2. Summary of Significant Accounting Policies | 12 Months Ended |
Sep. 30, 2013 |
Notes | ' |
2. Summary of Significant Accounting Policies | ' |
2. Summary of Significant Accounting Policies |
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Principles of Accounting and Consolidation |
These consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”). The consolidated financial statements include the accounts of ActiveCare and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated. |
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Use of Estimates in the Preparation of Financial Statements |
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. |
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In May 2013, the Company effected a 10-for-1 reverse common stock split. The consolidated financial statements and notes for all periods presented have been retroactively adjusted to reflect the reverse common stock split. |
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Discontinued Operations |
In June 2013, the Company sold the net assets and operations of its reagents business segment to a third party for $184,318 in cash. During fiscal years 2013 and 2012, the Company recognized a loss from discontinued operations of $5,312 and $145,990, respectively. |
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Fair Value of Financial Instruments |
The carrying values of cash, accounts receivable and accounts payable approximate their respective fair values due to the short-term nature and liquidity of these financial instruments. Derivative financial instruments are recorded at fair value based on current market pricing models. Based on current market condition, the Company estimates the fair values of its long-term debt obligations approximate their carrying values as of September 30, 2013. |
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Concentrations 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 these accounts. |
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In the normal course of business, the Company provides credit terms to its customers and requires no collateral. The Company performs ongoing credit evaluations of its customers’ financial condition. The Company maintains an allowance for doubtful accounts receivable based upon management’s specific review and assessment of each account at the period end. |
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During fiscal year 2013, the Company had revenues from three significant Chronic Illness Monitoring customers, which represented 72% of total revenue. As of September 30, 2013, accounts receivable from significant customers represented 92% of total accounts receivable. During fiscal year 2012, the Company had revenues from one significant Chronic Illness Monitoring customers, which represented 28% of total revenues. As of September 30, 2012, accounts receivable from the significant customer represented 51% of total accounts receivable. |
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Accounts Receivable |
Accounts receivable are carried at original invoice amount less an estimate made for doubtful accounts. Specific reserves are estimated by management based on certain assumptions and variables, including the customer’s financial condition, age of the customer’s receivables and changes in payment histories. Accounts receivable are written off when management determines the likelihood of collection is remote. A receivable is considered to be past due if any portion of the receivable balance has not been received by the contractual payment date. Interest is not charged on accounts receivable that are past due. The Company recorded an allowance for doubtful accounts of $76,544 and $20,195 as of September 30, 2013 and 2012, respectively. |
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Inventories |
Inventories are recorded at the lower of cost or market, cost being determined using the first-in, first-out (“FIFO”) method. Chronic Illness Monitoring inventory consists of diabetic supplies. The Company writes down inventory for obsolescence and excessive levels to estimated net realizable value. Due to competitive pressures and technological innovation, it is possible that estimates of net realizable values could change in the near term. Inventories consist of the following as of September 30: |
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| | | | 2013 | | 2012 |
Chronic Illness Monitoring | | | | |
| Finished goods | $ | 1,249,220 | $ | 185,884 |
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Careservices | | | | |
| ActiveHomeTM | | - | | 56,767 |
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Reagents | | | | |
| Raw materials | | - | | 36,211 |
| Work in process | | - | | 5,745 |
| Finished goods | | - | | 6,161 |
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| | Total inventories | $ | 1,249,220 | $ | 290,768 |
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Property and Equipment |
Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are determined using the straight-line method over the estimated useful lives of the assets, which range between 3 and 7 years. Leasehold improvements are amortized over the shorter of the estimated useful lives of the assets or the terms of the lease. Expenditures for maintenance and repairs are expensed as incurred. Upon the sale or disposal of property and equipment, any gains or losses are included in the results of operations. |
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Equipment Leased to Customers |
Leased equipment is stated at cost less accumulated depreciation and amortization. The Company amortizes the cost of leased equipment on a straight-line basis over 36 months, which is the estimated useful life of the equipment. Amortization of leased equipment is recorded as cost of revenues. |
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Goodwill |
Goodwill is not amortized but is reviewed for potential impairment at least annually. The identification and measurement of goodwill impairment involves the estimation of the fair value of the Company’s reporting units. The estimates of fair value of reporting units are based on the best information available as of the date of the assessment and incorporate management assumptions about expected future cash flows. Future cash flows can be affected by changes in Company performance, industry or market conditions, or overall economic trends. Management determined goodwill that was not impaired during fiscal years 2013 or 2012. |
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Impairment of Long-Lived Assets |
Purchased intangible assets with finite lives are amortized using the straight-line method over the estimated economic lives of the assets, which range from 2 to 20 years. Long-lived assets, including intangible assets with finite lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Management determined that long-lived assets were not impaired during fiscal years 2013 or 2012. |
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Revenue Recognition |
The Company’s revenue has historically been from three sources: (i) sales from Chronic Illness Monitoring services and supplies; (ii) sales from CareServices; and (iii) sales of medical diagnostic stains from the reagents segment, which was sold during fiscal year 2013 and reported as discontinued operations. |
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Chronic Illness Monitoring |
The Company began chronic illness monitoring sales as a result of its acquisition of 4G Biometrics, LLC in the quarter ended March 31, 2012 (see Note 4). The Company recognizes Chronic Illness Monitoring revenue when persuasive evidence of an arrangement with the customer exists, title passes to the customer, prices are fixed or determinable, and collection is reasonably assured. |
