UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





(Mark
One)


x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
quarterly period ended: March 31, 2010


or





 ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
transition period from ____________ to _____________





Commission
File Number:0-53570


ActiveCare,
Inc.




(Exact
name of registrant as specified in its charter)





Delaware
            
            87-0578125(State
      or other jurisdiction of incorporation
              or
      organization)
            
            (I.R.S.
      Employer Identification No.)5095
      West 2100 South
              West Valley City,
      Utah
            
            84120(Address
      of principal executive offices)
            
            (Zip
      Code)





(801)
974-9474


(Registrant's
telephone number, including area code)










(Former
name, former address and former fiscal year if changed since last
report)





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  ̈





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 during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).


Yes  ̈  No  ̈





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





Large
      accelerated filer  ̈
            Accelerated
      filer  ̈Non-accelerated
      filer  ̈
            Smaller
      reporting company x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.)


Yes   ̈   No  x





As of May
10, 2010, the registrant had 13,957,353 shares of common stock
outstanding.





ActiveCare,
Inc.


(Formerly
Volu-Sol Reagents Corporation)





Table
of Contents





PagePART
      I – FINANCIAL INFORMATION
            3Item
      1. Financial Statements
            3Condensed
      Consolidated Balance Sheets (unaudited)
            3Condensed
      Consolidated Statements of Operations (unaudited)
            5Condensed
      Consolidated Statements of Cash Flows (unaudited)
            6Notes
      to Condensed Consolidated Financial Statements (unaudited)
            8Item
      2. Management's Discussion and Analysis of Financial Condition and Results
      of  Operations
            19Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk
            28Item
      4.  Controls and Procedures
            28PART
      II – OTHER INFORMATION
            29Item
      1. Legal Proceedings.
            29Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
            29Item
      3. Defaults Upon Senior Securities
            29Item
      6. Exhibits
            30SIGNATURES
            32





2


PART
I – FINANCIAL INFORMATION





Item
1.  Financial Statements.


ActiveCare,
Inc


(Formerly
Volu-Sol Reagents Corporation)


Condensed
Consolidated Balance Sheets


(unaudited)


March
      31, 2010
              
              
              September
      30, 2009AssetsCurrent
      assets:Cash
              
              $
              533,721
              
              
              $
              830,931Accounts
      receivable, net of allowance for doubtful accounts of $2,500 and
      $3,000, respectively
              
              
              73,288
              
              
              
              63,469Inventories,
      net of reserve of $41,441 and $34,517, respectively
              
              
              39,041
              
              
              
              48,965Prepaid
      expenses and other assets
              
              
              4,486
              
              
              
              12,431Total
      current assets
              
              
              650,536
              
              
              
              955,796Property
      and equipment, net of accumulated depreciation of $419,372 and
      $408,652, respectively
              
              
              87,101
              
              
              
              71,967Deposit
      on inventory purchases
              
              
              20,000
              
              
              
              65,000Domain
      Name, net of amortization of $357 and $0respectively
              
              
              13,943
              
              
              
              -Leased
      Equipment, net of amortization of $11,327 and $0,respectively
              
              
              57,697
              
              
              
              -License
      agreement, net of amortization of $30,842 and
      $14,019,  respectively
              
              
              269,158
              
              
              
              285,981Intangible
      asset – access to financing, net of amortizationof
      $735,840 and $40,880, respectively
              
              
              -
              
              
              
              694,960Total
      assets
              
              $
              1,098,435
              
              
              $
              2,073,704








See
accompanying notes to condensed consolidated financial
statements


3


ActiveCare,
Inc


(Formerly
Volu-Sol Reagents Corporation)


Condensed
Consolidated Balance Sheets


(unaudited)
cont.





March
      31, 2010
            
            
            September
      30, 2009Liabilities and
      Stockholders’ EquityCurrent
      liabilities:Accounts
      payable
            
            $
            331,733
            
            
            $
            248,552Derivative
      liability
            
            
            1,036,718
            
            
            
            -Accrued
      expenses
            
            
            212,196
            
            
            
            154,544Deferred
      Revenue
            
            
            4,989
            
            
            
            -Related
      party notes payable
            
            
            100,000
            
            
            
            -Accrued
      payable on license agreement
            
            
            300,000
            
            
            
            300,000Series
      A convertible preferred stock, net of discount of$232,034 and $615,829, respectively (aggregateliquidation preference of $1,000,000)
            
            
            767,966
            
            
            
            384,171Series
      B convertible preferred stock, net of discount of$365,754 and $0, respectively (aggregate liquidationpreference of $600,000
            
            
            234,246
            
            
            
            -Total
      current liabilities
            
            
            2,987,848
            
            
            
            1,087,267Total
      liabilities
            
            
            2,987,848
            
            
            
            1,087,267Stockholders’
      equity (deficit):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 sharesauthorized;
      13,957,353and 11,822,639 shares issued andoutstanding,
      respectively
            
            
            140
            
            
            
            118Additional
      paid in capital
            
            
            6,477,248
            
            
            
            6,043,470Accumulated
      deficit
            
            
            (8,366,801
            )
            
            
            (5,057,151
            )Total
      stockholders’ equity (deficit)
            
            
            (1,889,413
            )
            
            
            986,437Total
      liabilities and stockholders’ equity (deficit)
            
            $
            1,098,435
            
            
            $
            2,073,704





See accompanying notes to condensed
consolidated financial statements


4


ActiveCare,
Inc.


