Attached files
| file | filename |
|---|---|
| EX-10.9 - STATEMENT OF WORK BETWEEN COMPANY AND QUECTEL WIRELESS SOLUTIONS, LTD., DATED DECEMBER 1, 2009 - ACTIVECARE, INC. | actc10k20090930sow.htm |
| EX-3.4 - ARTICLES OF AMENDMENT TO ARTICLES OF INCORPORATION CHANGING NAME TO ACTIVECARE, INC. - ACTIVECARE, INC. | actc10k20090930art.htm |
| EX-32 - SECTION 1350 CERTIFICATIONS - ACTIVECARE, INC. | actc10k20090930ex32.htm |
| EX-31.1 - CERTIFICATIONS OF CHIEF EXECUTIVE (PRINCIPAL) EXECUTIVE OFFICER UNDER RULE 13A-14(A)/15D-14(A) - ACTIVECARE, INC. | actc10k20090930ex31-i.htm |
| EX-31.2 - CERTIFICATIONS OF CHIEF FINANCIAL (PRINCIPAL FINANCIAL AND ACCOUNTING) OFFICER UNDER RULE 13A-14(A)/15D-14(A) - ACTIVECARE, INC. | actc10k20090930ex31-ii.htm |
| EX-3.5 - CERTIFICATE OF INCORPORATION (DELAWARE) JULY 15, 2009 - ACTIVECARE, INC. | actc10k20090930certinc.htm |
| EX-3.6 - BY-LAWS REFLECTING CHANGE OF THE CORPORATE NAME - ACTIVECARE, INC. | actc10k20090930bylawsvol.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
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(Mark
One)
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x
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ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the fiscal year ended September 30, 2009
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OR
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o
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TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the transition period from
to
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Commission file number:
0-53570
ActiveCare,
Inc.
(Formerly
Volu-Sol Reagents Corporation)
(Exact
name of registrant as specified in its charter)
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Delaware
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87-0578125
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
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5095
West 2100 South, Salt Lake City, Utah 84120
(Address
of principal executive offices, Zip Code)
(801)
974-9474
(Registrant's
telephone number, including area code)
Securities registered pursuant to
Section 12(b) of the Act: None
Securities registered pursuant to
Section 12(g) of the Act: Common Stock, $0.00001 par
value
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d)
of the Act. Yes o No x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes x No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of the registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
|
Large accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller reporting
company x
|
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No x
ACTIVECARE, INC.
FORM
10-K
For the
Fiscal Year Ended September 30, 2009
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Page
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Item 1
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Business
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3
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Item 1A
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Risk
Factors
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8
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Item 2
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Properties
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13
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Item 3
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Legal
Proceedings
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13
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Item 4
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Submission
of Matters to a Vote of Security Holders
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13
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Part II
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||||
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Item 5
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Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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13
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Item 7
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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15
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Item 8
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Financial
Statements and Supplementary Data
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22
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Item 9
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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22
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Item 9A(T)
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Controls
and Procedures
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22
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Item 9B
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Other
Information
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23
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Part III
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Item 10
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Directors,
Executive Officers and Corporate Governance
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23
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Item 11
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Executive
Compensation
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26
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Item 12
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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31
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Item 13
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Certain
Relationships and Related Transactions, and Director
Independence
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33
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Item 14
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Principal
Accounting Fees and Services
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34
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Part IV
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Item 15
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Exhibits,
Financial Statement Schedules
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35
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Signatures
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The statements contained in
this Report on Form 10-K that are not purely historical are considered to
be "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 and Section 21E of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). These statements represent our
expectations, beliefs, anticipations, commitments, intentions, and strategies
regarding the future, and include, but are not limited to the risks and
uncertainties outlined in Item 1A. “Risk Factors,” and Item. 7,
“Management's Discussion and Analysis of Financial Condition and Results of
Operations.” Readers are cautioned that actual results could differ materially
from the anticipated results or other expectations that are expressed in
forward-looking statements within this Report.
Item 1. Business
Background
ActiveCare,
Inc. (formerly Volu-Sol Reagents Corporation) (the "Company" or "ActiveCare")
was formed March 5, 1998 as a wholly owned subsidiary of RemoteMDx, Inc.
[OTCBB:RMDx], a Utah Corporation ("RemoteMDx"). During the twelve
months ended December 31, 2008, the ownership interest of RemoteMDx in
ActiveCare was reduced through (a) the sale of shares of our common stock by us
to investors in private transactions and (b) the sale and transfer of shares of
our common stock by RemoteMDx in private transactions. RemoteMDx
completed its divestiture of ActiveCare in February 2009, through the
distribution of approximately 1,421,667 shares of our common stock to the
shareholders of RemoteMDx. Each shareholder of RemoteMDx received one
share of ActiveCare common stock for every 117 shares of RemoteMDx common stock
owned of record on January 30, 2009. The distribution date was February 27,
2009. Following the distribution of our shares RemoteMDx retained no
ownership interest in ActiveCare. Effective July 15, 2009, we changed
our name to ActiveCare, Inc., and our state of incorporation to
Delaware.
General
Our
original business involves the manufacture and distribution of medical
diagnostic equipment and laboratory stains and solutions. Over the
past several years we have expanded our vision and business plan to incorporate
products and services focused on the elderly market. As part of these
efforts we have established a sophisticated CareCenter with highly trained
specialists to assist the elderly in managing their daily lives 24 hours per day
7 days per week. In order for the CareCenter to service our
customers, we have developed and continue to develop numerous products designed
to assist the elderly maintain a more active and mobile
lifestyle. The first product that we introduced is the ActiveOneTM
device. The ActiveOneTM is a
patented mobile personal emergency response ("PERS") device that allows the user
to contact our CareCenter at the push of a button. The ActiveOneTM
constantly communicates its location to the CareCenter by utilizing GPS
technology. This allows the CareCenter Specialists to constantly help
and assist the elderly customer no matter where they may be.
Our plan is to continue to invest
monies into research, development and patents as we broaden the services offered
by our CareCenter. Eventually we intend to add to the functionality
of the ActiveOneTM to
allow for vital sign monitoring for the chronically ill and additional services
to assist both the mobile and homebound seniors, including those who may require
a personal assistant to check on them during the day to ensure their safety and
well being and know where they are at all times.
Our business model focuses on seniors
who are mobile and want the "peace of mind" of recognizing that their location
is known at all times and that they can request assistance at any
time. Our business plan is to sell or give customers a device and
require payment of a monthly recurring subscription for
services. Different services which we provide range from requesting
emergency services to receiving calls throughout the day from the CareCenter to
remind our customers of specific events and ensuring their health and state of
mind. All of our clientele will have access to a CareCenter
specialist who can immediately contact emergency services and provide directions
on how to reach the subscriber in the event of an emergency.
In the future, we plan to offer the
capability to both monitor the vital signs of the elderly and alert the patient
and appropriate family members and emergency personnel when abnormal vital signs
are identified at the CareCenter. We also plan to integrate third
party bio-medical sensors to capture specific vital signs such as glucose, blood
pressure, and oxygen saturation levels and to transmit the measurements to the
CareCenter.
3
We believe that through the
technologies we are developing, we can enhance the lives of the elderly, a
growing segment of today's population, and enable them to live a more "normal"
lifestyle and, most important, permit them to remain in their own homes longer.
The CareCenter is staffed around the clock with advisors that receive calls
originating from the product. Our services will enhance our clientele’s mobility
and provide peace of mind knowing that their vital signs are being monitored and
their locations are known at all times. We can immediately
communicate with the patient and emergency personnel in times of need and
communicate the patient's location and an abbreviated medical
history.
Our
Growth Strategy
Like the products we have in
development, the ActiveOne™
device incorporates GPS, cellular capability and fall detection, all of
which are connected to our 24-hour CareCenter with the push of a button. The
transmitter can be worn on a neck pendant or carried in a purse, and it sends a
cellular signal to our CareCenter. When the wearer of the device pushes the
button, the staff at the CareCenter evaluates the situation, deciding whether to
call emergency services or a designated friend or family member.
Currently, there are separate
products on the market that provide service to the PERS industry and products
that provide geographical locations, and clinical health
parameters. However, we believe that no product on the market today
has successfully integrated both of these technologies in a single effective
device. We feel that it is imperative to bring such a solution to the
market. We are developing end user products and CareCenter
applications and infrastructure to interface with the patient and the CareCenter
specialist.
With U.S. healthcare
costs spiraling upward, we believe that cost containment is a primary issue
facing the industry. These escalating costs will only intensify during the
21st century as the baby-boom generation ages. As of 2005, 35 million
Americans were 65 years of age or older according to the US Census Bureau, and
this number is projected to increase to 54 million by the year 2020, according
to a study by the Economic Research Service of the U.S. Department of
Agriculture.1 By that year, 1 in 6 Americans will
be over the age of 65 and by the middle of the century, the number of elderly
could reach more than 86 million people, more than double its present
size. With an aging population, and because approximately 80% of
healthcare costs occur in the last two years of life, according to an article
published in the National Review Online, the nation is in dire need of viable
cost saving options.
Aside from the obvious problems
associated with aging, approximately one in every four Americans suffers from a
chronic illness, according to a 2004 presentation to the American Telemedicine
Association, which typically becomes more severe and prominent with age.
The demographics of chronic illnesses include over 15 million people with
diabetes and close to 14 million with coronary heart disease (according to
reports published by the American Heart Association), and over 10 million with
osteoporosis (according to a study by the University of Maryland Medical
Center). Various industry studies, including a study published in the IBM
Systems Journal in 2007 and a study conducted by heart specialists from Columbia
Presbyterian Medical Center Cardiac Transplant Service, have been conducted
showing the cost savings that can be realized by the daily monitoring of the
chronically ill.
Through the technologies we are
developing, we believe we can enhance the lives of the elderly and enable
them to live more "normal" lifestyles by providing them mobility and peace of
mind with the knowledge that their vital signs are being monitored and
their locations are known at all times. At the same time we can save
millions of dollars to the health care sector as we identify problems and issues
in advance.
ActiveOne
Under the
trademark ActiveOne™ we have developed a product that incorporates GPS, cellular
capability, and fall detection, all of which are connected to a 24 hour care
center with the push of a button. The transmitter can be worn on a neck pendant
or carried in a purse, and it sends a cellular signal to our care center. When
the wearer of the device pushes the button, the staff at the care center
evaluates the situation and decides whether to call emergency services or a
designated friend or family member.
Marketing
We have begun selling the
ActiveOneTM
service through a direct mail and direct telephone campaign. Our sales team has
already established a distributor network in different parts of the country and
we intend to grow this distributor network as we build relationships across the
U.S. It is also our intention to place print ads in news papers and
periodicals that reach the general public and specifically those that target
seniors. There are also plans for television ads that convey our
message to seniors and others that have monitoring needs.
1
Copies of this and other studies, reports, articles and presentations referenced
in this section of our report on Form 10-K are on file with the
Company.
4
Research
and Development Program
General
Information
GPS technology utilizes highly accurate
clocks on 24 satellites orbiting the earth owned and operated by the U.S.
Department of Defense. These satellites are designed to transmit
their identity, orbital parameters and the correct time to earthbound GPS
receivers at all times. Supporting the satellites are several
radar-ranging stations maintaining exact orbital parameters for each satellite
and transmitting that information to the satellites for rebroadcast at
frequencies between 1500 and 1600 MHz.
A GPS
receiver (or engine) scans the frequency range for GPS satellite transmissions.
If the receiver can detect three satellite transmissions, algorithms within the
engine deduce its location, usually in terms of longitude and latitude, on the
surface of the earth as well as the correct time. If the receiver can detect
four or more GPS satellite transmissions, it can also deduce its own elevation
above sea level. The effectiveness of GPS technology is limited by
obstructions between the device and the satellites and, therefore, service can
be interrupted or may not be available at all if the user is located in the
lower floors of high-rise buildings or underground.
During
the year ended September 30, 2009, we spent $375,293 on research and
development. Research and development (“R&D”) has taken place on
a GPS/Cellular communications device and on a water resistant wrist device that
will detect falls and include a speaker and microphone. Our goal is to
develop a wristwatch-size PERS device. The watch will be universal
for women and men with an adjustable strap. The expanded CareCenter
and the related products will be developed by our team. We have
identified and are working with several vendors for services that will further
our objectives.
An
important part of this R&D program is our relationship with SIM Technology
Group Limited (“SIM Technology”). We have entered into an agreement
with Quectel Wireless Solutions, Ltd. (“Quectel”), a subsidiary of SIM
Technology, to assist us in development of the ActiveOne™ and its companion
device, the ActiveOne+™. According to its 2008 Annual Report and 2009
Interim Report (www.sim.com/english/investor/Reports), SIM Technology was
founded in 2002 and has been listed on the Main Board of the Hong Kong Stock
Exchange since 2005 [2000.HK]. SIM Technology is an investments holding company.
In addition to Quectel, SIM Technology’s subsidiaries include Shanghai Simcom,
Shanghai Sunrise Simcom and several other companies that are leading mobile
handset and wireless communication developers in China. Over the past few years,
SIM Technology Group has been a leader of the Chinese mobile phone design
industry in revenue, profit and stock market. The company employs
approximately 2,500 people with about 1,100 in research and
development.
SIM
Technology was listed as one of the “Deloitte Technology Fast 50 China” and
“Deloitte Technology Fast 500 Asia Pacific” for three consecutive years (2005,
2006, and 2007). SIM Technology also was recognized as one of “The
BCG 50 Local Dynamos” by Boston Consulting Group, a leading global consulting
firm. Quectel is a professional supplier of high quality wireless
modules and trackers in GSM/GPRS and GPS and related technologies. Its module
products are used for automotive, smart metering, control and monitoring,
tracking and tracing, payment, security, and many other Machine-to-Machine (M2M)
products.
CareCenter
In
concert with the development of our products, we also created the
CareCenter. In contrast with a typical monitoring center, our CareCenter
is equipped with hardware and software that pinpoints the location of the
incoming caller by utilizing GPS technology. This capability is
referred to as telematic. The operator’s computer screen can identify
the caller as well as locate the caller’s precise location on a detailed
map. We believe the CareCenter is and will be the cornerstone of
our business.
Competition
Our products incorporate technologies
and services also found in devices sold in several diverse
markets. The major markets in which we compete or plan to compete may
be referred to as the “Telehealth” and the Personal Emergency Response or “PERS”
markets. We have identified the entities listed below that appear to compete
directly in one or more of our markets. Note that these entities
mostly focus on specific needs and do not offer a personal assistant as we do in
our CareCenter. In addition, the entities operating in the PERS
market target the senior who is confined to the home, as opposed to our intended
customer who is typically more mobile.
5
Competitors
in the Telehealth Market
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·
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BodyTel
Europe GmbH – uses glucose meter to transmit glucose information via cell
phone to BodyTel’s database, where users can log on to view
results
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·
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CardioNet,
Inc.- specializing in monitoring the heart for detection of arrhythmia,
utilizing a monitoring center and two way communication with patient’s
physician
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·
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LifeWatch,
Inc. and its subsidiary, CardGuard Scientific Survival, Ltd. -
monitors heartbeat data for arrhythmia detection and transmits
data through the patients mobile phone to LifeWatch’s Monitoring
center
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·
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Diabetech
LP – monitors glucose for diabetic patients, and sends text or
e-mail to patient and doctors
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·
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GE
Healthcare’s Living Independently – uses motion detectors in the home to
monitor a seniors movements in order to detect patterns and inform
caregivers when there may be an emergency, also monitors medication and
sends alerts
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·
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GrandCare
Systems LLC – monitors motion in the home through motion detectors and
other sensors to monitor well being of seniors, blood pressure cuff,
glucometer and weight scale to monitor
health
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·
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HealthPia
USA – glucose meter that attaches to certain mobile phones, results
uploaded and sent to caregivers via wireless
network
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·
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Philips
Remote Cardiac Services/Raytel Imaging Network – records up to 30-days
worth of heart data and transmits via internet connectivity, not yet
wireless
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Competitors
in Personal Emergency Response System (PERS) Market
The
current PERS market is based on technology that has not changed in 30
years. The hardware given to a PERS customer generally includes a
base unit that is connected to the customer’s home phone line and a pendant that
is worn on the person which activates a call for help. The base unit
serves as a call forwarding device that dials the number to the call center when
the button on the pendant is pressed. The pendant can only operate
within 200 to 600 ft of the base unit. Since there is no voice communication
through the pendant the customer must be within earshot of the base unit for the
system to work correctly. This effectively tethers a customer to
their home if they do not want to risk being out of range of this emergency
service. In contrast, our ActiveOne products incorporate cellular and
GPS technologies, freeing the wearer to leave their home without being within a
short distance of a base unit.
Competitors
in this market include:
|
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·
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ADT
Security Services, Inc. – specializes in home security, they offer a
pendent device/home communications
station.
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·
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Alert
One Services, Inc. – offers a wristband and pendent device / home
communications device.
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·
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American
Medical Alarms, Inc. – offers a pendent device/home communications
device.
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·
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Life
Alert Emergency Response, Inc. – offers a pendent device/home
communications device.
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·
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Philips
Lifeline – is the largest provider in the industry with over 500,000
subscribers. Offers a pendent device/home communications
station. They also send out messages to family members or caregivers when
the monitoring center receives an
alarm.
