | |
| Forfeited | | | (1,142,856 | ) | | | 1.75 | |
| Outstanding as of September 30, 2010 | | | 12,604,000 | | | $ | 0.47 | |
| Granted | | | 3,150,000 | | | | 0.50 | |
| Exercised | | | (5,082,000 | ) | | | 0.25 | |
| Forfeited | | | - | | | | - | |
| Outstanding as of September 30, 2011 | | | 10,672,000 | | | $ | 0.58 | |
| Exercisable as of September 30, 2011 | | | 8,422,000 | | | $ | 0.60 | |
As of September 30, 2011, the total outstanding warrants has an aggregate intrinsic value of $0, and the weighted average remaining term of the warrants is 3.48 year.
The Company is organized into two business segments based primarily on the nature of the Company’s products. The Stains and 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 Care Services segment is engaged in the business of developing, distributing and marketing mobile health monitoring and concierge services to distributors and consumers. The Care Services part of the Company’s business started during the quarter ended December 31, 2009. Prior to that time the Company did not allocate any expenses or assets between the segments.
The following table reflects certain financial information relating to each reportable segment for the year ended September 30, 2011 and 2010:
| | | Care Services | | | Stains and Reagents | | | Total | |
| Year Ended September 30, 2011 | | | | | | | | | |
| Sales to external customers | | $ | 333,902 | | | $ | 437,489 | | | $ | 771,391 | |
| Segment income (loss) | | $ | (7,717,864 | ) | | $ | (180,849 | ) | | $ | (7,898,713 | ) |
| Segment assets | | $ | 716,400 | | | $ | 290,530 | | | $ | 1,006,930 | |
| Depreciation and amortization | | $ | 151,346 | | | $ | 7,154 | | | $ | 158,500 | |
| | | | | | | | | | | | | |
| Year Ended September 30, 2010 | | | | | | | | | | | | |
| Sales to external customers | | $ | 74,258 | | | $ | 474,066 | | | $ | 548,324 | |
| Segment income (loss) | | $ | (11,523,273 | ) | | $ | (115,522 | ) | | $ | (11,638,795 | ) |
| Segment assets | | $ | 2,549,824 | | | $ | 185,442 | | | $ | 2,735,266 | |
| Depreciation and amortization | | $ | 56,281 | | | $ | 19,329 | | | $ | 75,610 | |
The Company recognizes deferred income tax assets or liabilities for the expected future tax consequences of events that have been recognized in the financial statements or income tax returns. Deferred income tax assets or liabilities are determined based upon the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates expected to apply when the differences are expected to be settled or realized. Deferred income tax assets are reviewed periodically for recoverability and valuation allowances are provided as necessary. Interest and penalties related to income tax liabilities, when incurred, are classified in interest expense and income tax provision, respectively.
For the years ended September 30, 2011 and 2010, the Company incurred net losses of approximately $7,798,000 and $11,639,000, respectively, for income tax purposes. The amount and ultimate realization of the benefits from the net operating losses is dependent, in part, upon the tax laws in effect, the Company’s future earnings, and other future events, the effects of which cannot be determined. The Company has established a valuation allowance for all deferred income tax assets not offset by deferred income tax liabilities due to the uncertainty of their realization. Accordingly, there is no benefit for income taxes in the accompanying statements of operations.
At September 30, 2011, the Company had net carryforwards available to offset future taxable income of approximately $22,239,000 which will begin to expire in 2026. The utilization of the net loss carryforwards is dependent upon the tax laws in effect at the time the net operating loss carryforwards can be utilized. The Internal Revenue Code contains provisions that likely could reduce or limit the availability and utilization of these net operating loss carryforwards. For example, limitations are imposed on the utilization of net operating loss carryforwards if certain ownership changes have taken place or will take place. The Company will perform an analysis to determine whether any such limitations have occurred as the net operating losses are utilized.
Deferred income taxes are determined based on the estimated future effects of differences between the financial statement and income tax reporting bases of assets and liabilities given the provisions of currently enacted tax laws and the tax rates expected to be in place. For fiscal year ended September 30, 2011 and 2010, the Company’s expected federal tax rate was 34%.
The deferred income tax assets (liabilities) were comprised of the following at September 30:
| | | 2011 | | | 2010 | |
| Net operating loss carryforwards | | $ | 8,295,000 | | | $ | 4,981,000 | |
| Depreciation and reserves | | | 25,000 | | | | 12,000 | |
| Stock based compensation | | | 898,000 | | | | 725,000 | |
| Accrued vacation | | | 15,000 | | | | 8,000 | |
| Valuation allowance | | | (9,233,000 | ) | | | (5,726,000 | ) |
| Total | | $ | - | | | $ | - | |
Reconciliations between the benefit for income taxes at the federal statutory income tax rate and the Company’s benefit for income taxes for the years ended September 30, 2010 and 2009 are as follows:
| | | 2011 | | | 2010 | |
| Federal income tax benefit at statutory rate | | $ | 2,686,000 | | | $ | 3,957,000 | |
| State income tax benefit, net of federal income tax effect | | | 261,000 | | | | 384,000 | |
| Non-deductible expenses | | | 5,000 | | | | 3,000 | |
| Change in valuation allowance | | | (3,507,000 | ) | | | (4,947,000 | ) |
| Change in effective tax rate | | | 555,000 | | | | 603,000 | |
| Benefit for income taxes | | $ | - | | | $ | - | |
During the years ended September 30, 2011 and 2010, the Company recognized no interest and penalties, and there were no changes in unrecognized tax benefits from tax positions taken or from lapsed statutes of limitations. There were no settlements with taxing authorities. At September 30, 2011, the Company had no unrecognized tax benefits that, if recognized, would affect the effective tax rate, and there are no positions that are anticipated to significantly increase or decrease by September 30, 2011. The Company had no tax examinations begin, end, or remains in process as of and for the years ended September 30, 2011 and 2010. Tax years subsequent to September 30, 2007 remain subject to examination.