(Formerly
Volu-Sol Reagents Corporation)


Condensed
Consolidated Statements of Operations


(unaudited)




Three
      months ended
                March
      31,
              
              
              Six
      months ended
                March
      31,2010
              
              
              2009
              
              
              2010
              
              
              2009Revenues:Care
      services
              
              $
              12,058
              
              
              $
              -
              
              
              $
              16,491
              
              
              $
              -Reagents
              
              
              113,448
              
              
              
              126,760
              
              
              
              221,869
              
              
              
              231,067Total
      revenues
              
              
              125,506
              
              
              
              126,760
              
              
              
              238,360
              
              
              
              231,067Cost
      of RevenueCare
      services
              
              
              61,466
              
              
              
              -
              
              
              
              122,087
              
              
              
              -Reagents
              
              
              89,572
              
              
              
              100,841
              
              
              
              186,610
              
              
              
              203,913Total
      cost of revenues
              
              
              151,038
              
              
              
              100,841
              
              
              
              308,697
              
              
              
              203,913Gross
      margin
              
              
              (25,532
              )
              
              
              25,919
              
              
              
              (70,337
              )
              
              
              27,154Operating
      expensesResearch
      and development
              
              
              32,639
              
              
              
              20,468
              
              
              
              196,969
              
              
              
              126,406Selling,
      general and administrative
              
              
              1,610,751
              
              
              
              156,806
              
              
              
              2,641,083
              
              
              
              405,810Loss
      from operations
              
              
              (1,668,922
              )
              
              
              (151,355
              )
              
              
              (2,908,389
              )
              
              
              (505,062
              )Other
      income (expenses):Gain
      on derivative liability
              
              
              278,565
              
              
              
              -
              
              
              
              638,629
              
              
              
              -Interest
      income
              
              
              -
              
              
              
              4,341
              
              
              
              -
              
              
              
              11,964Interest
      expense
              
              
              (293,666
              )
              
              
              -
              
              
              
              (651,850
              )
              
              
              -Gain
      on forgiveness of payable
              
              
              -
              
              
              
              34,032
              
              
              
              -
              
              
              
              34,032Other
      income (expenses)
              
              
              (399
              )
              
              
              -
              
              
              
              (342
              )
              
              
              (825
              )
  Net
      loss
              
              $
              (1,684,422
              )
              
              $
              (112,982
              )
              
              $
              (2,921,952
              )
              
              $
              (459,891
              )Dividends
      on preferred stock
              
              
              (21,534
              )
              
              
              -
              
              
              
              (46,082
              )
              
              
              -Net
      loss attributable to common shareholders
              
              
              (1,705,956
              )
              
              
              (112,982
              )
              
              
              (2,968,034
              )
              
              
              (450,891
              )Net
      loss per common share – basic and diluted
              
              $
              (0.14
              )
              
              $
              (0.01
              )
              
              $
              (0.24
              )
              
              $
              (0.05
              )Weighted average shares – basic and diluted
              
              
              12,463,000
              
              
              
              8,983,000
              
              
              
              12,139,000
              
              
              
              8,983,000










See
accompanying notes to condensed consolidated financial
statements


5




ActiveCare,
Inc.


(Formerly
Volu-Sol Reagents Corporation)


Condensed
Consolidated Statements of Cash Flows


(unaudited)





Six
      Months EndedMarch
      31,2010
            
            
            2009Cash
      flows from operating activities:Net
      loss
            
            $
            (2,968,034
            )
            
            $
            (459,890
            )Adjustments
      to reconcile net loss to net cash usedIn
      operating activities:Depreciation
      and amortization
            
            
            734,187
            
            
            
            5,868Amortization
      of deferred consulting and financing
            
            
            100,050
            
            
            
            -Common
      stock issued for services
            
            
            175,068
            
            
            
            -Warrants
      issued for services
            
            
            826,340
            
            
            
            -Amortization
      of debt discount recorded as interest expense
            
            
            638,954
            
            
            
            -Common
      stock issued for interest
            
            
            45,161
            
            
            
            -Gain
      on derivative liability
            
            
            (638,629
            )
            
            
            -Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            (9,819
            )
            
            
            (5,399
            )Interest
      receivable
            
            
            -
            
            
            
            (11,991
            )Inventories
            
            
            9,924
            
            
            