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·
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LifeStation,
Inc. – offers a wristband, belt clip, pendent devices / home
communications station.
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·
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Rescue
Alert – offers a pendent device/home communications
station. Claims to have the best panic button range of 600 feet
to the home communication device. Monitoring center that
is staffed with certified EMD
advisors.
|
Information
necessary to determine or reasonably estimate our market share or that of any
competitor in any of these markets is not readily available.
Dependence
on Major Customers
To date,
most of our revenue has been derived from the sale of our diagnostic devices and
stains. During the fiscal years ended September 30, 2009 and 2008, we
had sales of medical and laboratory stains and solutions to entities which
represented more than 10% of our revenues. Thermo Fisher Scientific,
Inc. (“Thermo”) accounted for 17.03% ($76,947) and Richard Allan Scientific
accounted for 12.89% ($58,227) for the year ended September 30,
2009. Thermo accounted for 31.36% ($141,664) and Cardinal Health
Medical for 15.44% ($69,769) of sales for the year ended September 30,
2008. No other customer accounted for more than 10% of our revenues
for the fiscal years ended September 30, 2009 and 2008.
6
Intellectual
Property
Trademarks. We
have registered certain of our trademarks with the United States Patent and
Trademark Office, including ActiveCare™, ActiveOne™, and
ActiveOne+™. We also use certain trademarks, trade names, and logos
which have not been registered. We claim common law rights to these
unregistered trademarks, trade names and logos. We also own domain
names, including www.activecare.com and www.activecaresys.com, for our primary
trademarks and own unregistered copyright rights in our website
content. We rely as well on a variety of property rights that we
license from third parties as described below.
Patents. Under a
February 2009 agreement with our former parent, RemoteMDx, we obtained the
exclusive, irrevocable, perpetual, worldwide, transferable, sublicensable
license of all rights conferred by the patents, patent applications, and
provisional patent applications listed in the table below for the healthcare and
personal safety industries/markets.
|
Patent
or
Application
No.
|
Country
|
Issue/Filing
Date
|
Title of
Patent
|
|
11/486,989
|
United
States
|
Pending/
7/14/2006
|
Remote
Tracking Device and System and Method for Two-Way Voice Communication
Between Device and a Monitoring Center
|
|
11/486,991
|
United
States
|
Pending/
7/14/2006
|
Remote
Tracking System and Device with Variable Sampling
|
|
11/830,398
|
United
States
|
Pending/
7/30/2007
|
Methods
for Establishing Emergency Communications Between a Communications Device
and a Response Center
|
|
12/614,242
|
United
States
|
Pending/
11/6/2009
|
Systems
and Devices for Emergency Tracking and Health
Monitoring
|
We were also granted worldwide and
exclusive rights to the patents and patent applications listed in the table
below under a license granted to us by Futuristic Medical Devices, LLC
(“Futuristic”), dated May 25, 2009 (“Patent Agreement”).
|
Patent
or
Application
No.
|
Country
|
Issue
Date
|
Title of
Patent
|
|
6,044,257
|
United
States
|
March
28, 2000
|
Panic
Button Phone
|
|
6,636,732
|
United
States
|
October
21, 2003
|
Emergency
Phone with Single Button Activation
|
|
6,226,510
|
United
States
|
May
1, 2001
|
Emergency
Phone for Automatically Summoning Multiple Emergency Response
Services
|
|
7,092,695
|
United
States
|
August
15, 2006
|
Emergency
Phone with Alternate Number Calling Capability
|
|
7,251,471
|
United
States
|
July
31, 2007
|
Emergency
Phone with Single Button Activation
|
Patent
Agreement
In May
2009, we entered into the Patent Agreement with Futuristic. Under the
Patent Agreement, we were granted the exclusive, irrevocable, worldwide,
transferable, sublicensable license of all rights conferred by the underlying
patents. We were also granted the exclusive right to grant and
authorize, from time to time and in our sole and absolute discretion, one or
more sublicenses. The Patent Agreement required an upfront royalty
payment of $300,000 and ongoing royalty payment equal to 5% of net sales
revenues for licensed products. The upfront royalty payment has not
been paid and the Patent Agreement is in default. We are currently
negotiating with Futuristic to cure this default.
7
Trade Secrets. We
own certain intellectual property, including trade secrets that we seek to
protect, in part, through confidentiality agreements with employees and other
parties, although some employees who are involved in research and development
activities have not entered into these agreements. Even where these agreements
exist, there can be no assurance that these agreements will not be breached,
that we would have adequate remedies for any breach, or that our trade secrets
will not otherwise become known to or independently developed by
competitors.
Employees
As of
December 1, 2009, we had 15 full time employees and 1 part-time
employee. None of these employees are represented by a labor union or
subject to a collective bargaining agreement. We have never experienced a
work stoppage and our management believes that our relations with employees are
good.
Additional
Available Information
We
maintain executive offices and principal facilities at 5095 West 2100 South,
Salt Lake City, Utah 84120. Our telephone number is
(801) 974-9474. We maintain a World Wide Web site at www.activecare.com.
The information on our web site should not be considered part of this report on
Form 10-K. We make available, free of charge at our corporate web site,
copies of our annual reports filed with the Securities and Exchange Commission
(“SEC”) on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, proxy statements, and all amendments to these reports, as soon
as reasonably practicable after such material is electronically filed with or
furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange
Act. We also provide copies of our Forms 8-K, 10-K, 10-Q, Proxy and Annual
Report at no charge to investors upon request.
All
reports filed by ActiveCare, Inc. with the SEC are available free of charge via
EDGAR through the SEC website at www.sec.gov. In addition, the public may read
and copy materials we have filed with the SEC at the SEC's public reference room
located at 450 Fifth St., N.W., Washington, D.C.
20549.
We have identified the following
important factors that could cause actual results to differ materially from
those projected in any forward looking statements we may make from time to time.
We operate in a continually changing business environment in which new risk
factors emerge from time to time. We can neither predict these new risk factors,
nor can we assess the impact, if any, of these new risk factors on our business
or the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those projected in any forward looking
statement. If any of these risks, or combination of risks, actually occurs,
our business, financial condition and results of operations could be seriously
and materially harmed, and the trading price of our common stock could
decline.
We
have not achieved profitable operations and continue to operate at a
loss.
From
incorporation to date, we have not achieved profitable operations and continue
to operate at a loss. Our present business strategy is to improve
cash flow by adding to our existing product line and expanding our sales and
marketing efforts, including the addition of in-house sales
personnel. There can be no assurance that we will ever be able to
achieve profitable operations or that we will not require additional financing
to fulfill our business plan.
Because
of our history of accumulated deficits and recurring cash flow losses, we must
improve profitability and may be required to obtain additional funding if we are
to continue as a "Going Concern."
We have a
history of accumulated deficits. As of September 30, 2009, and
September 30, 2008, our accumulated deficit was $5,057,151 and $2,640,788,
respectively. As of September 30, 2007, we had an accumulated deficit
of $362,057. Our financial statements have been prepared on the assumption that
we will continue as a going concern. Our independent registered
public accounting firm has issued their report dated December 24, 2009, that
includes an explanatory paragraph stating that our recurring losses raise
substantial doubt about our ability to continue as a going
concern. Our product line is limited and it has been necessary to
rely upon loans and capital contributions and the sale of our equity securities
to sustain operations. In addition, we have recently begun to
emphasize a new product line and business plan, which will require additional
investment in research and development and marketing. Our management
anticipates that we may require approximately $5,000,000 in additional capital
over the next twelve months to implement this business plan and to fund ongoing
operations, although this is only an estimate, and there can be no guarantee
that such funds would be sufficient. If such additional funding is needed and
cannot be obtained, we may be required to scale back or discontinue
operations.
8
Our
profitability depends upon achieving success in our future operations through
implementing our business plan, increasing sales, and expanding our customer and
distribution bases, for which there can be no assurance given.
Profitability
depends upon many factors, including the success of our marketing program, our
ability to identify and obtain the rights to additional products to add to our
existing product line, expansion of distribution and customer base, maintenance
or reduction of expense levels and the success of our business
activities. For a discussion of risks related to our accumulated
deficits, please see the preceding risk factor. We anticipate that we will
continue to incur operating losses in the future. Our ability to achieve
profitable operations will also depend on our success in developing and
maintaining an adequate marketing and distribution system. There can be no
assurance that we will be able to develop and maintain adequate marketing and
distribution resources. If adequate funds are not available, we may be required
to materially curtail or cease operations.
Our
products are not based entirely on technology that is proprietary to us, which
means that we do not have a technological advantage over our competitors, and
that we must rely on the owners of the proprietary technology that is the basis
for our products to protect that technology. We have no control over such
protection.
We use
certain trademarks and trade names with certain of our products. Nevertheless,
our current core products, medical diagnostic stains and solutions and other
biochemical products, as well as the Definitive Slide Stainer Device (the
“Definitive”), are not based on technology proprietary to us. Indeed, the
majority of our present product line is based on technology that is in the
public domain and therefore there are effectively no entry barriers for
potential competitors. We purchased an inventory of Definitive
machines under an exclusive license agreement with GG&B Engineering, Inc.
(“GG&B”). GG&B owns the intellectual property rights
associated with the Definitive. There can be no assurance that
GG&B will be able in the future to adequately protect its proprietary rights
upon which the Definitive is based.
We are
currently preparing to bring a new personal health monitoring product to market
and recently launched our first product, ActiveOne™. These new
products utilize technology based in part on patents which have been licensed to
us for use within our markets. Our success in adding to our existing
product line will depend on our ability to acquire or otherwise license
competitive technologies and products and to operate without infringing the
proprietary rights of others, both in the United States and
internationally. No assurance can be given that any licenses required
from third parties will be made available on terms acceptable to us, or at all.
If we do not obtain such licenses, we could encounter delays in product
introductions while we attempt to adopt alternate measures, or could find that
the manufacture or sale of products requiring such licenses is not possible.
Litigation may be necessary to defend against claims of infringement, to protect
trade secrets or know-how owned by us, or to determine the scope and validity of
the proprietary rights of others. Such litigation could have an
adverse and material impact on us and on our operations.
Our
future products could be based on patents derived from our Patent Agreement with
Futuristic. This agreement is currently in default.
In May
2009, we entered into the Patent Agreement with Futuristic. Under the
Patent Agreement, we were required to make an upfront royalty payment of
$300,000 and to make future payments of royalties equal to 5% of net sales
revenues for licensed products. We did not make the upfront royalty
payment and the Patent Agreement is in default. We are negotiating
with Futuristic and expect to cure this default. If we are not able
to cure the default, our future use of technologies or products based on the
patents covered by the Patent Agreement may infringe the rights of Futuristic
and we may be subject to lawsuits or claims for damages as a result of such
infringement.
Our
industry is fragmented, and we experience intense competition from a variety of
sources, some of which are better financed and better managed than we
are.
The
medical diagnostic supply and biochemical industries, including those segments
devoted to manufacturing and distributing laboratory equipment, stain solutions
and chemical reagents, are characterized by intense competition. We face, and
will continue to face, competition in the stain solution, reagent and related
equipment fields. In addition, competition in the PERS market is also
significant. Many, if not most, of our competitors and potential competitors are
much larger and consequently have greater access to capital as well as mature
and highly sophisticated distribution channels. Some of our larger competitors
are able to manufacture chemical products on a much larger scale and therefore
presumably would be able to take advantage of economies of scale that we do not
presently enjoy. Moreover, many of our competitors have far greater
name recognition and experience in the medical diagnostic supply
industry. There can be no assurance that competition from other
companies will not render our products noncompetitive.
We are highly dependent on our
executive officers and certain of our scientific, technical and operations
employees.
Our
current revenues are derived primarily from our current core products, medical
diagnostic stains and solutions and other biochemical products, as well as the
Definitive. We depend heavily on our executive officers and certain
scientific, technical, and operations employees, including Christine Kilpack,
James Dalton, and Michael Acton. As of the date of this report, we do
not have employment agreements with any of these individuals. We have entered
into a management agreement with Mr. Dalton, who serves as our Chief Executive
Officer. The loss of services of any of these personnel could impede the
achievement of our objectives. There can be no assurance that we will be able to
attract and retain qualified executive, scientific, or technical personnel on
acceptable terms.
9
We
rely on third parties to manufacture some of our product line.
Our
manufacturing experience and capabilities are limited to the manufacture of
staining solution, reagent and certain related chemical
compounds. With respect to the manufacturing of devices and equipment
related to the staining solution products, including without limitation the
Definitive, we have in the past used, and intend to continue to use, third-party
manufacturing resources. We also use and intend to continue using third-party
manufacturers for our new PERS and other devices. Consequently, we are dependent
on contract manufacturers for the production of existing products and will
depend on third-party manufacturing resources to manufacture equipment and
devices we may add to our product line in the future. In the event we
are unable to obtain or retain third-party manufacturing, we will not be able to
continue operations as they relate to the sale of equipment and
devices.
Our
medical solutions business is subject to certain environmental risks and the
requirement that we comply with regulations which increases the cost of doing
business.
Our
chemical manufacturing processes involve the controlled use of hazardous
materials. We are subject to federal, state and local laws and regulations
governing the use, manufacture, storage, handling and disposal of such materials
and certain waste products. We carry limited product liability
insurance relating to the use of potentially hazardous materials, with coverage
amounts of $1,000,000 per claim and per accident, and $2,000,000 in the
aggregate. The premium for such insurance coverage is
$94,000. Although we believe that our activities currently comply
with the standards prescribed by such laws and regulations, the risk of
accidental contamination or injury from these materials cannot be
eliminated. In the event of such an accident, we could be held liable
for any damages that result and any such liability could exceed our
resources. In addition, there can be no assurance that we will not be
required to incur significant costs to comply with environmental laws and
regulations in the future.
We
market and sell our medical stains and solutions products through independent
distributors who are free to sell other, and at times competing, products. We
therefore have no direct control over our sales force.
We sell
our legacy staining products to approximately 75 independent distributors who
are free to resell the products. In order to achieve profitable
operations, we must maintain its current base of sales staff and must expand
that base in the future. There can be no assurance that we will be
able to enter into arrangements with qualified sales staff if and when such
additional staff are required. Our sales staff will compete with
other companies that currently have experienced and well funded marketing and
sales operations. To the extent that we enters into co-promotion or
other marketing and sales arrangements with other companies, any revenues to be
received by us will be dependent on the efforts of others, and there can be no
assurance that such efforts will be successful.
From
time to time, we may be subject to expensive claims relating to product
liability law; our ability to insure against this risk is limited.
The use
of any of our existing or potential products in laboratory or clinical settings
may expose us to liability claims. These claims could be made directly by
persons who assert that inaccuracies or deficiencies in their test results were
caused by defects in our products. Alternatively, we could be exposed
to liability indirectly by being named as a third-party defendant in actions
brought against companies or persons who have purchased our
products. We have obtained limited product liability insurance
coverage in the amount of $1 million per occurrence and $2 million in the
aggregate. We intend to expand our insurance coverage on an as-needed basis as
sales revenue increases. However, insurance coverage is becoming
increasingly expensive, and no assurance can be given that we will be able to
maintain insurance coverage at a reasonable cost or in sufficient amounts to
protect us against losses due to liability. There can also be no assurance that
we will be able to obtain commercially reasonable product liability insurance
for any products added to our product line in the future. A successful product
liability claim or series of claims brought against us could have a material
adverse effect on our business, financial condition and results of
operations.
The
uncertainty of health care litigation and regulatory measures in our primary
markets can have an adverse effect on our business.
Political,
economic and regulatory influences are likely to lead to fundamental change in
the health care industry in the United States. Numerous proposals for
comprehensive reform of the nation's health care system have been introduced in
Congress over the past years and a significant measure is currently pending
action in the U.S. Senate. In addition, certain states are
considering various health care reform proposals. We anticipate that Congress
and state legislatures will continue to review and assess alternative health
care delivery systems and payment methodologies, and that public debate of these
issues will likely continue in the future. Due to uncertainties
regarding the ultimate features of reform initiatives and their enactment and
implementation, we cannot predict which, if any, reforms will be adopted, when
they may be adopted, or what impact they may have on us. Our ability
to earn sufficient returns on our products may also depend in part on the extent
to which reimbursement for the costs of such products will be available from
government health administration authorities, private health insurers and other
organizations. Third-party payers are increasingly challenging the
price and cost effectiveness of medical products and services, including medical
diagnostic procedures. There can be no assurance that adequate
reimbursement will be available or sufficient to allow us to sell products on a
competitive basis.
10
Concentration of
ownership among our existing executive officers, directors and principal
stockholders may prevent new investors from influencing significant corporate
decisions.
Our
executive officers, directors and principal stockholders own, in the aggregate,
approximately 30.26% of our outstanding common stock. In addition, certain
of our officers and all of our directors have been granted options to purchase
common stock. All of the options and warrants held by these officers
and directors are subject to vesting provisions conditioned on certain
performance criteria and goals and none of these options or warrants have vested
or are exercisable as of the date of this report. If none of these
criteria or less than all of them are satisfied, then the options or warrants
will not become exercisable in whole or in part. As a result of the
ownership of the shares currently held and, if they become exercisable, their
ownership and potential exercise of these options and warrants, these
stockholders may be able to exercise control over all matters requiring
stockholder approval, including the election of directors, amendment of our
certificate of incorporation and approval of significant corporate transactions
and will have significant control over our management and policies. The
interests of these stockholders may not be consistent with your interests as a
stockholder.