12. Commitments and Contingencies
The Company leases two facilities under non-cancelable operating leases that expire in February 2014 and November 2015, respectively. The Company is also under two equipment lease contracts expiring in June 2012 and August 2013. Future minimum rental payments under the non-cancelable operating lease as of September 30, 2011 are approximately as follows:
| Lease Obligations | | | |
| Year Ending September 30: | | | |
| | | | |
| 2012 | | $ | 143,446 | |
| 2013 | | | 141,497 | |
| 2014 | | | 104,259 | |
| 2015 | | | 87,171 | |
| 2016 | | | 15,970 | |
| Total | | $ | 492,343 | |
The current facility rent expense related to these non-cancelable operating leases were approximately $155,000 and $76,000 for the years ended September 30, 2011 and 2010, respectively.
13. Subsequent Events
Sapinda Agreement
On October 10, 2011, the Company, entered into a written agreement with a contractor to advise and assist the Company in establishing an equity line of credit (the “Equity Line”) to provide up to $10 million in equity financing to the Company. According to the agreement, the first $5 million of financing available under the commitment amount was to be paid to the Company on or before November 15, 2011. The Company received $900,000 prior to the execution of the Agreement, which was credited against the first financing under the Equity Line. The contractor did not provide the balance of the first $5 million on or before November 15, 2011 and has not done so as of the date hereof.
Chief Executive Officer
On October 17, 2011, the Company entered into a written Employment Agreement containing compensation and other terms with a new Chief Executive Officer of the Company. The term of the Employment Agreement is two years. The term and the employment of the new Chief Executive Officer will continue for successive two-year periods unless terminated prior to the expiration of the current term by either the Company or the Chief Executive Officer.
The Employment Agreement also includes the grant of an option to purchase 3,000,000 shares of the Company’s common stock at an exercise price of $0.44 per share. One-third of the option vests upon grant and 55,555 shares will vest monthly during the term of the agreement until the maximum of 3,000,000 shares is vested. The option is exercisable for a three-year period. The fair value of the 3,000,000 warrants issued at the date of grant was $822,218, and was measured using the Black-Scholes valuation model using the following assumptions: exercise price of the warrants at $0.44; risk free interest rate of 0.40%; expected life of 2.5 years; expected dividend of zero; a volatility factor of 130.61%; and market price on date of grant of $0.40. Expected volatilities are based on historical volatility of a peer 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 for periods within the contractual life of the warrants is based on the U.S. Treasury yield curve in effect at the time of grant.
Subsequent to September 30, 2011, the Company granted to the chairman of the board warrants to purchase 3,600,000 shares of common stock at $0.40 per share. The fair value of the 3,600,000 warrants issued at the date of grant was $1,007,564, and was measured using the Black-Scholes valuation model using the following assumptions: exercise price of the warrants at $0.40; risk free interest rate of 0.40%; expected life of 2.5 years; expected dividend of zero; a volatility factor of 130.61%; and market price on date of grant of $0.40. Expected volatilities are based on historical volatility of a peer 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 for periods within the contractual life of the warrants is based on the U.S. Treasury yield curve in effect at the time of grant.
Preferred Stock
Subsequent to September 30, 2011, the Company authorized the issuance of Series C and Series D convertible preferred stock. Each share of Series C and Series D convertible preferred stock is convertible into 10 shares of the Company’s common stock.
Common Stock
Subsequent to September 30, 2011, the board of directors approved the issuance of 276,000 shares of common stock to an unrelated third-party to provide the Company with regular and customary financial consulting advice.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Amended Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
| | ActiveCare, Inc. |
| | |
| | |
| | By: /s/ James J. Dalton |
| | James J. Dalton, Chief Executive Officer |
Date: December 27, 2011 | (Principal Executive Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | | Title | Date |
| | | | |
| | | | |
| | | | |
| /s/ James J. Dalton | | Director, Chairman, and | December 27, 2011 |
| James J. Dalton | | Chief Executive Officer | |
| | | (Principal Executive Officer) | |
| | | | |
| | | | |
| /s/ David S. Boone | | Director | |
| David S. Boone | | | December 27, 2011 |
| | | | |
| | | | |
| | | | |
| /s/ James G. Carter | | | |
| James G. Carter | | Director | December 27, 2011 |
| | | | |
| | | | |
| | | | |
| /s/ Robert J. Welgos | | | |
| Robert J. Welgos | | Director | December 27, 2011 |
| | | | |
| | | | |
| | | | |
| /s/ William K. Martin | | | |
| William K. Martin | | Director | December 27, 2011 |
| | | | |
| | | | |
| | | | |
| /s/ Jack J. Johnson | | | |
| Jack J. Johnson | | Director | December 27, 2011 |
| | | | |
| | | | |
| | | | |
| /s/ Michael G. Acton | | Chief Financial Officer | December 27, 2011 |
| Michael G. Acton | | (principal financial officer) | |
| | | (principal accounting officer) | |
36