            3,342Prepaid
      expenses and other assets
            
            
            52,945
            
            
            
            (2,226
            )Accounts
      payable
            
            
            83,180
            
            
            
            54,913Accrued
      liabilities
            
            
            57,652
            
            
            
            41,271Deferred
      revenue
            
            
            4,989
            
            
            
            -Net
      cash used in operating activities
            
            
            (888,032
            )
            
            
            (374,112
            )Cash
      flows from investing activities:Payments
      for property and equipment
            
            
            (25,853
            )
            
            
            (8,719
            )Disposal
      of leased equipment
            
            
            2,475
            
            
            
            -Purchase
      of intangibles
            
            
            (14,300
            )
            
            
            -Purchase
      of leased equipment
            
            
            (71,500
            )
            
            
            -Net
      cash used in investing activities
            
            
            (109,178
            )
            
            
            (8,719
            )Cash
      flows from financing activities:Proceeds
      from related-party notes
            
            
            100,000
            
            
            
            284,702Issuance
      of Series B preferred stock
            
            
            600,000
            
            
            
            -Net
      cash provided by financing activities
            
            
            700,000
            
            
            
            284,702Net
      decrease in cash
            
            
            (297,210
            )
            
            
            (98,129
            )Cash,
      beginning of period
            
            
            830,931
            
            
            
            474,146Cash,
      end of period
            
            $
            533,721
            
            
            $
            376,017








See
accompanying notes to condensed consolidated financial
statements


6





ActiveCare,
Inc.


(Formerly
Volu-Sol Reagents Corporation)


Condensed
Consolidated Statements of Cash Flows


(unaudited)
cont.





Six
      Months EndedMarch
      31,2010
            
            
            2009Supplemental
      Cash Flow Information:Cash
      paid for income taxes
            
            
            -
            
            
            
            -Cash
      paid for interest
            
            
            -
            
            
            
            -Non-Cash
      Investing and Financing:Issuance
      of stock for loan origination fees
            
            $
            50,500
            
            
            
            -





See
accompanying notes to condensed consolidated financial
statements


7





ActiveCare,
Inc.


Notes to
Condensed Consolidated Financial Statements


(unaudited)





1.
            Basis
      of Presentation





The
      unaudited interim consolidated financial information of ActiveCare, Inc.
      (the “Company” or “ActiveCare”) has been prepared in accordance with
      Article 10 of Regulation S-X promulgated by the Securities and Exchange
      Commission.  Certain information and disclosures normally
      included in financial statements prepared in accordance with accounting
      principles generally accepted in the United States of America have been
      condensed or omitted pursuant to such rules and regulations.  In
      the opinion of management, the accompanying interim consolidated financial
      information contains all adjustments, consisting only of normal recurring
      adjustments necessary to present fairly the Company’s financial position
      as of March 31, 2010, and results of its operations for the three and six
      months ended March 31, 2010 and 2009.  These financial
      statements should be read in conjunction with the annual consolidated
      financial statements and notes thereto that are included in the Company’s
      Annual Report on Form 10-K for the year ended September 30,
      2009.  The results of operations for the three and six months
      ended March 31, 2010 may not be indicative of the results for the fiscal
      year ending September 30, 2010.







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 and for the
      period ended March 31, 2010.  These factors raise substantial
      doubt about the Company's ability to continue as a going concern. The
      financial statements do not include any adjustments that might result from
      the outcome of this uncertainty.





In
      order for the Company to remove substantial doubt about its ability to
      continue as a going concern, the Company must generate positive cash flows
      from operations and obtain the necessary funding to meet its projected
      capital investment requirements.  Management’s plans with
      respect to this uncertainty include raising additional capital from the
      sale of the Company’s common stock or attempting to secure additional
      financing through traditional bank financing or a debt
      offering.  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.





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.





2.
            Revenue
      Recognition





The
Company’s revenue has historically been from three sources: (i) sales from
care services; (ii) diagnostic equipment product sales; and (iii) sales of
medical diagnostic stains.





Care
Services


Care
services include lease contracts in which the Company provides care services and
leases devices to distributors or end users and the Company retains ownership of
the leased device.  The Company typically leases its devices on a
month-to-month contract with customers (members) that use the Company’s care
services.  However, these contracts may be cancelled by either party at
anytime with 30 days notice.  Under the Company’s standard contract, the
leased device becomes billable on the date the customer (member) orders the
product, and remains billable until the device is returned to the Company. 
The Company recognizes revenue on leased devices at the end of each month that
care services have been provided.  In those circumstances in which the
Company receives payment in advance, the Company records these payments as
deferred revenue.





The
Company recognizes Care services revenue when persuasive evidence of an
arrangement with the customer exists, title passes to the customer, prices are
fixed or determinable and collection is reasonably assured.