This
control or the potential for such control may have the effect of deterring
hostile takeovers, delaying or preventing changes in control or changes in
management, or limiting the ability of our other stockholders to approve
transactions that they may deem to be in the best interests of our
company.
There may not be
a viable public market for our common stock.
There is
not now and there has not been any public market for our common stock.
Consequently, unless and until such a market does develop, our stockholders may
not be able to resell their ActiveCare shares at or above the price for which
they were acquired. We cannot predict the extent to which investor interest will
lead to the development of an active trading market in our securities or how
liquid that market might become. An active public market for our common stock
may not develop or be sustained in the future. If an active public market does
not develop or is not sustained, it may be difficult for you to sell your shares
of common stock at a price that is attractive to you, or at all.
Our stock price
may be volatile or may decline regardless of our operating performance, and you
may not be able to resell your shares at or above the price you paid for
them.
Any
market price for our common stock that does develop is likely to be volatile, in
part because our shares have not been traded publicly. In addition, the market
price of our common stock may fluctuate significantly in response to a number of
factors, most of which we cannot control, including:
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market
conditions or trends in our industry or the economy as a whole and, in
particular, in the retail sales
environment;
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timing
of promotional events;
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•
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changes
in key personnel;
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•
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entry
into new markets;
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•
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announcements
by us or our competitors of new product offerings or significant
acquisitions;
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•
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actions
by competitors;
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•
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the
level of expenses associated with new product development and
marketing;
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changes
in operating performance and stock market valuations of
competitors;
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the
public’s response to press releases or other public announcements by us or
third parties, including our filings with the
SEC;
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the
financial projections we may provide to the public, any changes in these
projections or our failure to meet these
projections;
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•
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changes
in financial estimates by any securities analysts who follow our common
stock, our failure to meet these estimates or failure of those analysts to
initiate or maintain coverage of our common
stock;
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•
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ratings
downgrades by any securities analysts who follow our common
stock;
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the
development and sustainability of an active trading market for our common
stock;
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future
sales of our common stock by our officers, directors and significant
stockholders;
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•
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other
events or factors, including those resulting from war, acts of terrorism,
natural disasters or responses to these events;
and
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changes
in accounting principles.
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11
In
addition, the stock markets have recently experienced extreme price and volume
fluctuations that have affected and continue to affect the market prices of
equity securities of many retail companies. In the past, stockholders in some
companies have instituted securities class action litigation following periods
of market volatility. If we were involved in securities litigation, we could
incur substantial costs and our resources, and the attention of management could
be diverted from our business.
Anti-takeover
provisions in our charter documents and Delaware law might discourage or delay
acquisition attempts for us that you might consider
favorable.
Our
certificate of incorporation and bylaws contain provisions that may make the
acquisition of our company more difficult without the approval of our board of
directors. These provisions:
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authorize
the issuance of undesignated preferred stock, the terms of which may be
established and the shares of which may be issued without stockholder
approval, and which may include super voting, special approval, dividend,
or other rights or preferences superior to the rights of the holders of
common stock; and
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establish
advance notice requirements for nominations for elections to our board of
directors or for proposing matters that can be acted upon by stockholders
at stockholder meetings.
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These
anti-takeover provisions and other provisions under Delaware law could
discourage, delay or prevent a transaction involving a change in control of our
company, even if doing so would benefit our stockholders. These provisions could
also discourage proxy contests and make it more difficult for you and other
stockholders to elect directors of your choosing and to cause us to take other
corporate actions you desire.
If securities or
industry analysts do not publish research, or publish inaccurate or unfavorable
research, about our business, our stock price and trading volume could
decline.
Any
future trading market for our common stock will depend in part on the research
and reports that securities or industry analysts publish about us or our
business. We do not currently have and may never obtain research coverage by
securities and industry analysts. If no securities or industry analysts commence
coverage of our company, the trading price for our common stock would be
negatively impacted. If we obtain securities or industry analyst coverage and if
one or more of the analysts who covers us downgrades our common stock or
publishes inaccurate or unfavorable research about our business, our stock price
would likely decline. If one or more of these analysts ceases coverage of us or
fails to publish reports on us regularly, demand for our common stock could
decrease, which could cause our stock price and trading volume to decline.
We do not expect
to pay any cash dividends for the foreseeable future.
The
continued operation and expansion of our business will require substantial
funding. Accordingly, we do not anticipate that we will pay any cash dividends
on shares of our common stock for the foreseeable future. Any determination to
pay dividends on the common stock in the future will be at the discretion of our
board of directors and will depend upon results of operations, financial
condition, contractual restrictions, including our senior secured credit
facility and other indebtedness we may incur, restrictions imposed by applicable
law and other factors our board of directors deems relevant. In addition, our
ability to pay dividends on the common stock is limited by the rights and
preferences of the holders of the Series A preferred stock; no dividends may be
paid on the common stock unless and until all accrued and unpaid dividends are
paid on the preferred stock. Accordingly, if you purchase or own
shares of our common stock, realization of a gain on your investment will depend
on the appreciation of the price of our common stock, which may never occur.
Investors seeking cash dividends in the foreseeable future should not purchase
our common stock.
We
are prohibited from taking certain actions and entering into certain
transactions without the consent of holders of our Series A preferred
stock.
For as
long as any shares of our Series A preferred stock remain outstanding we are
prohibited from taking certain actions or entering into certain transactions
without the prior consent of specific holders of outstanding shares of Series A
preferred stock (currently consisting of Harborview Master Fund, L.P. and Gemini
Master Fund, Ltd.). We are prohibited from paying dividends to common
stockholders, amending our certificate of incorporation or bylaws, issuing any
equity security or any security convertible into or exercisable for any equity
security at a price of $1.75 or less or with rights senior to the Series A
preferred stock (except for certain exempted issuances), increasing the number
of shares of Series A preferred stock or issuing any additional shares of Series
A preferred stock other than the 1,000,000 shares designated in our Certificate
of Incorporation, as amended, or changing the number of our
directors. We are also prohibited from entering into certain
transactions such as:
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selling
or otherwise disposing of all or substantially all of our assets (and in
the case of licensing, any material intellectual property) or entering
into a merger or consolidation with another company unless we are the
surviving corporation, the Series A preferred stock remains outstanding
and there are no changes to the rights and preferences of the Series A
preferred stock;
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redeeming
or repurchasing any capital stock other than Series A preferred stock or
the related warrants; or
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incurring
any new debt for borrowed money in excess of
$250,000.
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Even
though our board of directors may determine that any of these actions are in the
best interest of us or our stockholders, we may be unable to complete them if we
do not get the approval of specific holders of the outstanding shares of Series
A preferred stock. The interests of the holders of Series A preferred
stock may differ from those of stockholders generally. If we are
unable to obtain consent from each of the holders identified above, we may be
unable to complete actions or transactions that our board of directors has
determined are in the best interest of our company and its
shareholders.
We lease premises
consisting of approximately 11,500 square feet of laboratory and office
facilities located at 5095 West 2100 South, West Valley City, Utah. These
premises also serve as our manufacturing, warehouse and shipping
facilities. This lease expires in November 2010 and the monthly base
rent is $5,750, subject to annual adjustments according to changes in the
Consumer Price Index. Management believes the facilities described
above are adequate to accommodate presently expected growth and needs of our
operations. As we continue to grow, additional facilities or the
expansion of existing facilities likely will be required.
Item 3. Legal
Proceedings
We are
not involved directly in any legal proceedings which management believes will
have a material effect upon our business or financial condition, nor are any
such material legal proceedings anticipated.
By way of
information, on August 15, 2008, plaintiffs Frederico and Erica Castellanos
filed a lawsuit in the Superior Court of the State of California, Los Angeles
County, Case No. BC396402, entitled "Frederico and Erica Castellanos vs.
Allegheny Ludlum Corporation, et al." The complaint names twenty-four
defendants and one hundred unnamed “Doe Defendants.” The complaint
asserts claims for negligence, strict liability - failure to warn, strict
liability - design defect, fraudulent concealment, breach of implied warranties,
and loss of consortium based on Mr. Castellanos' alleged exposure to certain
chemicals during the course of his employment. One of the original
named defendants was Logos Scientific, Inc. On September 4, 2008,
plaintiffs amended their complaint to substitute "Volu-Sol, Inc. as successor in
interest to Logos Scientific, Inc." for the previously unnamed Doe 1. Volu-Sol,
Inc. was the original name of RemoteMDx, our former parent
corporation. As of the date of this report, we were not a party to
the lawsuit.
We are
not aware of any contemplated legal or regulatory proceeding by a governmental
authority in which we may be involved.
No matters were submitted to a vote of
shareholders during the quarter ended September 30, 2009.
PART
II
Item 5. Market for Registrant's
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Market
Information
Our
common stock is not traded on any exchange.
Holders
As of
December 1, 2009, there were approximately 600 holders of record of the common
stock and 11,822,639 shares of common stock outstanding. We also have 571,428
shares of Series A preferred stock outstanding, held by two stockholders,
convertible into a minimum of approximately 571,428 shares of common
stock.
We have
granted warrants for the purchase of approximately 14,642,856 shares of common
stock. 13,500,000 of these warrants are not vested and only vest upon
completion of specific performance criteria. As discussed elsewhere
in this report, we may be required to issue additional shares of common stock or
preferred stock to pay accrued dividends, or to comply with anti-dilution
adjustments to the conversion rights of present or former preferred
stockholders.
13
Dividends
Since
incorporation, we have not declared any cash dividends on our common
stock. We do not anticipate declaring cash dividends on our common
stock for the foreseeable future. The Series A preferred stock
accrues dividends at the rate of 8% annually, which may be paid in cash or
additional shares of preferred or common stock, at our option. To
date no dividends have been paid.
Dilution
We have a
large number of shares of common stock authorized in comparison to the number of
shares issued and outstanding. The board of directors determines when
and under what conditions and at what prices to issue stock. In
addition, a significant number of shares of common stock are reserved for
issuance upon exercise of purchase or conversion rights. The issuance of
any shares of common stock for any reason will result in dilution of the equity
and voting interests of existing stockholders.
Transfer
Agent and Registrar
The
transfer agent and registrar for our common stock is American Stock Transfer
& Trust Company, 59 Maiden Lane, Plaza Level, New York, NY
11219.
Equity
Compensation Plans
We
currently do not have any equity compensation plans covering our
employees. We have entered into a management agreement with our Chief
Executive Officer providing for equity compensation in the form of restricted
stock and options for the purchase of common stock. We have also
granted options for the purchase of common stock to our directors and other
officers.
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Plan Category(1)
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Number
of securities to
be
issued upon exercise
of
outstanding options,
warrants,
and rights
(#)
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Weighted-average
exercise
price of
outstanding
options,
warrants,
and right
($)
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Number
of securities
remaining
available for
future
issuance under
equity
compensation
plans
(excluding
securities
reflected in
the
first column)
(#)
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Equity
compensation plans
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approved
by security
holders
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0 | $ | 0 | 0 | ||||||||
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Equity
compensation plans
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not
approved by security holders
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13,500,000 | $ | 0.29 | 0 | ||||||||
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Totals
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13,500,000 | $ | 0.29 | 0 | ||||||||
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(1)
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Includes
500,000 shares of common stock issuable upon exercise of outstanding
options granted to directors and 13,000,000 shares of common stock
issuable upon exercise of outstanding options granted under a personal
compensation plan to our Chief Executive Officer. As of the date of this
report these warrants have not vested and they will only vest in the
future upon completion of specific performance
criteria.
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Recent
Sales of Unregistered Securities
During
the past three fiscal years, we have sold or issued shares of our common stock
and other equity securities without registration of the offer and sale of the
securities under the Securities Act of 1933 (the “Securities Act”) in reliance
upon exemptions from registration pursuant to rules and regulations promulgated
under the Securities Act as summarized below.
14
In fiscal
year 2007, between March and September 2007, we sold 1,687,500 shares of common
stock in private transactions to eighteen accredited investors. Each
of the transactions was privately negotiated, and no public offering took
place. The offer and sale of these securities was believed to be
exempt from registration under Section 4(2) of the Securities Act related to
private sales of securities by an issuer. Each of the purchasers represented to
us that they were accredited investors as defined under the rules and
regulations of the Securities Act. No public solicitation or advertising was
undertaken in connection with the transactions and the purchasers of the shares
sold in the offering represented that they were purchasing the shares for their
own account and for investment purposes and not for purposes of distribution or
resale. The certificates evidencing such shares were marked with a restrictive
legend, indicating that any resale or transfer thereof was subject to
restrictions under the Securities Act and applicable rules and
regulations.
During
the year ended September 30, 2008, we sold 2,690,972 restricted shares of our
common stock for $2,198,333 in cash. Of these shares, we sold
2,135,417 shares for sale proceeds of $2,098,333 to ADP
Management. The remaining 555,555 shares were sold to unrelated third
parties. At the time of the offer and sale of these securities, ADP Management
was an affiliate of our parent corporation, RemoteMDx and was also an accredited
investor. The offer and sale of these shares to ADP Management and to
the unrelated third parties, who were also accredited, was exempt under Section
4(2) of the Securities Act. Each of the purchasers represented to us that they
were accredited investors as defined under the rules and regulations of the
Securities Act. No public solicitation or advertising was undertaken in
connection with the transactions and the purchasers of the shares sold in the
offering represented that they were purchasing the shares for their own account
and for investment purposes and not for purposes of distribution or resale. The
certificates evidencing such shares were marked with a restrictive legend,
indicating that any resale or transfer thereof was subject to restrictions under
the Securities Act and applicable rules and regulations.
Additionally
during the year ended September 30, 2008, we issued 437,500 restricted
shares of common stock for services rendered (with a value of $350,000, or $0.80
per share) to three non-affiliated third parties for services
rendered. The services included providing technical evaluations,
patent reviews, creation and identification of sales channels, evaluation of
competition, market research, and potential market penetration. The
three consultants were paid in restricted stock, and each received approximately
$116,000 worth of shares of our common stock. We had no consulting or
other agreements with these three individuals. The issuance of these securities
was exempt under Section 4(2) of the Securities Act.
During
the fiscal year ended September 30, 2009, we issued 840,000 restricted shares of
common stock valued at $735,840 in connection with an acquisition. The
recipients of these shares represented in the original acquisition agreements
that they were accredited investors as defined in Rule 501 under the Securities
Act. Each of these entities also purchased from us shares of our
Series A preferred stock, which is convertible into common stock under certain
circumstances and subject to certain limitations. These shares of
common and preferred stock were issued without registration under the Securities
Act in reliance on Section 4(2) of the Securities Act and the rules and
regulations promulgated thereunder, including Regulation D and Rule
506. There were no non-accredited investors involved in this
issuance. A Form D was filed by us in connection with the issuance of these
securities. We have agreed with the holders of the Series A preferred stock to
register the shares of common stock underlying and issuable upon conversion of
the Series A preferred stock prior to its issuance in any attempted conversion
of the preferred stock. As of the date of this report, no
registration statement has been filed in connection with this obligation and no
shares of Series A preferred stock have been converted.
Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations
The
following Management’s Discussion and Analysis of Financial Condition and
Results of Operations (“MD&A”) is intended to help the reader better
understand ActiveCare, our operations and our present business
environment. This MD&A is provided as a supplement to, and should
be read in conjunction with, our consolidated financial statements for the
fiscal years ended September 30, 2009 and 2008 and the accompanying notes
thereto contained in this report.
Overview
Historically,
our core business has been the manufacture, distribution and sale of medical
diagnostic stains and solutions. In February 2009, we were spun off
from our former parent, RemoteMDx, Inc. (“RemoteMDx”). In connection
with the spin-off, we acquired from RemoteMDx the exclusive license rights to
certain technology, including patent rights utilizing GPS and cellular
communication and monitoring technologies for use in the healthcare and personal
security markets. We subsequently acquired by license the exclusive
rights to certain patents owned by Futuristic Medical Devices, LLC
(“Futuristic”) for technologies that are complementary to the patented
technology we acquired from RemoteMDx. We are currently in default
under our agreement with Futuristic and we are currently negotiating with
Futuristic to cure this default. Our business plan is to develop and
market a new product line for monitoring and providing assistance to mobile and
homebound seniors and the chronically ill, including those who may require a
personal assistant to check up on them during the day to ensure their safety and
well being and know where they are at all times.
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Recent
Developments
We have
financed operations exclusively through equity security sales and short-term
debt. Accordingly, if our revenues continue to be insufficient to
meet our needs, we will attempt to secure additional financing through
traditional bank financing or a debt or equity offering. However, because of the
development stage nature of our business and the potential of a future poor
financial condition, we may be unsuccessful in obtaining such financing or the
amount of the financing may be minimal and therefore inadequate to implement our
continuing plan of operations. There can be no assurance that we will be able to
obtain financing on satisfactory terms or at all, or raise funds through a debt
or equity offering. In addition, if we only have nominal funds with which to
conduct our business activities, this will negatively impact the results of
operations and our financial condition.