Shipping and handling billed to customers are included in revenues. The related freight costs and supplies directly associated with shipping products to customers are included as a component of cost of revenues. Sales of Chronic Illness Monitoring products and services do not contain multiple deliverables. |
The Company enters into agreements with insurance companies, disease management companies, and self-insured companies (collectively, customers) to lower medical expenses by distributing diabetic testing supplies to their customers or employees (members) and monitoring their test results. Customers are obligated to pay for the supplies at the time of shipment and cash is due from these customers as the product is deployed to the members. The terms of these contracts are generally one year and, unless terminated by either party, will automatically renew for another year. Collection terms are net 30-days after claims are submitted. |
Revenue is recognized on the date of sale because the following exist: |
· The price to the contracted customer is fixed or determinable at the date of sale. |
· The customer has paid or is obligated to pay the Company within terms. |
· The customer’s obligation to the Company is not changed in the event of theft or physical destruction or damage of the product. |
· Once the product is shipped, there is no right of return. |
CareServices |
The “CareServices” segment sells devices to distributors as well as provides monitoring services to end users on a contractual basis. The Company typically enters into contracts on a month-to-month basis with customers (members) that use the Company’s CareServices. However, either party may cancel these contracts at any time with 30-days notice. Under the Company’s standard contract, the device becomes billable on the date the 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 CareServices 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 CareServices revenue when persuasive evidence of an arrangement with the customer exists, title passes to the customer, prices are fixed or determinable, and collection is reasonably assured. Shipping and handling fees billed to the customer are included in revenues. The related freight costs and supplies directly associated with shipping products to members are included as a component of cost of revenues. All CareServices sales are made with net 30-day payment terms. |
Revenue is recognized on the date of sale because the following exist: |
· The price to the customer is fixed or determinable at the date of sale. |
· The customer has paid or is obligated to pay within terms, and the obligation is not contingent on resale of the product. |
· The customer’s obligation is not changed in the event of theft or physical destruction or damage of the product. |
· The customer acquiring the product for resale has economic substance apart from the Company. |
· The Company does not have significant obligations for future performance to bring about resale of the product by the customer. |
· The amount of future returns are estimatable and are not significant. |
The vast majority of CareServices revenues are for services. Because equipment sales are not material, the Company presents services and equipment sales together in the accompanying financial statements. |
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. Revenues are recorded net of estimated returns and discounts. |
Reagents |
Prior to the sale of the reagent segment, the Company recognized reagents revenues when persuasive evidence of an arrangement with the customer existed, title passed to the customer, prices were fixed or determinable, and collection was reasonably assured. Prior to the sale of the reagent segment, shipping and handling fees billed to customers were included in revenues and the related freight costs and supplies directly associated with shipping products to customers were included as a component of cost of revenues. |
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Research and Development Costs |
All expenditures for research and development are charged to expense as incurred. Research and development expenses for fiscal years 2013 and 2012 were $832,271 and $187,230, respectively. The expenditures for fiscal year 2013 were primarily for the development of the Chronic Illness Monitoring operating system. The expenditures for fiscal year 2012 were for software development efforts for the chronic illness market. |
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Advertising Costs |
The Company expenses advertising costs as incurred. Advertising expenses for fiscal years 2013 and 2012 were $59,330 and $176,300, respectively. Advertising expenses primarily relate to the Company’s Chronic Illness Monitoring segment. |
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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 reporting bases and tax reporting 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. As of September 30, 2013, management has determined to provide a 100% allowance against deferred income tax assets as it is more likely than not these assets will not be realized. Interest and penalties related to income tax liabilities, when incurred, are classified in interest expense and income tax provision, respectively. |
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Warrant Exercises |
The Company issues common shares in connection with warrant exercises when it has received verification that the proceeds have been deposited and when it has received an exercise letter from the warrant holder. The Company issues common shares in connection with note conversion after it verifies the outstanding note balance and the eligibility of conversion, and has received a conversion letter from the lender. |
Stock-Based Compensation |
The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized in the statement of operations over the period during which the employee is required to provide service in exchange for the award – the requisite service period. The grant-date fair values of the equity instruments are estimated using option-pricing models adjusted for the unique characteristics of those instruments. |
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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 year. |
Diluted net loss per common share (“Diluted EPS”) is computed by dividing net loss available to common stockholders by the sum of the weighted average number of common shares outstanding and the weighted-average dilutive common share equivalents 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, shares issuable from restricted stock grants, shares issuable from convertible notes and convertible Series C, Series D and Series E preferred stock. As of September 30, 2013 and 2012, there were 13,127,396 and 8,202,219 outstanding common share equivalents, respectively, that were not included in the computation of Diluted EPS as their effect would be anti-dilutive. The common stock equivalents outstanding consist of the following as of September 30: |
| | 2013 | | 2012 | | |
Common stock options and warrants | 3,598,554 | | 2,386,587 | | |
Series C convertible preferred stock | 480,000 | | 480,000 | | |
Series D convertible preferred stock | 4,691,090 | | 1,830,515 | | |
Series E convertible preferred stock | 601,585 | | - | | |
Convertible debt | 3,738,917 | | 3,444,217 | | |
Restricted shares of common stock | 17,250 | | 60,900 | | |
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| Total common stock equivalents | 13,127,396 | | 8,202,219 | | |
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Reclassifications |
Certain prior year amounts have been reclassified to conform to the current year’s presentation. The reclassification had no effect on the previously reported net loss. |
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Recent Accounting Pronouncements |
The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and has concluded that the future adoption of any such pronouncements will not have a material impact on the Company’s financial position, results of operations, or liquidity. |