8


Shipping
and handling fees are included as part of net sales. The related freight costs
and supplies directly associated with shipping products to customers are
included as a component of cost of goods sold. Neither the sale of diagnostic
equipment nor the sale of medical diagnostic stains contains multiple
deliverables.





Customers
order either of the Company’s product lines by phone or website.  The
Company does not enter into long-term contracts.  All of the Company’s
sales are made with net 30-day payment terms.





In
connection with generally accepted accounting principles to qualify for the
recognition of revenue at the time of sale, the Company notes the
following:





·
            The
      Company’s price to the buyer is fixed or determinable at the date of
      sale.


·
            The
      buyer has paid the Company, or the buyer is obligated to pay the Company
      within 30 days, and the obligation is not contingent on resale of the
      product.


·
            The
      buyer's obligation to the Company would not be changed in the event of
      theft or physical destruction or damage of the
  product.


·
            The
      buyer acquiring the product for resale has economic substance apart from
      that provided by the Company.


·
            The
      Company does not have significant obligations for future performance to
      directly bring about resale of the product by the
  buyer.


·
            The
      amount of future returns can be reasonably estimated and they are
      negligible.




Accounting
standards state that, “an enterprise shall report revenues from external
customers for each product and service or each group of similar products and
services unless it is impractical to do so.”  The vast majority of the
Company’s sales are Care service revenue.  Because Care service
equipment sales are not material to the financial statements, the Company
discloses sales as one line item.





The
Company’s revenue recognition policy for sales to distributors is the same as
the policy for sales to end-users.





A
customer qualifies as a distributor by completing a distributor application and
proving its sales tax status.  Upon qualifying as a distributor, the
distributor receives a 20% 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.





Diagnostic
Equipment Product Sales


Although
not the focus of the Company’s new business model, the Company also sells
diagnostic devices in certain situations. The Company recognizes product sales
revenue when persuasive evidence of an arrangement with the customer exists,
title passes to the customer and the customer cannot return the devices, prices
are fixed or determinable and collection is reasonably assured.





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
are fixed or determinable and collection is reasonably assured.




Shipping
and handling fees are included as part of net sales. The related freight costs
and supplies directly associated with shipping products to customers are
included as a component of cost of goods sold. Neither the sale of diagnostic
equipment nor the sale of medical diagnostic stains contains multiple
deliverables.





Customers
order either of the Company’s product lines by purchase order.  The
Company does not enter into long-term contracts.  Its diagnostic
equipment sales were $2,362 for the three months ended March 31, 2010 and its
medical diagnostic stain sales were $111,086 for the three months ended March
31, 2010.  All of the Company’s sales are made with net 30-day payment
terms.


9


In
connection with generally accepted accounting principles to qualify for the
recognition of revenue at the time of sale, the Company notes the
following:





·
            The
      Company’s price to the buyer is fixed or determinable at the date of
      sale.


·
            The
      buyer has paid the Company, or the buyer is obligated to pay the Company
      within 30 days, and the obligation is not contingent on resale of the
      product.


·
            The
      buyer's obligation to the Company would not be changed in the event of
      theft or physical destruction or damage of the
  product.


·
            The
      buyer acquiring the product for resale has economic substance apart from
      that provided by the Company.


·
            The
      Company does not have significant obligations for future performance to
      directly bring about resale of the product by the
  buyer.


·
            The
      amount of future returns can be reasonably estimated and they are
      negligible.


·
            Customers
      may return diagnostic equipment within 30 days of the purchase date.
      Customers may return the medical diagnostic stains within 30 days of the
      purchase date provided that the stain’s remaining life is at least 8
      months. Customers must obtain prior authorization for a product
      return.




The
Company’s products have not been modified significantly for several
years.  There is significant history on which to base the Company’s
estimates of sales returns.  These sales returns have been
negligible.





The
Company has 70 types of products based on the number of individual stock-keeping
units (“SKUs”) in its inventory.  Most of these 70 SKUs are for
medical diagnostic stain inventory.  For example, certain medical
diagnostic stains are packaged in different sizes, and each packaged size (i.e.
16 oz., 32 oz., and 48 oz.) has a unique SKU in inventory.  Accounting
standards state that, “an enterprise shall report revenues from external
customers for each product and service or each group of similar products and
services unless it is impractical to do so.”  The vast majority of the
Company’s sales are of medical diagnostic stains, with a minimal portion of
sales being diagnostic equipment.  Because diagnostic equipment sales
are not material to the financial statements, the Company discloses 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.





3.         
   Net Loss per Common Share





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 March 31, 2010 and 2009, there were 15,148,979 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.





4.
            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 adopted this guidance on October
1, 2009.  This guidance did not have a material impact on the
financial statements.


10




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 adopted this guidance on October
1, 2009.  This guidance did not have a material impact on the
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
adopted this guidance on October 1, 2009.  This guidance did not have
a material impact on the financial statements.





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. The Company adopted this
guidance on October 1, 2009 see Note 5 for the accounting impact.