In May
2009, we entered into a license and distribution agreement (“License Agreement”)
with euromicron AG, a German corporation. The euromicron Group is a
solution provider of communication systems and security networks with production
expertise in the field of fiber optics technology. Its range of
services covers the planning, implementation and maintenance of communication
and security networks and the development, production and distribution of
network components based on copper, optical fiber and wireless
technology. The product portfolio includes smaller active network
components, connectors and connection technology for optical fiber networks,
pre-assembled fiber optic cable and assembly and measuring
equipment. These are integrated components of WANs and LANs used for
data communication at data centers, and in the field of medical and security
technology. Under the License Agreement, we granted to euromicron an
exclusive license to manufacture market and distribute our products in the
healthcare and personal security markets and to provide related services in the
countries of Albania, Austria, Bosnia & Herzegovina, Bulgaria, Croatia,
Czech Republic, Germany, Greece, Hungary, Italy, Kosovo, Macedonia, Poland,
Serbia, Slovakia, Slovenia, Switzerland, and Turkey. We are required
to maintain the applicable patents and use our best efforts to extend the
patents and register them in the jurisdictions that are included within the
territory. In addition, we will transfer to euromicron all know how,
intellectual property (including software) and technology that are related to
our products and provide support, training and service to euromicron and its
customers during the term of the License Agreement either directly or through
one or more contracted service providers, including our former parent
corporation, RemoteMDx. We also agreed to supply products and to provide
monitoring services until such time as euromicron has established a monitoring
center dedicated to the territory.
In
September 2009, our board of directors designated 1,000,000 shares of preferred
stock as Series A preferred stock. We sold an aggregate of 571,428
shares of these securities to two investment funds, Gemini Master Fund, Ltd. and
Harborview Master Fund, L.P. for gross proceeds of $1,000,000. These
investors also received Class A and Class B Warrants for the purchase of common
stock of the company at exercise prices of $1.75 and $2.25 per share,
respectively, exercisable over a five-year term. In a related
transaction, we acquired from these two investors all of the issued and
outstanding shares of a Nevada corporation, HG Partners, Inc., formerly
Solutions Mechanical, Inc., for 840,000 shares of our common stock.
How We Assess the Performance of Our
Business
In
assessing the performance of our business, we consider a variety of performance
and financial measures. The key measures for determining how our business is
performing are net sales, comparable store and non-comparable store sales, gross
profit margin and selling, general and administrative expense.
Net Sales
Net sales
constitute gross sales net of any returns and merchandise
discounts.
Gross Profit
Gross
profit is equal to our net sales minus our cost of goods sold. Gross margin
measures gross profit as a percentage of our net sales. Cost of goods sold
includes the direct cost of purchased merchandise, distribution costs, all
freight costs and purchasing costs.
Our cost
of goods sold is substantially higher in higher volume quarters because cost of
goods sold generally increases as net sales increase. Changes in the mix of our
products, such as changes in the proportion of accessories, may also impact our
overall cost of goods sold.
Selling, General and Administrative
Expense
Selling,
general and administrative expense includes administration, share-based
compensation and occupancy costs. These expenses do not generally vary
proportionally with net sales. As a result, selling, general and administrative
expense as a percentage of net sales is usually higher in lower volume quarters
and lower in higher volume quarters. We expect that our selling, general and
administrative expense will increase in future periods, in part to additional
legal, accounting, insurance and other expenses we incur as a result of being a
public company since our spin-off from RemoteMDx completed in February 2009.
Among other things, we expect that compliance with the Sarbanes-Oxley Act and
related rules and regulations will result in significant legal and accounting
costs.
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Share-based
Compensation Expense
Share-based compensation expense
related to stock options was nil for fiscal years 2007 and 2008. We granted no
options to purchase shares of common stock in fiscal years 2007 and 2008. During
the year ended September 30, 2009, we granted options for the purchase of
13,500,000 shares at an expense of $665,201. These and any future
stock option grants will increase our share-based compensation expense in fiscal
year 2010 and in future fiscal years compared to fiscal year 2009. See
“—Critical Accounting Policies” below.
Fiscal
Year 2009 Compared to Fiscal Year 2008
Net
Sales
Net sales
decreased to $452,000 in fiscal year 2009, from $608,000 in fiscal year
2008. The change from 2008 to 2009 was due to a reduction in orders
of Wright-Giemsa stain. During the 2008 fiscal year, our prior
management changed the formula for Wright-Giemsa stain and customers did not
respond well to the changed formula. We have reintroduced the old formula and we
are working to get customers to once again order these products.
Cost
of Goods Sold
Cost of
goods sold totaled $396,000 in fiscal 2009, compared to $466,000 for the year
ended September 30, 2008. The decrease in 2009 is due to lower sales
in the fiscal year compared to the prior year. As a percentage of
sales, cost of goods sold was 87.6% in fiscal year 2009, compared to 76.6% in
fiscal year 2008.
Research
and Development Expenses
Research
and development expenses decreased to $375,000 in fiscal year 2009, from
$632,000 in the year ended September 30, 2008. The decrease in research and
development expenses in 2009 was primarily related to our selection of more
moderately priced research and development vendors.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses increased to $2,032,000 in fiscal year 2009,
from $1,804,000 in fiscal year 2008. The increase in these expenses
in 2009 was due primarily to the following:
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Increase
in consulting expense of approximately $363,000, all of which was
non-cash, paid with restricted shares of common stock, and the
amortization of warrant expense;
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Increase
in board fees of approximately
$90,000;
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Increase
in accounting and legal services of approximately $306,000 for services
related to our spin-off and expenses associated with being
public;
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Increase
in advertising of $44,404;
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Increase
in other selling, general, and administrative expenses of $180,000 due to
increased phone usage, copy machine usage, meal charges, amortization,
dues, investor relations and related items for the additional
employees
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All of
these increases, which total $861,000, were offset by a decrease in payroll of
$359,000 and a decrease in allocations from the former parent company of
$396,000.
Other
Income and Expense
Interest
income decreased to $470 in fiscal year 2009 from $15,000 in fiscal year
2008. The reason for the decrease is due to the payment of a
related-party note receivable and no interest accruing on that note in fiscal
year 2009.
Net
Loss
Net loss
for the year ended September 30, 2009 increased to $2,416,000 from a net loss of
$2,279,000 in fiscal year 2008.
Liquidity
and Capital Resources
Our
primary sources of liquidity are from the proceeds from the sale of our equity
securities and from borrowings from our former parent, RemoteMDx. We
have not historically financed operations from cash flows from operating
activities. We anticipate that we will continue to seek funding
through the sale of our securities until we begin to have sales under our new
business plan.
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As of
September 30, 2009, we had unrestricted cash of $831,000, compared to cash of
$474,000 as of September 30, 2008. As of September 30, 2009, working capital
deficit was $131,471, compared to working capital of $407,000 as of September
30, 2008.
Operating
activities used cash of $1,122,000 in fiscal year 2009, compared to $1,247,000
cash used in 2008.
Investing
activities for the year ended September 30, 2009 used cash of $25,000, compared
to $12,000 of cash used by investing activities in the year ended September 30,
2008.
Financing
activities in fiscal year 2009 provided $1,503,000 of net cash, compared to
$981,000 of net cash provided by financing activities in the year ended
September 30, 2008.
During
fiscal year 2009, we incurred a net loss of $2,416,000 and had negative cash
flows from operating activities of $1,122,000, compared to a net loss of
$2,279,000 and negative cash flows from operating activities of $1,247,000 in
the year ended September 30, 2008. As of September 30, 2009, our
working capital deficit was $131,471 and we had an accumulated deficit of
$5,057,000 and total stockholders’ equity of $986,000.
Fiscal
Year 2008 Compared to Fiscal Year 2007
Net
Sales
Net sales
decreased 7.1%, or $47,000 to $608,000 in fiscal year 2008, from $655,000 in
fiscal year 2007. The decrease from 2007 to 2008 was due to a
temporary stop in production because of a fire at our production facility in May
2008.
Cost
of Goods Sold
Cost of
goods sold totaled $466,000 in fiscal 2008, compared to $486,000 for the year
ended September 30, 2007. The decrease of approximately $20,000
relates to the temporary stop in production because of the fire at our
production facility.
Research
and Development Expenses
Research
and development expenses increased 339%, or $488,000 to $632,000 in fiscal year
2008, from $144,000 in the year ended September 30, 2007. The increased research
and development expenses in 2008 were primarily related to the development of
home medical monitoring products for the home health market.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses increased 240%, or $1,274,000 to $1,804,000
in fiscal year 2008, from $530,000 in fiscal year 2007. The increase
in these expenses in 2008 was due primarily to the following:
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Increase
in consulting of approximately $581,000, $350,000 of which was a non-cash
item paid with shares of common stock to three consultants for market and
sales and marketing research (discussed in more detail below), and
$200,000 of which was paid to ADP Management Corporation (“ADP
Management”), an entity controlled by our Chairman and Chief Executive
Officer for strategic planning and other services (discussed in more
detail below);
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Increase
in contract labor of approximately $47,000 from hiring one additional
part-time contractor to perform quality assurance testing, and hiring
contractors to expand our medical device
website;
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Increase
in accounting and legal services of approximately $34,000 for services
related to our spin-off;
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Increase
in payroll of approximately $220,000 due to the hiring of additional sales
and marketing employees and the accruing of $120,000 of salary for our
Chief Executive Officer;
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Increase
in office expenses of $16,000 due to increased number of
employees;
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Increase
in other selling, general, and administrative expenses of $61,000 due to
increased phone usage, copy machine usage, meal charges and related items
for the additional employees. These increases were offset by
decreases in insurance, outside services, utilities and printing costs of
approximately $77,000; and
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Increase
in other expenses of $402,000. The non-cash, one-time expenses
are related to the spin-off from RemoteMDx. They include
charges for labor and management that RemoteMDx has provided to our
company. (For a more detailed discussion, of this expense, see
“Certain Relationships and Related Transactions, and Director
Independence.”)
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The
consulting services provided by ADP Management included high-level strategic
planning, consulting on the national and international direction of our company,
identifying research and development firms, and identifying potential strategic
partners or acquisition targets through the services of Mr. Derrick and Mr.
Dalton, both of whom are control persons with respect to ADP
Management.
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The
consulting services provided by the three other unaffiliated third-party
consultants described above included providing technical evaluations, patent
reviews, creation and identification of sales channels, evaluation of
competition, market research, and potential market penetration. The
three consultants were paid in restricted stock, and each received approximately
$116,000 worth of shares of our common stock. We had no consulting or
other agreements with these three individuals.
Other
Income and Expense
Interest
income increased 25%, or $3,000 to $15,000 in fiscal year 2008 from $12,000 in
fiscal year 2007. The increase in interest income was due to the sale
of common shares in 2008 and the deposit of the proceeds from the sale of the
securities in interest-bearing accounts with banks.
Net
Loss
Net loss
for the year ended September 30, 2008 increased 363% to $2,279,000 from a net
loss of $492,000 in fiscal year 2007. This increase in net loss is
due primarily to an increase in direct labor costs, research and development,
and selling, general, and administrative expense.
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 SFAS No.
168, “The FASB Accounting Standards Codification and Hierarchy of Generally
Accepted Accounting Principles (a replacement of SFAS No. 162).” FASB Accounting
Standards Codification (ASC) has become the source of authoritative generally
accepted accounting principles GAAP recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the SEC
under authority of federal securities laws are also sources of authoritative
GAAP for SEC registrants. On the effective date of this statement,
the codification will supersede all then-existing non-SEC accounting and
reporting standards; and all non-grandfathered, non-SEC accounting literature
not included in the codification will be superseded and deemed
non-authoritative. We have adopted the new codification standards in
our annual report on Form 10-K as of September 30, 2009. Reference to
the new ASC topic, subtopic, or section will be provided along with the
superseded historical accounting literature. The adoption of codification
standards did not impact our consolidated financial position, Results of
Operations or cash flows.
In September 2006, the Financial
Accounting Standards Board (FASB) issued guidance which defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value
measurements. It is effective for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. In
February 2008, the FASB extended the effective date to fiscal years beginning
after November 15, 2008. We do not expect the adoption of this
guidance to have a material impact on our financial statements.
In February 2007, the FASB issued
guidance which permits companies to choose to measure many financial instruments
and certain other items at fair value. It is effective for financial
statements issued for fiscal years beginning after November 15,
2007. We do not expect the adoption of this guidance to have a
material impact on our financial statements.
In December 2007, the FASB issued
guidance which requires an acquirer of a business to measure the identifiable
assets acquired, the liabilities assumed and any non-controlling interest in the
acquiree at their fair values on the acquisition date, with goodwill being the
excess value over the net identifiable assets acquired. It clarifies
that a non-controlling interest in a subsidiary should be reported as equity in
the financial statements, net income shall be adjusted to include the net income
attributed to the non-controlling interest and comprehensive income shall be
adjusted to include the comprehensive income attributed to the non-controlling
interest. The calculation of earnings per share will continue to be
based on income amounts attributable to the parent. This guidance is
effective for financial statements issued for fiscal years beginning after
December 15, 2008. Early adoption is prohibited. We have
not yet determined the effect on our financial statements, if any, upon adoption
of this guidance.
In September 2008, the FASB provided
guidance for measuring liabilities issued with an attached third-party credit
enhancement (such as a guarantee). It clarifies that the issuer of a liability
with a third-party credit enhancement (such as a guarantee) should not include
the effect of the credit enhancement in the fair value measurement of the
liability. This guidance is effective for the first reporting period beginning
after December 15, 2008. We have not yet determined the effect on our financial
statements, if any that will occur upon adoption of this guidance.
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In October 2008, the FASB issued
guidance which clarifies the application of fair value accounting in an inactive
market. It demonstrated how the fair value of a financial asset is determined
when the market for that financial asset is inactive. This guidance was
effective upon issuance, including prior periods for which financial statements
had not been issued. The effect of adopting this guidance did not have a
material effect on our financial statements.
In November 2008, the FASB provided
guidance which clarifies the accounting for certain transactions and impairment
considerations involving equity method investments. This guidance is effective
for fiscal years beginning after December 15, 2008, with early adoption
prohibited. We have not yet determined the effect on our financial statements,
if any that will occur upon adoption of this guidance.
In June 2008, the FASB provided
guidance which assists in determining whether an instrument (or embedded
feature) is indexed to an entity’s own stock. This amendment is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. Early application is not
permitted. A contract that would otherwise meet the definition of a derivative
but is both (a) indexed to our own stock and (b) classified in stockholders’
equity in the statement of financial position would not be considered a
derivative financial instrument. This amendment provides a new two-step model to
be applied in determining whether a financial instrument or an embedded feature
is indexed to an issuer’s own stock and thus able to qualify for the this
exception. This standard is expected to trigger liability accounting on our
Class A and B warrants, which have an exercise price that adjusts downward if we
issue shares of common stock at prices less than the warrant’s exercise price
then in effect. We are currently evaluating the impact of the adoption of this
guidance on our consolidated financial statements.
Critical
Accounting Policies
We prepare our consolidated financial
statements in conformity with accounting principles generally accepted in the
United States. As such, we are required to make certain estimates, judgments and
assumptions that we believe are reasonable based on the information available.
These estimates and assumptions affect the reported amounts of assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the periods presented. There can be no assurance
that actual results will not differ from those estimates. We believe the
following represent our most critical accounting policies.
Management considers an accounting
estimate to be critical if:
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It
requires assumptions to be made that were uncertain at the time the
estimate was made, and
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Changes
in the estimate or different estimates that could have been selected could
have a material impact on our consolidated Results of Operations or
financial condition.
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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.
Concentration
of Credit Risk
We
maintain cash in bank accounts that, at times, may exceed federally insured
limits. We have not experienced any losses in such accounts in the
past.
In the
normal course of business, we provide credit terms to our customers.
Accordingly, we perform ongoing credit evaluations of customers' financial
condition; we typically do not require collateral or security from our
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.
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Inventories
Inventories
are recorded at the lower of cost or market, cost being determined on a
first-in, first-out ("FIFO") method. Inventories consist of raw materials,
work-in-process, and finished goods. 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.
Revenue
Recognition
Our
revenue has historically been from two sources: (i) sales of diagnostic
equipment and accessories; and (ii) sales of medical diagnostic
stains. The policies for recognizing revenue from these sources are
summarized below.
Diagnostic Equipment Product
Sales. Although this has not been the primary focus of our
business model, we sell diagnostic equipment devices in certain situations. We
recognize product sales 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.
Medical Diagnostic Stain
Sales. We recognize revenue from the sale of medical
diagnostic stains 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.
We have
no sales that contain multiple deliverables. All of our revenues
consist of sales of products (either diagnostic equipment or diagnostic
stains). The diagnostic equipment does not require installation or
customization.
Our sales
are made generally on net 30-day payment terms. We have not changed
our payment terms in the past five years and have no plans to change our payment
terms in the future.
Our
equipment and 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. 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.
In
connection with generally accepted accounting principles, to qualify for the
recognition of revenue at the time of sale, we note the following:
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the
price to the buyer is fixed or determinable at the date of
sale;
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the
buyer has paid us, or the buyer is obligated to pay us within 30 days, and
the obligation is not contingent on resale of the
product;
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the
buyer's obligation to us would not be changed in the event of theft or
physical destruction or damage of the
product;
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the
buyer acquiring the product for resale has economic substance apart from
that provided by us;
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we
do not have significant obligations for future performance to directly
bring about resale of the product by the buyer;
and
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the
amount of future returns can be reasonably estimated and they are
negligible.