In June
2009, the FASB issued accounting guidance on the consolidation of variable
interest entities (VIEs). This new guidance revises previous guidance by
eliminating the exemption for qualifying special purpose entities, by
establishing a new approach for determining who should consolidate a
variable-interest entity and by changing when it is necessary to reassess who
should consolidate a variable-interest entity.  This guidance will be
effective at the beginning of the first fiscal year beginning after November 15,
2009. Early application is not permitted.  The company does not
anticipate that this will have a material impact on the financial
statements.





In
September 2009, the FASB issued guidance that changes the existing
multiple-element revenue arrangements guidance currently included under its
Revenue Arrangements with Multiple Deliverables codification. The revised
guidance primarily provides two significant changes: 1) eliminates the need for
objective and reliable evidence of the fair value for the undelivered element in
order for a delivered item to be treated as a separate unit of accounting, and
2) eliminates the residual method to allocate the arrangement consideration. In
addition, the guidance also expands the disclosure requirements for revenue
recognition. This will be effective for the first annual reporting period
beginning on or after June 15, 2010, with early adoption permitted provided that
the revised guidance is retroactively applied to the beginning of the year of
adoption. The Company is currently assessing the future impact of this new
accounting update to its financial statements.





In
October 2009, the FASB issued guidance on share-lending arrangements entered
into on an entity's own shares in contemplation of a convertible debt offering
or other financing.  This new guidance is effective for fiscal years
beginning on or after December 15, 2009, and fiscal years within those fiscal
years for arrangements outstanding as of the beginning of those years.
Retrospective application is required for such arrangements and early
application is not permitted.  The adoption of this guidance is not
expected to significantly impact the Company’s results of operations and
financial position.


11


In
January 2010, the FASB issued guidance which requires an entity to disclose the
following:





·
            Separately
      disclose the amounts of significant transfers in and out of Level 1 and
      Level 2 fair value measurements and describe reasons for the
      transfers.





·
            Present
      separately information about purchases, sales, issuances and settlements,
      on a gross basis, rather than on one net number, in the reconciliation for
      fair value measurements using significant unobservable inputs (Level
      3).





·
            Provide
      fair value measurement disclosures for each class of assets and
      liabilities.





·
            Provide
      disclosures about the valuation techniques and inputs used to measure fair
      value for both recurring and nonrecurring fair value measurements for fair
      value measurements that fall in either Level 2 or level
  3.





This
guidance is effective for interim and annual reporting periods beginning after
December 15, 2009, except for the disclosures about purchases, sales, issuances,
and settlements in the roll forward of activity in Level 3 fair value
measurements.  Those disclosures are effective for fiscal years
beginning after December 15, 2010.  The Company adopted this guidance
during the quarter ended December 31, 2009.  This guidance did not
have a material impact on the financial statements.





In
February 2010, the FASB issued ASU No. 2010-09, “Amendments to Certain
Recognition and Disclosure Requirements” (“ASU 2010-09”), which is included in
the FASB Accounting Standards Codification (the “ASC”) Topic 855 (Subsequent
Events). ASU 2010-09 clarifies that an SEC filer is required to evaluate
subsequent events through the date that the financial statements are issued. ASU
2010-09 is effective upon the issuance of the final update and did not have a
significant impact on the Company’s financial statements.





5.
            Change
      in Accounting Principle





Beginning
October 1, 2009, the Company recognized the fair value of the Class A and Class
B warrants along with the embedded conversion features of the Series A Preferred
Stock as derivative liabilities on its consolidated balance sheet. This was as a
result of the adoption of new guidance as found in ASC Topic 815-10, effective
for the Company at the beginning of this fiscal year.  Accordingly,
changes in the fair value of these liabilities at each reporting period are
required to be recognized as non-cash expense or income in the consolidated
statement of operations.  Future movements in the Company’s stock
price alone can materially affect both its results of operations and financial
position in the future.  Substantial movements in the Company’s stock
price could result in material volatility in the Company’s results of operations
and financial position.





Upon
adoption, a cumulative effect adjustment was recorded, based on amounts that
would have been recognized if this guidance had been applied from the issuance
date of the affected instruments.  The following table illustrates the
changes to the Company’s consolidated balance sheet resulting from the
implementation of this guidance:





Balance
      at
              September
      30,
              2009
            
            
            Cumulative
              Effect
              Adjustment
            
            
            Balance
      at
              October
      1,
              2009Series
      A convertible preferred stock, net(liability)
            
            $
            (384,171
            )
            
            $
            255,159
            
            
            $
            (129,012
            )Derivative
      liability
            
            $
            -
            
            
            $
            (1,309,593
            )
            
            $
            (1,309,593
            )Additional
      paid in capital
            
            $
            (6,043,470
            )
            
            $
            712,818
            
            
            $
            (5,330,652
            )Accumulated
      deficit
            
            $
            5,057,151
            
            
            $
            341,616
            
            
            $
            5,398,767





The fair
value of the warrants and beneficial conversion feature on the Preferred stock
of $712,818 was included in additional paid-in capital on the issuance date of
the Preferred stock and warrants (September 10, 2009).  As a result of
the reclassification to derivative liabilities, the cumulative effect of these
adjustments on October 1, 2009 was an increase in the discount on the Preferred
stock of $255,159, an increase in derivative liability of $1,309,593, a
reduction of additional paid-in capital of $712,818 and a corresponding increase
in the Company’s accumulated deficit of $341,616. See Notes 11 and 13 for
further treatment of the derivative liabilities.