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We have
70 types of products based on the number of individual SKUs in our
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. Generally accepted accounting
principles 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. Because diagnostic equipment sales are not material
to the financial statements, we disclose sales as one line item.
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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. Our distributors are not required to
maintain specified amounts of product on hand, and distributors are not required
to make minimum purchases to maintain distributor
status. Distributors have no stock rotation rights or additional
rights of return. 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.
Going
Concern
The
factors described above, as well as the risk factors listed elsewhere in this
report raise substantial doubt about our company’s ability to continue as a
going concern. The financial statements included in this report do not include
any adjustments that might result from the outcome of this
uncertainty. Our plan with respect to this uncertainty is to focus on
sales of our reagent products and completing strategic acquisitions and business
combinations, and to raise capital through the offer and sale of our equity
securities. There can be no assurance that revenues will increase
rapidly enough to offset operating losses and repay debts. Likewise,
there can be no assurance that we will be successful in raising additional
capital from the sale of equity or debt securities. If we are unable
to increase revenues or obtain additional financing, it will be unable to
continue the development of its products and would likely cease
operations.
Item
8. Financial Statements and Supplementary Data
The financial statements and
supplemental data required by this item are included in Part IV,
Item 15.
None.
Disclosure controls and procedures are
controls and other procedures that are designed to ensure that information
required to be disclosed in company reports filed or submitted under the
Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include without limitation, controls and procedures designed to ensure that
information required to be disclosed in company reports filed or submitted under
the Exchange Act is accumulated and communicated to management, including our
chief executive officer and treasurer, as appropriate to allow timely decisions
regarding required disclosure.
As required by Rules 13a-15 and 15d-15
under the Exchange Act, our chief executive officer and chief financial officer
carried out an evaluation of the effectiveness of the design and operation of
our disclosure controls and procedures as of September 30, 2009. Based on their
evaluation, they concluded that our disclosure controls and procedures were
effective.
Management is responsible for
establishing and maintaining adequate internal control over our financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). Our
internal control over financial reporting is a process designed by, or under the
supervision of, our chief executive officer and chief financial officer and
effected by our board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of our financial reporting and
the preparation of our financial statements for external purposes in accordance
with generally accepted accounting principles.
Internal control over financial
reporting includes policies and procedures that pertain to the maintenance of
records that in reasonable detail accurately and fairly reflect the transactions
and dispositions of our assets; provide reasonable assurance that transactions
are recorded as necessary to permit preparation of our financial statements in
accordance with generally accepted accounting principles, and that our receipts
and expenditures are being made only in accordance with the authorization of our
board of directors and management; and provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of our assets that could have a material effect on our financial
statements.
22
Under the supervision and with the
participation of our management, including our chief executive officer, we
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission ("COSO"). Based on this evaluation under the criteria
established in Internal Control - Integrated Framework, our management concluded
that our internal control over financial reporting was effective as of September
30, 2009.
This annual report does not include an
attestation report of our registered public accounting firm regarding internal
control over financial reporting. Management's report was not subject to
attestation by our registered public accounting firm pursuant to temporary rules
of the Securities and Exchange Commission that permit us to provide only
management's report in this annual report.
During the most recently completed
fiscal quarter, there has been no change in our internal control over financial
reporting that has materially affected or is reasonably likely to materially
affect, our internal control over financial reporting.
None.
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,
2009.
|
Name
|
Age
|
Position
|
||
|
James
J. Dalton
|
67
|
Chairman
(Director) and Chief Executive Officer
|
||
|
James
G. Carter
|
70
|
Director
|
||
|
William
K. Martin
|
66
|
Director
|
||
|
Jack
J. Johnson
|
67
|
Director
|
||
|
Robert
J. Welgos
|
71
|
Director
|
||
|
Michael
G. Acton
|
46
|
Chief
Financial Officer,
Secretary-Treasurer
|
James
Dalton – Chief Executive Officer and Chairman
Mr.
Dalton joined us as a director on October 1, 2004. He has been our
Chief Executive Officer and Chairman since June 16, 2008. Mr. Dalton
is also a director of RemoteMDx, where he was President from August 2003 until
June 2008. Prior to joining RemoteMDx, 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.
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.
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).
23
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 our 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.
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.
Michael 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 RemoteMDx. He
also served as that company’s Chief Financial Officer from March 2001 until June
2008. On November 20, 2008, Mr. Acton agreed to resume the role of
Chief Financial Officer of RemoteMDx when his successor left to pursue other
opportunities. Mr. Acton expects to transition out of the RemoteMDx
position when a successor has been identified and appointed. Mr.
Acton is a Certified Public Accountant in the State of Utah.
Corporate
Governance
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. Because our stock
was not trading on an exchange as of the date of this report, we are not
required to have independent directors. Nevertheless, 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.
Audit Committee
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;
|
|
·
|
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 Securities and Exchange
Commission, or SEC, to be included in our annual proxy
statement.
|
24
As
indicated above, our board of directors has affirmatively determined that Mr.
Welgos and Mr. Carter 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. Our board of directors has adopted a written charter for
our audit committee, which is available on our corporate website at
www.activecaresys.com.
Compensation
Committee
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;
|
|
·
|
reviewing
and discussing annually with management our “Compensation Discussion and
Analysis” disclosure required by SEC
rules;
|
|
·
|
preparing
the compensation committee report required by the SEC to be included in
our annual proxy
statement; and
|
|
·
|
administrating,
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
During the year ended September 30,
2009, the board of directors met on four occasions. All members of
the board attended these four meetings. The two board committees were organized
in June 2009 and did not meet thereafter prior to September 30,
2009.
Director
Compensation
Our
directors are paid a director’s fee of $30,000 per year. In addition,
in June 2009, each 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, subject to the
following vesting schedule:
|
|
·
|
15,000
shares when our common stock begins trading on the OTCBB or other
market;
|
|
|
·
|
15,000
shares when our annual revenue reaches
$5,000,000;
|
|
|
·
|
15,000
shares when our annual revenue reaches
$10,000,000;
|
|
|
·
|
20,000
shares when our annual revenue reaches
$15,000,000;
|
|
|
·
|
20,000
shares when our annual revenue reaches
$20,000,000;
|
|
|
·
|
20,000
shares when our annual revenue reaches $25,000,000;
and
|
|
|
·
|
20,000
shares when we achieve
profitability.
|
25
The table below summarizes the
compensation we paid to our directors for their services as directors for the
fiscal year ended September 30, 2009.
|
Name
(a)
|
Fees
Earned or Paid in Cash
($)
(b)
|
Stock
Awards
($)
(c)
|
Option
Awards
($)
(3)
(d)
|
Non-Equity
Incentive Plan Compensation
($)
(e)
|
Change
in Pension Value and Nonqualified Deferred Compensation
Earnings
($)
(f)
|
All
Other Compensation
($)
(4)
(g)
|
Total
($)
(h)
|
|
James
J. Dalton (1)
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
|
James
G. Carter
|
$30,000
|
--
|
$23,416
|
--
|
--
|
--
|
$53,416
|
|
William
K. Martin
|
$30,000
|
--
|
$23,416
|
--
|
--
|
--
|
$53,416
|
|
Robert
J. Welgos
|
$12,500
|
--
|
$23,416
|
--
|
--
|
--
|
$35,916
|
|
Jack
Johnson
|
$27,500
|
--
|
$23,416
|
--
|
--
|
--
|
$50,916
|
(1) Mr.
Dalton is Chairman of the board of directors. He also serves as our
Chief Executive Officer pursuant to the terms of a management
agreement. Under the management agreement, Mr. Dalton received
restricted shares of our common stock in lieu of cash compensation and options
to purchase 13,000,000 shares of our common stock. He receives no
compensation for his service as a director. As of the date of this
report, these warrants have not vested and they will only vest in the future
upon completion of specific performance criteria.
Section
16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act
requires our executive officers and directors, and persons who own more than 10%
of our common stock ("Reporting Persons") to file initial reports of ownership
and to report changes in ownership in reports filed with the SEC. Reporting
Persons are required by regulation of the SEC to furnish us with copies of all
Section 16(a) forms they file.
Based solely on review of the copies of
such forms furnished to us during and with respect to the fiscal year ended
September 30, 2009, we believe that during the fiscal year ended September 30,
2009 all Section 16(a) filings applicable to these Reporting Persons were timely
filed.
Item
11. Executive Compensation
Compensation Discussion and
Analysis
The
purpose of this compensation discussion and analysis section is to provide
information about the material elements of compensation that are paid, awarded
to, or earned by, our “named executive officers,” who consist of our principal
executive officer and our principal financial officer. We have no other
executive officers or significant employees. For fiscal year 2009,
our named executive officers, were James J. Dalton, President and Chief
Executive Officer, and Michael G. Acton, Chief Financial Officer, Secretary and
Treasurer.
Historical Compensation
Decisions
Our
compensation approach is necessarily tied to our stage of development. Until
September 2008, we were a wholly owned subsidiary of RemoteMDx. We were spun off
from RemoteMDx in January 2009, when our former parent divested its remaining
ownership interest in ActiveCare by distributing the shares of our common stock
then held by it to its stockholders. We also registered our common
stock under Section 12(g) of the Exchange Act in February 2009 and became
subject to the reporting requirements of the Exchange Act.
Our stock
is not listed or included in any stock market as of the date of this
report. Therefore, we are not currently subject to any exchange rules
requiring a majority of our board of directors to be independent or relating to
the formation and functioning of board committees, including audit, compensation
and nominating committees. Most, if not all, of our prior compensation policies
and determinations, including those made for fiscal year 2008, were the product
of informal discussions between our President and Chief Executive Officer and
our board of directors or the board of directors of our former parent
corporation.
26
On June
23, 2009, our board of directors established an audit committee and a
compensation committee and adopted charters for each committee. The
members of the compensation and audit committees are independent directors,
applying the definition of independence established by the Nasdaq Stock
Market. The audit committee chairman is a financial expert as defined
by Item 407 of Regulation S-K and related rules of the SEC.
Compensation Philosophy and
Objectives
Prior to
June 2009, our board of directors, acting as a compensation committee, reviewed
and approved the compensation of our named executive officers and oversaw and
administered our executive compensation programs and initiatives. With the
formation of the compensation committee, we expect that the specific direction,
emphasis and components of our executive compensation program will continue to
evolve under the direction of that committee. For example, over time we may
reduce our reliance upon subjective determinations made by our Chief Executive
Officer and/or board of directors in favor of a more empirically-based approach
that involves benchmarking against peer companies. Accordingly, the compensation
paid to our named executive officers for fiscal year 2009 is not necessarily
indicative of how we will compensate our named executive officers in the
future.
We have
endeavored to create an executive compensation program that balances short-term
versus long-term payments and awards, cash payments versus equity awards and
fixed versus contingent payments and awards in ways that we believe are most
appropriate to motivate our executive officers. Our goals in establishing
compensation for our executive officers include an intent to:
|
·
|
attract
and retain talented and experienced executives in our
industry;
|
|
·
|
reward
executives whose knowledge, skills and performance are critical to our
success;
|
|
·
|
align
the interests of our executive officers and stockholders by motivating
executive officers to increase stockholder value and rewarding
executive officers when stockholder value
increases;
|
|
·
|
foster
a shared commitment among executives by aligning their individual goals
with the goals of the executive management team and our
company; and
|
|
·
|
compensate
our executives in a manner that incentivizes them to manage our business
to meet our long-range objectives.
|
In the
future, we expect that the compensation committee will meet outside the presence
of all of our executive officers, including our named executive officers, to
consider appropriate compensation for our Chief Executive Officer. For all other
named executive officers, the compensation committee will meet outside the
presence of all executive officers except our Chief Executive Officer. Going
forward, our Chief Executive Officer will review annually each other named
executive officer’s performance with the compensation committee and recommend
appropriate base salary, cash performance awards and grants of long-term equity
incentive awards for all other executive officers. Based upon the
recommendations from our Chief Executive Officer and in consideration of the
objectives described above and the principles described below, the compensation
committee will approve the annual compensation packages of our executive
officers other than our Chief Executive Officer. The compensation committee also
will annually analyze our Chief Executive Officer’s performance and determine
his base salary, cash performance awards and grants of long-term equity
incentive awards based on its assessment of his performance with input from any
consultants engaged by the compensation committee.
Compensation
amounts historically have been highly individualized, resulted from arm’s length
negotiations and have been based on a variety of informal factors including, in
addition to the factors listed above, our financial condition and available
resources, our need for that particular position to be filled and the
compensation levels of our other executive officers, each as of the time of the
applicable compensation decision. In addition, we informally considered the
competitive market for corresponding positions within comparable geographic
areas and companies of similar size and stage of development. This informal
consideration was based on the general knowledge possessed by our Chief
Executive Officer regarding the compensation given to some of the executive
officers of other companies in our industry. As a result, our Chief Executive
Officer historically has typically applied his subjective discretion to make
compensation decisions and did not formally benchmark executive compensation
against a particular set of comparable companies or use a formula to set the
compensation for our executives in relation to survey data. Our Chief Executive
Officer, in consultation with members of our board of directors made
compensation decisions for our executive officers and after thorough discussion
of various factors, including any informal knowledge or data he may have had,
set the compensation for our Chief Financial Officer. We anticipate that our
compensation committee will more formally benchmark executive compensation
against a peer group of comparable companies in the future. We also anticipate
that our compensation committee may make adjustments in executive compensation
levels in the future as a result of this more formal benchmarking
process.
27
Elements of
Compensation
Our Chief
Executive Officer, Mr. Dalton, is not paid a cash salary for his
services. His compensation package is governed by an agreement
authorized by the board of directors (with Mr. Dalton abstaining) in May 2009,
more particularly described below. Because of our early stage of
development, Mr. Dalton’s compensation is closely tied to the achievement of
certain milestones and is equity based. This enables us to use our cash for
product development and operating expenses rather than executive compensation
during the period in which we begin to implement our new business
plan.
Our
current executive compensation program for our Chief Financial Officer, which
was set by our Chief Executive Officer in consultation with our board of
directors prior to the establishment of our compensation committee, consists of
the following components:
|
·
|
Base
salary;
|
|
·
|
bonuses,
as awarded by the Chief Executive Officer or the board of
directors,
|
|
·
|
periodic
grants of long-term equity-based compensation, such as restricted stock or
options; and
|
|
·
|
other
executive benefits and perquisites.
|
We
combine these elements in order to formulate compensation packages that provide
competitive pay, reward the achievement of financial, operational and strategic
objectives and align the interests of our executive officers and other senior
personnel with those of our stockholders. Other than the management agreement
with Mr. Dalton, we do not have written employment agreements with any of our
executive officers.
Base Salary
The
primary component of compensation of our Chief Financial Officer is base salary.
The base salary is intended to reflect the officer’s responsibilities,
experience, prior performance and other discretionary factors deemed relevant by
our compensation committee. Base salary is also designed to provide the officer
with steady cash flow during the course of the fiscal year that is not
contingent on short-term variations in our corporate performance. Our
compensation committee determines market level compensation for the base salary
based on the executive’s experience in the industry with reference to the base
salaries of similarly situated executives in other companies of similar size and
stage of development. This determination is informal and based primarily on the
general knowledge of the compensation committee of the compensation practices
within our industry.
With
these principles in mind, base salary is reviewed during the fiscal year by the
compensation committee, and may be adjusted from time to time based on the
results of this review. In past years, our Chief Executive Officer and/or the
board of directors of RemoteMDx reviewed the performance of all executive
officers, and based on this review, set the executive compensation package for
each executive officer for the coming year, including base salary and bonus, as
applicable. In the future, our compensation committee will take a more
significant role in this annual review and decision-making process.
Bonus
Our
compensation committee has authority to award annual cash bonuses to our
executive officers. The annual cash bonuses are intended to offer incentive
compensation by rewarding the achievement of corporate and individual
performance objectives.
Long-Term
Equity-Based Compensation
Our
compensation committee believes that equity-based compensation is an important
component of our executive compensation program and that providing a significant
portion of our Chief Executive Officers’ total compensation package in
equity-based compensation aligns the incentives of our executives with the
interests of our stockholders and with our long-term corporate success.
Additionally, our compensation committee believes that equity-based compensation
awards enable us to attract, motivate, retain and adequately compensate
executive talent. To that end, we have awarded equity-based compensation in the
form of options to purchase shares of our common stock to our Chief Executive
Officer, providing him with a significant long-term interest in our success by
rewarding the creation of stockholder value over time. No stock options had been
granted during the period we were owned by RemoteMDx. Following the
separation and spin-off in 2009, our board of directors made a one-time grant of
stock options to our executive officers as described below.
Stock
options are granted with an exercise price equal to or greater than the fair
value of our stock on the applicable date of grant. After our common stock
begins trading, we expect to determine fair value for purposes of stock option
pricing based on the closing price of our common stock should trading commence
in the common stock.