12




6.
            Inventory





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 March 31, 2010
and September 30, 2009 were as follows:








Mar.
      31
            
            
            Sept.
      30Raw
      materials
            
            $
            31,345
            
            
            $
            38,851Work
      in process
            
            
            4,677
            
            
            
            5,422Finished
      goods
            
            
            44,460
            
            
            
            39,209Reserve
      for inventory obsolescence
            
            
            (41,441
            )
            
            
            (34,517
            )Total
      inventory
            
            $
            39,041
            
            
            $
            48,965





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.





7.
            Property
      and Equipment





Property
      and equipment consisted of the following as of March 31, 2010 and
      September 30, 2009:





Mar.
      31
            
            
            Sept.
      30Equipment
            
            $
            185,614
            
            
            $
            171,577Software
            
            
            19,259
            
            
            
            15,498Leasehold
      improvements
            
            
            274,436
            
            
            
            269,448Furniture
      and fixtures
            
            
            27,164
            
            
            
            24,096506,473
            
            
            
            480,619Accumulated
      depreciation
            
            
            (419,372
            )
            
            
            (408,652
            )Property
      and equipment, net of accumulated depreciation
            
            $
            87,101
            
            
            $
            71,967





Depreciation
      expense for the six months ended March 31, 2010 and 2009 was $10,719, and
      $5,868, respectively.





8.
            Leased
      Equipment





The
Company purchases equipment that it intends to lease to customers under certain
terms.  Leased equipment consisted of the following as of March 31,
2010 and September 30, 2009:





Mar.
      31
            
            
            Sept.
      30Leased
      equipment
            
            $
            69,024
            
            
            $
            -Accumulated
      depreciation
            
            
            (11,327
            )
            
            
            -Leased
      equipment, net of accumulated depreciation
            
            $
            57,697
            
            
            $
            -





Depreciation
expense for the three months ended March 31, 2010 and the year ended September
30, 2009 was $5,391, and $0, respectively.





9.       
    Patent License Agreement





During
the year ended September 30, 2009, the Company licensed the use of certain
patents from a third party.  This license agreement will aid the
Company as it furthers its business plan.  The Company is required to
pay $300,000 plus a 5% royalty on the net sales of all licensed products and 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 $16,823 and $14,019 of amortization
expense for the six months ended March 31, 2010 and the year ended September 30,
2009, respectively.  The Company had not paid the $300,000 as of March
31, 2010.


13





10.
            Related-Party
      Note Payable





During
the quarter ended March 31, 2010, the Company borrowed $100,000 from two
officers of the Company.  These notes have an annual interest rate of
12% and are due on demand.  Accrued interest on these notes totaled
$2,885 for the quarter ended March 31, 2010.





11.
            Series A Convertible Preferred
      Stock





Concurrent
with the closing of the acquisition of HG on September 10, 2009 (see Note 19),
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.





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 March 31, 2010.  Dividends are payable
at the Company’s option in cash or, in certain circumstances, in registered
shares of the Company’s common stock.  As of March 31, 2010, the
Company had accrued approximately $19,945 of dividends for the
quarter.  All the accrued dividends were paid prior to quarter end by
issuing 44,714 shares of 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.





Effective
October 1, 2009, certain conversion features on the Series A along with the
warrants were required to be classified as derivatives. See Notes 5 and 13 for
further discussion.


14




12.
            Series
      B Convertible Preferred Stock





On March
23, 2010, the Company issued 342,857 shares of Series B Convertible Preferred
Stock (Series B) for $1.75 per share, or a total of $600,000.  The
purchasers received one Class C warrant for each share of Series B
purchased.  The Series B par value is $.00001 per share and the stated
value is $1.75 per share.





The
Series B is mandatorily redeemable at 125% of the stated value plus any accrued
but unpaid dividends and liquidated damages at the earlier of March 23, 2011 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 B 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 B 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 March 31, 2010.  Dividends are payable
at the Company’s option in cash or, in certain circumstances, in registered
shares of the Company’s common stock.  As of March 31, 2010, the
Company had accrued approximately $921 of dividends as part of accrued expenses
in the financial statements.