28
In
general, stock option grants to our executive officers are determined at the
discretion of the compensation committee. In addition, the compensation
committee also considers the executive officer’s current position with our
company, the size of his or her total compensation package and the amount of
existing vested and unvested stock options, if any, then held by the executive
officer. No formal benchmarking efforts are made with respect to the size of
option grants made to executive officers and, in general, the determination
process is very informal. The compensation committee will, subject to approval
by our board of directors as deemed necessary by the compensation committee,
determine the size and terms and conditions of option grants to our executive
officers in accordance with the terms of any applicable plan and will approve
them on an individual basis.
Grants
of Plan-Based Awards
On May
12, 2009, as part of his management agreement authorized by the board of
directors, we approved a grant of stock options to our Chief Executive Officer,
as summarized in the table below. No options or equity awards were
made to our Chief Financial Officer during 2009. In addition, no
stock options were exercised and no stock options granted by us vested during
the year ended September 30, 2009.
|
Name
|
Grant
date
|
Estimated
future payouts under non-equity incentive plan awards
|
Estimated
future payouts under equity incentive plan awards
|
All
other stock awards: Number of shares of stock or units
(#)
|
All
other option awards: Number of securities underlying options
(#)
|
Exercise
or base price of option awards
($/Sh)
|
Grant
date fair value of stock and option awards
|
||||
|
Threshold
($)
|
Target
($)
|
Maximum
($)
|
Threshold
(#)
|
Target
(#)
|
Maximum
(#)
|
||||||
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
(k)
|
(l)
|
|
James
J. Dalton
|
5/21/09
|
-
|
-
|
-
|
-
|
-
|
$2,895,003
|
2,000,000
|
13,000,000
|
$0.25
|
$2,895,003
|
|
Michael
G. Acton
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Chief
Executive’s Management Agreement
The table
above summarizes the compensation package awarded to our Chief Executive
Officer. On May 12, 2009, the board of directors authorized and
approved a two-year management contract with an effective date of October 1,
2008 through September 30, 2010. Under the terms of the agreement,
Mr. Dalton is not paid any cash compensation. The basic terms of the
agreement and his compensation thereunder are as follows:
|
·
|
Accrued
but unpaid compensation from October 1, 2008, through May 12, 2009,
totaling $120,000 was converted to restricted shares of our common stock
at a price of $0.25 per share, or 480,000
shares.
|
|
·
|
The
board authorized the grant of an additional 1,520,000 restricted shares of
common stock to Mr. Dalton at a price of $0.25 per share, which vested
immediately. These shares are for compensation for the two year
period beginning October 1, 2008.
|
|
·
|
The
board granted options to Mr. Dalton for the purchase of 13,000,000 shares
of common stock at a price of $0.25 per share, vesting according to the
following schedule:
|
|
o
|
1,000,000
shares at such time as our common stock commences trading in the public
market or upon a sale of our company, whichever first
occurs;
|
|
o
|
2,000,000
shares at the time that our revenues are equivalent to $5,000,000 per
year;
|
|
o
|
2,000,000
shares when annual revenues are
$10,000,000;
|
|
o
|
2,000,000
shares when revenues reach $15,000,000 per
year;
|
|
o
|
2,000,000
shares when revenues reach $20,000,000 per
year;
|
|
o
|
2,000,000
shares when revenues are $25,000,000 per year;
and
|
|
o
|
2,000,000
shares at such a time as our audited annual reports show a net
profit.
|
Other Executive Benefits and
Perquisites
We
provide the following benefits to our executive officers on the same basis as
other eligible employees’ health insurance:
|
|
·
|
vacation,
personal holidays and sick days;
and
|
|
|
·
|
life
insurance and supplemental life
insurance.
|
29
We
believe these benefits are generally consistent with those offered by other
companies and specifically with those companies with which we compete for
employees. We also provide an automobile allowance to our executive officers and
a housing allowance and the reimbursement of certain travel expenses of our
named executive officers.
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 $1 million
may be deducted if it is “performance-based compensation” within the meaning of
the Code.
Our board
of directors has determined that stock options granted under Mr. Dalton’s
management contract, with an exercise price at least equal to the fair value of
our common stock on the date of grant should be treated as “performance-based
compensation.” Our board of directors believes that we should be able to
continue to manage our executive compensation program for our named executive
officers so as to preserve the related federal income tax deductions, although
individual exceptions may occur.
Summary Compensation
Table
The
following table sets forth certain information with respect to compensation for
the year ended September 30, 2009 earned by, awarded to or paid to our named
executive officers.
|
Name
and principal position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
awards
($)
|
Option
awards
($)
|
Non-equity
incentive
plan compensation
($)
|
Change
in pension value and nonqualified deferred compensation
earnings
($)
|
All
other compensation
($)(1)
|
Total
($)
|
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
|
James
J. Dalton, (2)
|
2009
|
$0
|
$0
|
$190,000(3)
|
$571,540(3)
|
$0
|
$0
|
$6,717
|
$768,257
|
|
Principal
Executive Officer
|
2008
|
$0
|
$0
|
$120,000
|
$0
|
$0
|
$0
|
$5,106
|
$125,106
|
|
Michael
G. Acton,
|
2009
|
$72,309
|
$0
|
$0
|
$0
|
$0
|
$0
|
$4,944
|
$ 77,253
|
|
Principal
Financial Officer
|
2008
|
$25,000
|
0
|
0
|
0
|
0
|
0
|
$2,784
|
$ 27,784
|
|
(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
|
$ 151
|
$5,826
|
$
|
599
|
$
|
141
|
||||||||||
|
Michael
G. Acton
|
$ 151
|
$3,573
|
$
|
968
|
$
|
253
|
||||||||||
|
(2)
|
As
discussed above, we do not pay a salary to our principal executive
officer. In May 2009, we entered into a two-year management
agreement which runs from October 1, 2008 through September 30,
2010. The terms of this agreement are discussed above. All
amounts except those reported in column (i) are non-cash amounts and
represent stock or option grants.
|
|
(3)
|
These
are non-cash compensation expense based on stock and option
grants. The calculation of the value of these grants is based
on the Black-Scholes option pricing
model.
|
30
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, 2009.
|
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
($)
(e)
|
Option
Expiration
Date
(f)
|
Number
of Shares or Units of Stock That Have Not Vested
(#)
(g)
|
Market
Value of Shares or Units of Stock That Have Not Vested
($)
(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
|
0
|
13,000,000
|
0
|
$0.25
|
5/11/
2014
|
13,000,000
|
$2,895,003
|
0
|
$0
|
|
Michael
G. Acton, Chief Financial Officer
|
0
|
0
|
0
|
$0
|
0
|
0
|
$0
|
0
|
$0
|
No awards
were made during the year ended or outstanding as of September 30,
2008. During fiscal year 2009 we made grants of option awards to our
directors and executive officers.
Options Exercised and Stock
Vested
No
options were exercised or vested in fiscal year ended September 30,
2009.
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 Meetings
Directors
hold office until the next annual meeting of the stockholders and until their
successors have been elected or appointed and duly
qualified. Executive officers are elected by the board of directors
and hold office until their successors are 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 15, 2009 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 each director nominee;
and
|
|
·
|
all
of the executive officers, directors and director nominees as a
group.
|
31
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 15, 2009, are 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 11,142,639 shares of common stock outstanding. 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
Shares Beneficial
Ownership
|
Percent of
Class
|
|
Common
|
Advance
Technology Investors, LLC
154
Rock Hill Road
Spring
Valley, NY 10977
|
1,529,437
|
13.73%
|
|
Common
|
ADP
Management Corporation
(1)
1401
N. Hwy 89 Suite 220
Farmington,
Utah 84025
|
2,549,162
|
22.88%
|
|
Common
|
Wilford
W. Kirton
39
Hoe Street
Paia,
HI 96779
|
762,223
|
6.84%
|
|
Common
|
Schwartz
Group, LLC(2)
735
Wythe Avenue
Brooklyn,
NY 11211
|
781,250
|
7.01%
|
|
Common
|
FG
Elysian, LLC
2215
York Road, Suite 414
Oak
Brook, IL 60523
|
625,000
|
5.61%
|
|
Executive
Officers and Directors:
|
|||
|
Title of
Class
|
Name of
Beneficial Owner
|
Amount
and
Nature
of Beneficial
Ownership
|
Percent of
Class
|
|
Common
|
James
J. Dalton(3)
|
2,549,162
|
22.88%
|
|
Common
|
James
G. Carter(4)
|
2,364
|
*
|
|
Common
|
William
K. Martin(5)
|
595,119
|
5.34%
|
|
Common
|
Robert
J. Welgos(6)
|
2,593
|
*
|
|
Common
|
Jack
Johnson(7)
|
0
|
*
|
|
Common
|
Michael
G. Acton(8)
|
227,810
|
2.04%
|
|
All
executive officers and directors as
a group (6 persons)(9)(10)
|
3,377,047
|
30.26%
|
|
* Represents
beneficial ownership of less than one percent (1%) of our outstanding common
stock.
32
|
(1)
|
ADP
Management is an entity under shared control of David Derrick, a former
director of ActiveCare and Mr. Dalton, our CEO and
Chairman. Amount indicated includes 2,046,227 shares owned of
record by Mr. Dalton, 473,651 shares owned of record by ADP Management,
29,025 shares owned of record by David Derrick and 259 shares owned of
record by MK Financial, an entity owned and controlled by David
Derrick.
|
|
(2)
|
Includes
156,250 shares owned of record by Shaya
Schwartz.
|
|
(3)
|
Mr.
Dalton is a member of our board of directors and our
CEO. Includes 473,651 shares of common stock owned of record by
ADP Management, 29,025 shares owned by David Derrick and 259 shares owned
by MK Financial, an entity owned by David
Derrick.
|
|
(4)
|
Mr.
Carter is a director.
|
|
(5)
|
Mr.
Martin is a director. All shares indicated are held in the name of Zenith
Holding, LTD, an entity controlled by Mr.
Martin.
|
|
(6)
|
Mr.
Welgos is a director.
|
|
(7)
|
Mr.
Johnson is a director.
|
|
(8)
|
Mr.
Acton is our Chief Financial Officer and
Secretary-Treasurer.
|
|
(9)
|
Includes
shares of our common stock issuable pursuant to the exercise of vested
stock options or warrants and the shares of our common stock beneficially
owned described in footnotes (3), (4), (5), (6), (7) and
(8).
|
|
(10)
|
Assumes
the exercise of all warrants exercisable within 60 days of December 15,
2009. These tables do not name the holders of our Series A
Preferred stock. The rights and preferences of the Series A Preferred
stock and certain of our common stock purchase warrants (the Class A and
Class B warrants) provide that the number of shares of common stock to be
obtained by each of the holders of Series A Preferred stock and the Class
A and Class B warrants upon conversion of the Series A Preferred stock or
exercise of the warrants, as the case may be, cannot exceed the number of
shares that, when combined with all other shares of our common stock and
securities owned by each of such holders, would result in any one of them
owning more than 4.99% of our outstanding common stock at the time of
conversion or exercise; provided, however that this limitation may be
revoked by the stockholder upon 61 days prior notice to us. No waiver
of such provisions has been received by us as of the date of this
report.
|
Sale
of Common Stock to Related Parties
In
February 2006, while we were still a subsidiary of RemoteMDx, we sold 1,250,000
shares of common stock to ADP Management, an entity owned and controlled by
James Dalton, and David Derrick. At the time of this transaction ADP
Management was an affiliate of our former parent corporation and Mr. Dalton and
Mr. Derrick were directors of our former parent corporation. The cash
paid for these restricted shares of common stock was $400,000. ADP
Management subsequently pledged a portion of these securities to third parties
as collateral for loans made to ADP Management. It also subsequently
sold certain of its shares of common stock to third parties in private resale
transactions.
Payment
of Consulting Fees to Related Party
Prior to
our spin-off from RemoteMDx, during the year ended September 30, 2008, we paid
consulting fees of $200,000 to ADP Management. The consulting services provided
by ADP Management included high-level strategic planning, consulting on our
national and international direction, identifying research and development
firms, and identifying potential strategic partners or acquisition targets
through the services of Mr. Derrick and Mr. Dalton.
Payments
to Former Parent Corporation
In
connection with our separation from our former parent corporation, RemoteMDx in
February 2009, we paid $402,163 to RemoteMDx. The non-cash, one-time expenses
include allocations of charges for labor and management that RemoteMDx provided
to us in periods prior to the separation, including assistance with financial
statement preparation, assistance with audit preparation and process, helping us
prepare to become a publicly traded company, and similar services.
Sale
of Shares of Common Stock to Related Party
During
the year ended September 30, 2008, we sold 2,135,417 restricted shares of our
common stock for proceeds of $2,098,333 to ADP Management.
33
Inter-company
Loan Transactions
Under the
terms of an earlier arrangement, RemoteMDx made sums available to us as loans
which were repayable together with interest at an annual rate of
5%. We also made funds available on similar terms to
RemoteMDx. As of September 30, 2008, RemoteMDx owed us $598,793 under
these arrangements. As of September 30, 2009, no further amounts were
owed to us by RemoteMDx.
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.
Registration
Rights Agreement
In
connection with the sale of shares of our Series A preferred stock, we entered
into a registration rights agreement that required us to file with the SEC no
later than December 10, 2009, a registration statement covering the resale of a
minimum of 2,554,286 shares of common stock (i.e. 100% of the shares of common
stock issuable upon conversion of the Series A preferred stock and exercise of
the related warrants, together with all of the shares issued in connection with
the acquisition of HG Partners, Inc.). Once filed, we are required to
use our best efforts to have the registration statement declared effective and
to keep the registration statement continuously effective under the Securities
Act until the earlier of (1) such time as all of the shares covered by this
report have been disposed of pursuant to and in accordance with the registration
statement or (2) the date on which all conversion shares and dividend shares may
be sold without the requirement to be in compliance with Rule 144(c)(1) and
otherwise without restriction or limitation pursuant to Rule 144 as determined
by our legal counsel pursuant to a written opinion letter to such effect,
addressed to our transfer agent. Prior to December 10, 2009, the holders of the
preferred stock agreed with us that the registration statement should not be
filed until such time as we had completed and filed this report on Form 10-K and
our shares have commenced trading on the over-the-counter market. We
expect to file the registration statement promptly after these conditions have
been met.
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.
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 2009 and 2008 totaled approximately $87,000 and
$19,000, respectively.
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 2009 and
2008.
The Audit
Committee of the board of directors considered and authorized all services
provided by and fees paid to Hansen Barnett & Maxwell, P.C..
34
Auditor
Independence
Our Audit
Committee considered that the work done for us in fiscal 2009 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, 2009.
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,
2009, for filing with the Securities and Exchange Commission.
Respectfully
submitted by the members of the Audit Committee:
|
Robert
J. Welgos, Chair
William
K. Martin
|
(a) The following documents
are filed as part of this Form:
1. Financial
Statements
|
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:
35
| Exhibit No. |
Title
of Document
|
|
|
2
|
Agreement
for the Acquisition of HG Partners, Inc. dated September 10,
2009. (previously filed as exhibit to Current Report on Form
8-K filed September 11, 2009)
|
|
|
3(i)
|
Designation
of Rights and Preferences of the Series A Convertible Preferred Stock of
ActiveCare, Inc. filed September 10, 2009 (previously filed as exhibit to
Current Report on Form 8-K filed September 11, 2009)
|
|
|
(3)(i)
|
Articles
of Incorporation of Registrant (previously filed as an exhibit to the
Company’s Registration Statement on Form S-1.)
|
|
|
(3)(ii)
|
Articles
of Amendment to Articles of Incorporation of Registrant (previously filed
as an exhibit to the Company’s Registration Statement on Form
S-1).
|
|
|
(3)(iii)
|
Bylaws
of Registrant (previously filed as an exhibit to the Company’s
Registration Statement on Form S-1).
|
|
|
(4)
|
Specimen
of common stock certificate (previously filed as an exhibit to the
Company’s Registration Statement on Form S-1).
|
|
|
4(i)
|
Class
A Warrant to Purchase Common Stock of ActiveCare, Inc. (previously filed
as exhibit to Current Report on Form 8-K filed September 11,
2009)
|
|
|
4(ii)
|
Class
B Warrant to Purchase Common Stock of ActiveCare, Inc. (previously filed
as exhibit to Current Report on Form 8-K filed September 11,
2009)
|
|
|
010(i)
|
Series
A Convertible Preferred Stock Purchase Agreement dated September 10, 2009
(previously filed as exhibit to Current Report on Form 8-K filed September
11, 2009)
|
|
|
(10)(i)
|
Lease
Agreement between RJF Company Ltd., and the Company, dated as of August 1,
2005 (previously filed as an exhibit to the Company’s Registration
Statement on Form S-1).
|
|
|
(10)(ii)
|
Loan
Agreement between the Company and RemoteMDx (previously filed as in
exhibit to the Company’s Registration Statement on Form
S-1).
|
|
|
(10)(iii)
|
Promissory
Note dated as of October 1, 2008 (previously filed as an exhibit to the
Company’s Registration Statement on Form S-1).
|
|
|
(10)(iv)
|
Professional
Services Contract between the Company and VPI Engineering, dated as of
September 27, 2007, together with addenda (previously filed as an exhibit
to the Company’s Registration Statement on Form S-1).
|
|
|
(10)(v)
|
Securities
Purchase Agreement between the Company and ADP Management, dated as of
November 15, 2007 (previously filed as an exhibit to the Company’s
Registration Statement on Form S-1).
|
|
|
(10)(vi)
|
License
Agreement between the Company and RemoteMDx, Inc. (previously filed as
exhibit to the Company’s Report on Form 10-Q for the period ended June 30,
2009)
|
|
|
(10)(vii)
|
License
Agreement between the Company and Futuristic Medical Devices
LLC (previously filed as exhibit to the Company’s Report on
Form 10-Q for the period ended June 30, 2009)
|
|
|
(10)(viii)
|
License
Agreement between the Company and euromicron AG (previously filed as
exhibit to the Company’s Report on Form 10-Q for the period ended June 30,
2009)
|
|
|
(11)
|
Computation
of Statement of Earnings (included in financial statements filed
herewith)*
|
|
* Filed
herewith.
36
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
|
ActiveCare,
Inc.
|
|||
|
By:
|
/s/ James J. Dalton | ||
|
James
J. Dalton, Chief Executive Officer
|
|||
|
(Principal
Executive Officer)
|
|||
Date:
December 24, 2009
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
|
||
|
James
J. Dalton
|
Chief
Executive Officer
|
December
24, 2009
|
|
|
(Principal
Executive Officer)
|
|||
| /s/ James G. Carter | |||
|
James
G. Carter
|
Director
|
December
24, 2009
|
|
| /s/ Robert J. Welgos | |||
|
Robert
J. Welgos
|
Director
|
December
24, 2009
|
|
| /s/ William K. Martin | |||
|
William
K. Martin
|
Director
|
December
24, 2009
|
|
| /s/ Jack J. Johnson | |||
|
Jack
J. Johnson
|
Director
|
December
24, 2009
|
|
| /s/ Michael G. Acton |
Chief
Financial Officer
|
December
24, 2009
|
|
|
Michael
G. Acton
|
(principal
financial officer)
|
||
|
(principal
accounting officer)
|
37
ActiveCare,
Inc.
(Formerly
Volu-Sol Reagents Corporation)
Financial
Statements
September
30, 2009 and 2008
Index
to Financial Statements
|
Page
|
|
|
Report of Independent
Registered Public Accounting Firm
|
F -
3
|
|
Balance Sheets as of
September 30, 2009 and 2008
|
F -
4
|
|
Statements of
Operations for the Years Ended
September 30, 2009 and 2008
|
F -
5
|
|
Statements of
Stockholders’ Equity for the Years Ended September 30, 2008 and
2009
|
F –
6
|
|
Statements of Cash
Flows for the Years Ended September 30, 2009 and
2008
|
F -
7
|
|
Notes to Financial
Statements
|
F -
9
|
F - 2
|
HANSEN, BARNETT & MAXWELL,
P.C.
|
||
|
A
Professional Corporation
|
Registered
with the Public Company
|
|
|
CERTIFIED
PUBLIC ACCOUNTANTS
|
Accounting
Oversight Board
|
|
|
5
Triad Center, Suite 750
|
||
|
Salt
Lake City, UT 84180-1128
|
||
|
Phone:
(801) 532-2200
Fax:
(801) 532-7944
|
 |
|
|
www.hbmcpas.com
|
A
Member of the Forum of Firms
|
REPORT
OF INDEPENDENT REGISTERD PUBLIC ACCOUNTING FIRM
To the
Directors and the Stockholders
ActiveCare,
Inc. (Formerly Volu-Sol Reagents Corporation)
We have
audited the accompanying balance sheets as of September 30, 2009 and 2008 and
the related statements of operations, stockholders' equity and cash flows of
ActiveCare, Inc., (the Company), for the years ended September 30, 2009 and
2008. 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, 2009 and 2008 and the results of their operations and cash
flows for the years ended September 30, 2009 and 2008 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
24, 2009
F - 3
ActiveCare,
Inc.
(Formerly
Volu-Sol Reagents Corporation)
Balance
Sheets
September
30, 2009 and 2008
|
2009
|
2008
|
|||||||
|
Assets
|
|
|
||||||
|
Current
assets:
|
||||||||
|
Cash
|
$ | 830,931 | $ | 474,146 | ||||
|
Accounts
receivable, net of allowance for doubtful accounts of $3,000 and
$2,500, respectively
|
63,469 | 91,667 | ||||||
|
Inventories,
net of reserve of $ 34,517 and $39,141, respectively
|
48,965 | 51,183 | ||||||
|
Prepaid
expenses and other assets
|
12,431 | 7,250 | ||||||
|
Total
current assets
|
955,796 | 624,246 | ||||||
|
Property
and equipment, net of accumulated depreciation of $408,652 and
$396,787, respectively (note 2)
|
71,967 | 52,375 | ||||||
|
Deposit
on inventory purchases
|
65,000 | - | ||||||
|
Related
party note receivable (note 4)
|
- | 598,793 | ||||||
|
License
agreement, net of amortization of $14,019 and $0,
respectively
|
285,981 | - | ||||||
|
Intangible
asset – access to financing, net of amortization of
$40,880 and $0, respectively
|
694,960 | - | ||||||
|
Total
assets
|
$ | 2,073,704 | $ | 1,275,414 | ||||
|
Liabilities and
Stockholders’ Equity
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 248,552 | $ | 72,158 | ||||
|
Accrued
expenses
|
154,544 | 145,293 | ||||||
|
Accrued
payable on license agreement
|
300,000 | - | ||||||
|
Series
A convertible preferred stock, net of discount of $615,829 and $0,
respectively (aggregate liquidation preference
of $1,000,000)
|
384,171 | - | ||||||
|
Total
current liabilities
|
1,087,267 | 217,451 | ||||||
|
Total
liabilities
|
1,087,267 | 217,451 | ||||||
|
Stockholders’
equity:
|
||||||||
|
Preferred
stock; .00001 par value, 10,000,000 shares authorized; 0 and 0 shares
issued and outstanding, respectively
|
- | - | ||||||
|
Common
stock, .00001 par value, 50,000,000 shares authorized; 11,822,639 and
8,982,639 shares issued and outstanding, respectively
|
118 | 90 | ||||||
|
Additional
paid in capital
|
6,043,470 | 3,698,661 | ||||||
|
Accumulated
deficit
|
(5,057,151 | ) | (2,640,788 | ) | ||||
|
Total
stockholders’ equity
|
986,437 | 1,057,963 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 2,073,704 | $ | 1,275,414 | ||||
See
accompanying notes to financial statements.
F - 4
ActiveCare,
Inc.
(Formerly
Volu-Sol Reagents Corporation)
Statements
of Operations
For the
Years Ended September 30, 2009 and 2008
|
2009
|
2008
|
|||||||
|
Sales,
net
|
$ | 451,750 | $ | 608,024 | ||||
|
Cost
of goods sold
|
396,183 | 466,385 | ||||||
|
Gross
profit
|
55,567 | 141,639 | ||||||
|
Operating
expenses:
|
||||||||
|
Research
and development
|
375,293 | 631,504 | ||||||
|
Selling,
general and administrative
|
2,032,284 | 1,804,189 | ||||||
|
Loss
from operations
|
(2,352,010 | ) | (2,294,054 | ) | ||||
|
Other
income (expense):
|
||||||||
|
Interest
income
|
470 | 15,323 | ||||||
|
Gain
on forgiveness of payable
|
35,607 | - | ||||||
|
Interest
expense – non cash
|
(100,430 | ) | - | |||||
|
Net
loss applicable to common shareholders
|
$ | (2,416,363 | ) | $ | (2,278,731 | ) | ||
|
Net
loss per common share – basic and diluted
|
$ | (0.24 | ) | $ | (0.27 | ) | ||
|
Weighted
average shares – basic and diluted
|
9,858,000 | 8,382,000 | ||||||
See
accompanying notes to financial statements.
F - 5
ActiveCare,
Inc.
(Formerly
Volu-Sol Reagents Corporation)
Statements
of Stockholders’ Equity
For the
Years Ended September 30, 2008 and 2009
|
Common
Stock
|
Additional
|
Accumulated
|
||||||||||||||||||
|
Shares
|
Amount
|
Paid-in
Capital
|
Deficit
|
Total
|
||||||||||||||||
|
Balance
at September 30, 2007
|
5,854,167 | $ | 59 | $ | 1,150,359 | $ | (362,057 | ) | $ | 788,361 | ||||||||||
|
Issuance
of common stock for:
|
||||||||||||||||||||
|
Cash
|
2,690,972 | 27 | 2,198,306 | - | 2,198,333 | |||||||||||||||
|
Services
|
437,500 | 4 | 349,996 | - | 350,000 | |||||||||||||||
|
Net
loss
|
- | - | - | (2,278,731 | ) | (2,278,731 | ) | |||||||||||||
|
Balance
at September 30, 2008
|
8,982,639 | 90 | 3,698,661 | (2,640,788 | ) | 1,057,963 | ||||||||||||||
|
Issuance
of common stock for:
|
||||||||||||||||||||
|
Cash
|
160,000 | 2 | 199,998 | - | 200,000 | |||||||||||||||
|
Services
|
2,000,000 | 20 | 119,980 | - | 120,000 | |||||||||||||||
|
Related
party note cancellation
|
(160,000 | ) | (2 | ) | (199,998 | ) | - | (200,000 | ) | |||||||||||
|
Purchase
of intangible
|
840,000 | 8 | 735,832 | - | 735,840 | |||||||||||||||
|
Amortization
of warrants issued
for services
|
- | - | 855,201 | - | 855,201 | |||||||||||||||
|
Related
party note cancellation
|
- | - | (79,022 | ) | - | (79,022 | ) | |||||||||||||
|
Record
beneficial conversion
feature of preferred stock
|
- | - | 712,818 | - | 712,818 | |||||||||||||||
|
Net
loss
|
- | - | - | (2,416,363 | ) | (2,416,363 | ) | |||||||||||||
|
Balance
at September 30, 2009
|
11,822,639 | $ | 118 | $ | 6,043,470 | $ | (5,057,151 | ) | $ | 986,437 | ||||||||||
See
accompanying notes to financial statements.
F - 6
ActiveCare,
Inc.
(Formerly
Volu-Sol Reagents Corporation)
Statements
of Cash Flows
For the
Years Ended September 30, 2009 and 2008
|
2009
|
2008
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
loss
|
$ | ( 2,416,363 | ) | $ | (2,278,731 | ) | ||
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
|
Depreciation
and amortization
|
66,765 | 10,053 | ||||||
|
Changes
in operating assets and liabilities:
|
||||||||
|
Amortization
of deferred consulting and financing costs
|
190,000 | 350,000 | ||||||
|
Related
party services
|
- | 492,070 | ||||||
|
Warrants
issued for services
|
665,201 | - | ||||||
|
Amortization
of debt discount recorded as interest exp.
|
96,989 | - | ||||||
|
Accounts
receivable
|
28,198 | 11,052 | ||||||
|
Inventories
|
2,218 | 176 | ||||||
|
Prepaid
expenses and other assets
|
(70,181 | ) | 20,023 | |||||
|
Accounts
payable
|
186,368 | 39,195 | ||||||
|
Accrued
liabilities
|
129,251 | 109,070 | ||||||
|
Net
cash used in operating activities
|
(1,121,554 | ) | (1,247,092 | ) | ||||
|
Cash
flows from investing activities:
|
||||||||
|
Purchase
of property and equipment
|
(24,941 | ) | (11,852 | ) | ||||
|
Net
cash used in investing activities
|
(24,941 | ) | (11,852 | ) | ||||
|
Cash
flows from financing activities:
|
||||||||
|
Proceeds
from related-party note
|
303,280 | 669,352 | ||||||
|
Payments
on related-party note
|
- | (1,887,000 | ) | |||||
|
Proceeds
from the sale of common stock
|
200,000 | 2,198,334 | ||||||
|
Issuance
of Series A preferred for cash
|
1,000,000 | - | ||||||
|
Net
cash provided by financing activities
|
1,503,280 | 980,686 | ||||||
|
Net
increase (decrease) in cash
|
356,785 | (278,258 | ) | |||||
|
Cash,
beginning of year
|
474,146 | 752,404 | ||||||
|
Cash,
end of year
|
$ | 830,931 | $ | 474,146 | ||||
|
Supplemental
Cash Flow Information:
|
||||||||
|
Cash
paid for interest and taxes:
|
||||||||
|
Cash
paid for income taxes
|
- | - | ||||||
|
Cash
paid for interest
|
- | - | ||||||
See
accompanying notes to financial statements.
F - 7
Supplemental
Disclosure of non-cash Investing and Financing Activities
|
2009
|
2008
|
|||||||
|
Non-cash
Investing and Financing Activities
|
||||||||
|
Acquisition
of HG Partners, Inc
|
$ | 735,840 | - | |||||
|
Accrued
liability incurred for patent purchase
|
300,000 | - | ||||||
|
Accruals
reduced by share issuance
|
120,000 | - | ||||||
|
Reduction
in related party receivable for fixed assets
and cancelation of common stock
|
285,538 | - | ||||||
|
Total
|
1,441,378 | - | ||||||
F - 8
ActiveCare,
Inc.
(Formerly
Volu-Sol Reagents Corporation)
Notes to
Financial Statements
September
30, 2009 and 2008
1.
Organization and Nature of Operations
ActiveCare,
Inc. (formerly Volu-Sol Reagents Corporation) (the "Company" or "ActiveCare")
was formed March 5, 1998 as a wholly owned subsidiary of RemoteMDx, Inc.
[OTCBB:RMDx], a Utah Corporation ("RemoteMDx"). During the twelve
months ended September 30, 2008, the ownership interest of RemoteMDx in
ActiveCare was reduced through (a) the sale of shares of their common stock by
the Company to investors in private transactions and (b) the sale and transfer
of shares of their common stock by RemoteMDx in private
transactions. RemoteMDx completed its divestiture of ActiveCare in
February 2009, through the distribution of approximately 1,421,667 shares of
their common stock to the shareholders of RemoteMDx. Each shareholder
of RemoteMDx received one share of ActiveCare common stock for every 117 shares
of RemoteMDx common stock owned of record on January 30, 2009. The distribution
date was February 27, 2009. Following the distribution of their
shares RemoteMDx 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 sells medical diagnostic substances and equipment to laboratories
throughout the United States. Subsequent to year end the Company
began selling ActiveOne™, a mobile emergency and concierge device throughout the
United States.
Going
Concern
The
Company incurred a net loss and has negative cash flows from operating
activities for the years ended September 30, 2009 and 2008. 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 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.
F - 9
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.
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
fiscal years ended September 30, 2009 and 2008, the Company had sales to
entities which represented more than 10% of its revenues. Thermo
Fisher Scientific, Inc. accounted for approximately 17% ($76,947)
and Richard Allan Scientific 13% ($58,227) for the year ended
September 30, 2009. Thermo Fischer Scientific, Inc. 31% ($141,664)
and Cardinal Health Medical 15% ($69,769) of sales for the year ended September
30, 2008. No other customer accounted for more than 10% of the
Company’s revenues for years ended September 30, 2009 and
2008.
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. Inventories consisted of raw materials,
work-in-process, and finished goods. Inventories as of September 30, 2009 and
2008 were as follows:
|
2009
|
2008
|
|||||||
|
Raw
materials
|
$ | 38,851 | $ | 39,829 | ||||
|
Work
in process
|
5,422 | 6,604 | ||||||
|
Finished
goods
|
39,209 | 43,891 | ||||||
|
Reserve
for inventory obsolescence
|
(34,517 | ) | (39,141 | ) | ||||
|
Total
inventory
|
$ | 48,965 | $ | 51,183 | ||||
F - 10
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.
Property
and equipment consisted of the following as of September 30:
|
2009
|
2008
|
|||||||
|
Equipment
|
$ | 171,577 | $ | 153,718 | ||||
|
Software
|
15,498 | 6,580 | ||||||
|
Leasehold
improvements
|
269,448 | 268,366 | ||||||
|
Furniture
and fixtures
|
24,096 | 20,498 | ||||||
| 480,619 | 449,162 | |||||||
|
Accumulated
depreciation
|
(408,652 | ) | (396,787 | ) | ||||
|
Property
and equipment, net of accumulated depreciation
|
$ | 71,967 | $ | 52,375 | ||||
Depreciation
expense for the years ended September 30, 2009 and 2008 was $11,865 and $10,053,
respectively.
Revenue Recognition
The
Company’s revenue has historically been from two sources: (i) diagnostic
equipment product sales; and (ii) sales of medical diagnostic
stains.
Diagnostic Equipment Product
Sales
Although
not the focus of the Company’s business model, the Company sells its diagnostic
equipment 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.
Medical Diagnostic Stain
Sales
The
Company recognizes medical diagnostic stains revenue when persuasive evidence of
an arrangement with the customer exists, title passes to the customer, prices
and 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 contain multiple
deliverables.
Customers
order either of the Company’s product lines by purchase order. The
Company does not enter into long-term contracts. Its diagnostic
equipment sales were $5,232 and $6,000 for the years ended September 30, 2009
and 2008, respectively, and its medical diagnostic stain sales were $446,518 and
$602,024 for the years ended September 30, 2009 and 2008,
respectively. All of the Company’s sales are made with net 30-day
payment terms.