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 B 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 B shareholders shall be entitled to receive a liquidation
preference amount equal to the stated value per share plus any accrued and
unpaid dividends.





Certain
conversion features on the Series B, along with the warrants were required to be
classified as derivatives and carried at their fair value. The fair value of
these derivatives on the date of issuance of $365,754 resulted in a debt
discount to be amortized over the life of the redemption provision of the
preferred stock of one year. During the quarter ended March 31, 2010 none
of the discount was amortized as interest expense.  The balance of the
debt discount on March 31, 2010 was $365,754.  See Note 13 for further
discussion.





13.
            Derivative
      Liability





The
Company does not hold or issue derivative instruments for trading
purposes.  However, the Company has warrants and convertible preferred
stock that contain embedded derivative features that require separate valuation
from the
convertible preferred stock.  The Company recognizes these derivatives as
liabilities in its balance sheet, measures them at their estimated fair value,
and recognizes changes in their estimated fair value in earnings (losses) in the
period of change.  As of March 31, 2010, the derivative instruments had a
fair value of $1,036,718 and the Company recognized a derivative valuation gain
of $278,565 for the six month period then ended.


15





14.
            Preferred
      Stock





The
Company is authorized to issue 10,000,000 shares of undesignated preferred
stock, with a par value of $0.00001 per share.  Pursuant to the
Company's Certificate of Incorporation, the Company's board of directors has the
authority to amend the Company's Certificate 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 board of directors designated
a Series A Convertible Preferred Stock.  See Note 11 for
details.  On March 23, 2010, the board of directors designated a
Series B Convertible Preferred Stock.  See Note 12 for
details.





15.
            Common
      Stock





During
the six months ended March 31, 2010, the Company issued 2,134,714 shares of
ActiveCare., common stock as follows:





·
            2,000,000
      shares were issued for services performed for a value of
      $2,020,000.


·
            50,000
      shares were issued in connection with a line of credit provided by an
      officer of the Company.


·
            40,000
      shares were issued for services performed for a value of
      $40,400.


·
            44,714
      shares were issued in connection with dividends on preferred
      stock





16.
            Warrants





During
the year ended September 30, 2009, the Company issued warrants to members of 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
      Criteria1,060,000
            When
      the Company’s stock is trading or sold2,060,000
            $5,000,000
      in annualized revenue2,060,000
            $10,000,000
      in annualized revenue2,080,000
            $15,000,000
      in annualized revenue2,080,000
            $20,000,000
      in annualized revenue2,080,000
            $25,000,000
      in annualized revenue2,080,000
            When
      the Company achieves profitability





As of
March 31, 2010, only 1,060,000 of these warrants had vested.  The
balance will only vest in future periods upon completion of specific performance
criteria.





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.


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
for the purchase of shares of the Company’s common stock through September 4,
2014.


16





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.





The total
expense associated with these warrants is $3,452,921, of which $1,078,371 was
recognized in prior periods and $413,170 is being recognized as non-cash
consulting expense during the quarter ended March 31, 2010.  The
balance of $1,961,380 will be expensed in future periods.





On March
23, 2010, the Company issued 342,857 shares of Series B Convertible Preferred
Stock (Series B) for $1.75 per share, or a total of $600,000.  In
conjunction with this private placement, the company issued 342,857 series C
warrants at an exercise price of $3 per share.  The price and number
of series B warrants has changed from $2.25 to $1.75 and from 571,428 to
734,694.   The warrants are immediately exercisable for the
purchase of shares of the Company’s common stock through March 24,
2015.





17.
            Segment
      Information





The
Company is organized into two business segments based primarily on the nature of
the Company's products. The Stains and Reagents segment is engaged in the
business of manufacturing and marketing medical diagnostic stains, solutions and
related equipment to hospitals and medical testing labs. The ActiveCare segment
is engaged in the business of developing, distributing and marketing mobile
emergency and concierge services to distributors and consumers.  The
care services part of the Company’s business started during quarter ended
December 31, 2009. Prior to that time the Company did not allocate any expenses
or assets between the segments.





The
following table reflects certain financial information relating to each
reportable segment for the three and six month periods ended March 31, 2010 and
2009:





ActiveCare
            
            
            Stains
      and
              Reagents
            
            
            TotalThree
      Months Ended March 31, 2010Sales
      to external customers
            
            $
            12,058
            
            
            $
            113,448
            
            
            $
            125,506Segment
      income (loss)
            
            $
            (1,688,881
            )
            
            $
            (17,075
            )
            
            $
            (1,705,956
            )Segment
      assets
            
            $
            918,691
            
            
            $
            179,744
            
            
            $
            1,098,435Depreciation
      and amortization
            
            $
            782,003
            
            
            $
            415,736
            
            
            $
            1,197,739





Three
      Months Ended March 31, 2009Sales
      to external customers
            
            $
            -
            
            
            $
            126,760
            
            
            $
            126,760Segment
      income (loss)
            