F - 11
In
connection with Generally Accepted Accounting Principles related to 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. For the year ended September 30, 2009, the Company
experienced $2,985 of sales returns.
The
Company’s 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 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., 48
oz.) has a unique SKU in inventory. Under Generally Accepted
Accounting Principles an enterprise should 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 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.
Research and Development
Costs
All
expenditures for research and development are charged to expense as incurred.
These expenditures in both 2009 and 2008 were for the development of a medical
home monitoring device and associated services. For the years ended September
30, 2009 and 2008, research and development expenses were $375,293 and $631,504,
respectively.
F - 12
Advertising Costs
The
Company expenses advertising costs as incurred. Advertising expenses
for the years ended September 30, 2009 and 2008 were approximately $45,286 and
$881, respectively. Virtually all of this advertising expense relates
to the Company’s ActiveOne™ product.
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.
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 upon conversion of preferred stock. As
of September 30, 2009 and 2008, there were 15,214,284 and 0 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
September 2006, the Financial Accounting Standards Board (FASB) issued guidance
which defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures about fair
value measurements. It is effective for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. In
February 2008, the FASB extended the effective date to fiscal years beginning
after November 15, 2008. The Company does not expect the adoption of
this guidance to have a material impact on our financial
statements.
In
February 2007, the FASB issued guidance which permits companies to choose to
measure many financial instruments and certain other items at fair
value. It is effective for financial statements issued for fiscal
years beginning after November 15, 2007. The Company does not expect
the adoption of this guidance to have a material impact on our financial
statements.
In
December 2007, the FASB issued guidance which requires an acquirer of a business
to measure the identifiable assets acquired, the liabilities assumed and any
non-controlling interest in the acquiree at their fair values on the acquisition
date, with goodwill being the excess value over the net identifiable assets
acquired. It clarifies that a non-controlling interest in a
subsidiary should be reported as equity in the financial statements, net income
shall be adjusted to include the net income attributed to the non-controlling
interest and comprehensive income shall be adjusted to include the comprehensive
income attributed to the non-controlling interest. The calculation of
earnings per share will continue to be based on income amounts attributable to
the parent. This guidance is effective for financial statements
issued for fiscal years beginning after December 15, 2008. Early
adoption is prohibited. The Company has not yet determined the effect
on our financial statements, if any, that will occur upon adoption of this
guidance.
In
September 2008, the FASB provided guidance for measuring liabilities issued with
an attached third-party credit enhancement (such as a guarantee). It clarifies
that the issuer of a liability with a third-party credit enhancement (such as a
guarantee) should not include the effect of the credit enhancement in the fair
value measurement of the liability. This guidance is effective for the first
reporting period beginning after December 15, 2008. The Company has not yet
determined the effect on its financial statements, if any, that will occur upon
adoption of this guidance.
F - 13
In
October 2008, the FASB issued guidance which clarifies the application of fair
value accounting in an inactive market. It demonstrated how the fair value of a
financial asset is determined when the market for that financial asset is
inactive. This guidance was effective upon issuance, including prior periods for
which financial statements had not been issued. The effect of adopting this
guidance did not have a material effect on the Company’s financial
statements.
In
November 2008, the FASB provided guidance which clarifies the accounting for
certain transactions and impairment considerations involving equity method
investments. This guidance is effective for fiscal years beginning after
December 15, 2008, with early adoption prohibited. The Company has not yet
determined the effect on its financial statements, if any, that will occur upon
adoption of this guidance.
In June
2008, the FASB provided guidance which assists in determining whether an
instrument (or embedded feature) is indexed to an entity’s own stock. This
amendment is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years. Early application is not permitted. A contract that would otherwise meet
the definition of a derivative but is both (a) indexed to the Company’s own
stock and (b) classified in stockholders’ equity in the statement of financial
position would not be considered a derivative financial instrument. This
amendment provides a new two-step model to be applied in determining whether a
financial instrument or an embedded feature is indexed to an issuer’s own stock
and thus able to qualify for the this exception. This standard is expected to
trigger liability accounting on the Company’s Class A and B warrants, which have
an exercise price that adjusts downward if the Company issues shares of common
stock less than the warrant’s exercise price then in effect. The
Company is currently evaluating the impact of the adoption of this guidance on
the Company’s consolidated financial statements.
3.
Patent
License Agreement
During
the year ended September 30, 2009, the Company licensed the use of certain
patents from Futuristic Medical Devices, LLC. 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 it has the right to purchase the underlying patents for 4,000,000
shares of common stock. The Company has capitalized the patents and is
amortizing them over the remaining estimated useful life of 9
years. The Company has recognized $14,019 and $0 of amortization
expense for the years ended September 30, 2009 and 2008,
respectively. The company has not paid the $300,000 as of September
30, 2009.
4.
Related-Party
Note Receivable
In
October 2004, the Company entered into a Loan Agreement with
RemoteMDx. Under the terms of the Loan Agreement, the Company made
sums available to RemoteMDx under a note which was repayable, together with
interest at an annual rate of 5%. As of September 30, 2009 and 2008,
RemoteMDx owed the Company $0 and $598,793, respectively. During the year ended
September 30, 2009, the Company settled the debt with RemoteMDx by receiving
furniture and equipment valued at $6,516, and 160,000 shares of stock in the
Company that was owned by RemoteMDx valued at $279,022. As of
September 30, 2009, there are no amounts owed under this
receivable.
5.
Series A Convertible Preferred
Stock
Concurrent
with the closing of the acquisition of HG on September 4, 2009 (see Note 12),
the Company issued 571,428 shares of Series A Convertible Preferred Stock
(Series A) for $1.75 per share, or a total of $1,000,000. The
purchasers received one Class A warrant and one Class B warrant for each share
of Series A purchased. The Series A par value is $.00001 per share
and the stated value is $1.75 per share.
F - 14
The
Series A is mandatorily redeemable at 125% of the stated value plus any accrued
but unpaid dividends and liquidated damages at the earlier of September 4, 2010
or at the option of the holder upon the Company’s failure to keep certain
obligations under the stock purchase agreement.
At any
time, or from time to time, the Company may redeem all or a portion of the
Series A outstanding upon twenty business days prior written notice at a price
per share of preferred stock equal to 120% of the stated value plus any accrued
but unpaid dividends and liquidated damages.
The
Series A is convertible at any time at the holder’s option at $1.75 per
share. The conversion rate is adjusted for stock splits,
combinations, dividends and distributions, reclassifications, exchanges,
substitutions, reorganizations, mergers, consolidations or sales of assets. The
conversion rate is also adjusted when the Company issues or sells any additional
shares of common stock or equivalents, at a price per share less than the
conversion rate then in effect.
Cumulative
dividends of 8% of the stated value per share per annum accrue daily and are
payable quarterly commencing on December 31, 2009. Dividends are
payable at the Company’s option in cash or, in certain circumstances, in
registered shares of the Company’s common stock.
If the
Company elects to pay any dividend in shares of common stock, the number of
shares of common stock to be issued shall be an amount equal to the greater of
(x) the quotient of (i) the dividend payment divided by (ii) $1.00 (as adjusted
for any stock dividend, stock split, stock combination, reclassification or
similar transaction) or (y) the quotient of (i) the dividend payment divided by
(ii) ninety percent (90%) of the average of the Volume Weighted Average Price
(VWAP, and as further defined in the certificate of designation) for the five
trading days immediately preceding the date the dividend payment is due;
provided, however, in the event that ninety percent (90%) of the average of the
VWAP for the five trading days immediately preceding the date the dividend
payment is due shall be less than $1.00 (as adjusted for appropriate adjustments
for any stock dividend, stock split, stock combination, reclassification or
similar transaction), at the option of at least 75% of the holders of the
preferred stock, the dividend payment shall be payable only in
cash.
Series A shareholders are entitled to
the number of votes equal to the number of shares of common stock into which the
Series A could be converted.
In the
event of the liquidation, dissolution or winding up of the affairs of the
Company, the Series A shareholders shall be entitled to receive a liquidation
preference amount equal to the stated value per share plus any accrued and
unpaid dividends.
6.
Preferred
Stock
The
Company is authorized to issue 10,000,000 shares of undesignated preferred
stock, with a par value of $0.00001per share. Pursuant to the
Company's Articles of Incorporation, the Company's board of directors has the
authority to amend the Company's Articles of Incorporation, without further
shareholder approval, to designate and determine, in whole or in part, the
preferences, limitations and relative rights of the preferred stock before any
issuance of the preferred stock and to create one or more series of preferred
stock and fix the number of shares of each such series and determine the
preferences, limitations and relative rights of each series of preferred stock,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, and liquidation
preferences. On September 10, 2009 the Company designated a
Series A Convertible Preferred Stock. See Note 5 for
details.
F - 15
7.
Common
Stock
Authorized
Shares
The
Company is authorized to issue up to 50,000,000 shares of common
stock.
Effective
June 30, 2009 the Company established a par value for its common stock of
$0.00001 per share. These financial statements have been retro
actively adjusted for the effects of the par value.
As of
September 30, 2007, the Company had 5,854,167 shares of common stock
outstanding. During the year ended September 30, 2008, the Company
issued 2,690,972 shares for $2,198,333 in cash. Of these amounts, 2,135,417
shares (and $2,098,333) were issued to a director of RemoteMDx, the Company’s
former parent company, and to ADP Management. The remaining 555,555
shares were sold to unrelated third parties. The company also issued
437,500 shares for services rendered for a value of $350,000, or $0.80 per
share. The shares issued for services were valued at
$0.80 per share based on stock purchases between the Company and third
parties. As of September 30, 2008, the Company had 8,982,639 shares
of common stock outstanding.
During
the year ended September 30, 2009, in a transaction related to the sale of the
Series A preferred stock, the Company issued 840,000 shares valued at $735,840
for all of the issued and outstanding shares of a Nevada corporation, HG
Partners, Inc., formerly Solutions Mechanical, Inc.
During
the year ended September 30, 2009, the Company issued 2,000,000 shares of common
stock valued at $500,000 to its Chief Executive Officer and Chairman of the
Board of Directors for past and future services.
During
the year ended September 30, 2009, the Company sold 160,000 shares of its common
stock to its former parent company, RemoteMDx. Subsequently, as part
of a settlement of the related-party receivable with RemoteMDx, the Company
received back the 160,000 shares of previously issued common stock. These shares
were retired. This settlement reduced the number of shares outstanding at year’s
end. As of September 30, 2009, the Company has 11,822,639 shares of common stock
outstanding.
8.
Warrants
During
the year ended September 30, 2009, the Company issued warrants to the board of
directors of the Company for the purchase of an aggregate of 13,500,000 shares
of common stock at prices ranging from $0.25 to $1.25 per share. All
of these warrants are subject to the following vesting schedule.
|
Number of
Warrants
|
Vesting
Criteria
|
|
1,060,000
|
When
the Company’s stock is trading or sold
|
|
2,060,000
|
$5,000,000
in annualized revenue
|
|
2,060,000
|
$10,000,000
in annualized revenue
|
|
2,080,000
|
$15,000,000
in annualized revenue
|
|
2,080,000
|
$20,000,000
in annualized revenue
|
|
2,080,000
|
$25,000,000
in annualized revenue
|
|
2,080,000
|
When
the Company achieves profitability
|
The fair
value of each warrant granted was estimated on the date of grant using the
Black-Scholes valuation model and assumes that the performance goals will be
achieved using the following inputs: Exercise price ranging from $0.25 to $1.25;
Risk free interest rate of between 2.02% - 2.71%; Expected life of 5 years;
Expected dividend of 0%; and a volatility factor of 141%. If such
performance goals are not met, no compensation cost is recognized and any
recognized compensation cost is reversed. Expected volatilities are
based on historical volatility of a peer company’s common stock among other
factors. The Company uses historical data to estimate option exercise and
employee termination within the valuation model. The risk-free rate
for periods within the contractual life of the option is based on the U.S.
Treasury yield curve in effect at the time of grant.
F - 16
On
September 4, 2009, the Company issued 571,428 shares of Series A Convertible
Preferred Stock (Series A) for $1.75 per share, or a total of
$1,000,000. The purchasers received one Class A warrant and one Class
B warrant for each share of Series A purchased. The Class A and B
warrants have identical terms, other than the exercise price. The
exercise price of the Class A warrants is $1.75, and the exercise price of the
Class B warrants is $2.25. The warrants are immediately exercisable
into shares of the Company’s common stock through September 4,
2014.
The
warrants have a cashless exercise feature commencing upon the earlier of 6
months following September 4, 2009 and the date the shares of common stock
subject to the warrants become eligible for resale pursuant to Rule 144 under
the Securities Act, if (i) the per share market value of one share of common
stock is greater than the warrants’ exercise price and (ii) a registration
statement under the Securities Act providing for the resale of the shares of
common stock subject to the warrants is not then in effect or not effective at
any time.
The
warrants’ exercise price will be adjusted downward if the Company issues any
additional shares of common stock (excluding certain issuances), at a price per
share less than the warrants’ exercise price then in effect or without
consideration (in which case such additional shares of common stock shall be
deemed to have been issued at a price per share of $.00001). If this
occurs, then the warrants’ exercise price upon each such issuance shall be
adjusted to the price equal to the consideration per share paid for such
additional shares of common stock, and the number of shares of common stock for
which the warrants are exercisable shall be increased such that the aggregate
warrant exercise price payable hereunder, after taking into account the decrease
in the exercise price, shall be equal to the aggregate exercise price prior to
such adjustment.
A summary
of the activity of the warrants as of September 30, 2009 is presented
below:
|
Performance
Options
|
Shares
|
Weighted-Average
Exercise
Price
|
Weighted-Average
Remaining
Contractual
Term
|
Aggregate
Intrinsic
Value
|
||||||||
|
Outstanding
at October
1, 2008
|
- | - | ||||||||||
|
Granted
|
14,642,856 | $0.42 | ||||||||||
|
Exercised
|
- | - | ||||||||||
|
Forfeited
|
- | - | ||||||||||
|
Outstanding
at September
30, 2009
|
14,642,856 | $0.42 |
4.64
years
|
- | ||||||||
|
Exercisable
at September
30, 2009
|
- | - | - | |||||||||
The total
expense associated with these warrants is $3,452,921, of which $665,201 is being
recognized as non-cash consulting expense during the year ended September 30,
2009. The balance of $2,787,720 will be expensed in future
periods.
9. 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 provision, respectively.
F - 17
For the
years ended September 30, 2009 and 2008, the Company incurred net losses of
approximately $2,294,000 and $2,280,000, 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, 2009, the Company had net carryforwards available to offset future
taxable income of approximately $4,574,000 which will begin to expire in
2018. 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.
The
deferred income tax assets (liabilities) were comprised of the following at
September 30:
|
2009
|
2008
|
|||||||
|
Net
operating loss carryforwards
|
$ | 775,000 | $ | 432,000 | ||||
|
Depreciation
and reserves
|
4,000 | 2,000 | ||||||
|
Valuation
allowance
|
(779,000 | ) | (434,000 | ) | ||||
|
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,
2009 and 2008 are as follows:
|
2009
|
2008
|
|||||||
|
Federal
income tax benefit at statutory
rate
|
$ | 308,000 | $ | 292,000 | ||||
|
State
income tax benefit, net of federal
income tax effect
|
46,000 | 75,000 | ||||||
|
Non-deductible
expenses
|
(9,000 | ) | (24,000 | ) | ||||
|
Change
in valuation allowance
|
(345,000 | ) | (343,000 | ) | ||||
|
Benefit
for income taxes
|
$ | - | $ | - | ||||
During
the years ended September 30, 2009 and 2008, 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, 2009, 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, 2010. The Company
had no tax examinations begin, end, or remain in process as of and for the years
ended September 30, 2009 and 2008. Tax years subsequent to September
30, 2005 remain subject to examination.
F - 18
10. Commitments
and Contingencies
The
Company leases a facility under a non-cancelable operating lease that expires in
November 2010. Future minimum rental payments under the
non-cancelable operating lease as of September 30, 2009 are approximately as
follows:
|
Lease
Obligations
|
||||
|
Year
Ending September 30:
|
||||
|
2010
|
$ | 87,006 | ||
|
2011
|
32,146 | |||
|
2012
|
20,633 | |||
|
2013
|
17,600 | |||
|
Total
|
$ | 157,385 | ||
Rent
expense related to this non-cancelable operating lease was approximately $74,000
and $73,000 for the years ended September 30, 2009 and 2008,
respectively.
11.
Acquisition
On
September 4, 2009, the Company completed the acquisition of HG Partners, Inc.
(HG) by acquiring 100% of HG’s common stock. Consideration consisted
of 840,000 shares of the Company’s common stock valued at
$735,840. The Company acquired HG to gain access to future financing
sources, including HG’s shareholders.
No assets
and liabilities were acquired from HG, and no operations were
acquired. The purchase price of $735,840 was allocated to an
intangible asset (access to financing sources). Management estimates
another financing to occur in approximately 18 months. The Company
has capitalized the intangible asset and is amortizing it on a straight-line
basis over the remaining useful life of 18 months. The Company has
recognized $40,880 and $0 of amortization expense for the years ended September
30, 2009 and 2008, respectively.
12. Subsequent
Events
The
Company has evaluated for subsequent events through December 24, 2009, the date
of the audit report. There are no material events that warrant further
disclosure.
F - 19