            $
            -
            
            
            $
            (112,982
            )
            
            $
            (112,982
            )Segment
      assets
            
            $
            -
            
            
            $
            911,708
            
            
            $
            911,708Depreciation
      and amortization
            
            $
            -
            
            
            $
            402,655
            
            
            $
            402,655








17




ActiveCare
            
            
            Stains
      and
              Reagents
            
            
            TotalSix
      Months Ended March 31, 2010Sales
      to external customers
            
            $
            16,491
            
            
            $
            221,869
            
            
            $
            238,360Segment
      income (loss)
            
            $
            (2,501,432
            )
            
            $
            (466,602
            )
            
            $
            (2,968,034
            )Segment
      assets
            
            $
            918,691
            
            
            $
            179,744
            
            
            $
            1,098,435Depreciation
      and amortization
            
            $
            782,003
            
            
            $
            415,736
            
            
            $
            1,197,739





Six
      Months Ended March 31, 2009Sales
      to external customers
            
            $
            -
            
            
            $
            231,067
            
            
            $
            231,067Segment
      income (loss)
            
            $
            -
            
            
            $
            (450,891
            )
            
            $
            (450,891
            )Segment
      assets
            
            $
            -
            
            
            $
            911,708
            
            
            $
            911,708Depreciation
      and amortization
            
            $
            -
            
            
            $
            402,655
            
            
            $
            402,655





18.
            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
      ObligationsYear
      Ending September 30:2010
            
            $
            87,0062011
            
            
            32,1462012
            
            
            20,6332013
            
            
            17,600Total
            
            $
            157,385





Rent
expense related to this non-cancelable operating lease was approximately $22,500
for the quarters ended March 31, 2009 and March 31, 2010.





19.
            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).  The Company has
capitalized the intangible asset and was amortizing it on a straight-line basis
over the remaining useful life of 18 months.  The Company recognized
$40,880 of amortization expense for the year ended September 30,
2009.  In conjunction with the issuance of Series B Convertible
Preferred Stock the Company expensed the remaining balance during the quarter
ended March 31, 2010.


18


Item
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.




The following Management’s Discussion and
Analysis of Financial Condition and Results of Operations (“MD&A”) is
intended to help the reader better understand 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 those reports. Unless otherwise
indicated, the terms “ActiveCare,” the “Company,” “we,” our” refer to
ActiveCare, Inc., a Delaware corporation, formerly Volu-Sol Reagents
Corporation, a Utah corporation.




Overview




Historically,
our core business has been the manufacture, distribution and sale of medical
diagnostic stains and solutions.  In February 2009, we were spun off
from our former parent, SecureAlert, Inc., formerly known as RemoteMDx, Inc.
(“SecureAlert”).  In connection with the spin-off, we acquired from
SecureAlert the exclusive license rights to certain technology, including patent
rights utilizing GPS and cellular communication and monitoring technologies for
use in the healthcare and personal security markets.  We subsequently
acquired by license the exclusive rights to certain patents owned by a
third-party for technologies that are complementary to the patented technology
we acquired from SecureAlert.  We are currently in default under this
license agreement and we are negotiating 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.




Recent
Developments




We have
financed operations exclusively through the sale of equity securities 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
our results of operations and 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.  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, SecureAlert. 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 May
2009, we entered into a patent agreement with a third-party (the “Patent
Agreement”).  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 to cure this
default.


19




In
September 2009, our board of directors designated 1,000,000 shares of preferred
stock as Series A Convertible 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.




In March
2010, our board of directors designated 1,000,000 shares of preferred stock as
Series B Convertible Preferred Stock.  We sold an aggregate of 342,857
shares of these securities to two investment funds, Gemini Master Fund, Ltd. and
Harborview Master Fund, L.P. for gross proceeds of $600,000.  In
conjunction with this private placement, the company issued 342,857 series C
warrants at an exercise price of $3 per share.  The price and number
of series B warrants has changed from $2.25 to $1.75 and from 571,428 to
734,694.   The warrants are immediately exercisable for the
purchase of shares of the Company’s common stock through March 24,
2015.




Under the
trademark ActiveOneTM 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.




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.




We have
conducted research and development (“R&D”) 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 Personal
Emergency Response System (“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 Quectel Wireless
Solutions, Ltd. (“Quectel”).Quectel, based in Shanghai, China, is a supplier of
high quality wireless modules and trackers that use GSM,GPRS and GPS
technology.  Its products are used worldwide for automotive, smart
metering, control and monitoring, tracking and tracing, payment, security, and
many other Machine-to-Machine products.  In December 2009, we entered
into an
agreement with Quectel.  Under this agreement, Quectel manufactures
the Company’s ActiveONE product, performs the research and development of the
Company’s ActiveOne+ product, as well as manufacturing.




20




CareCenter




In concert with the development of our
products, we also created the CareCenter.  In contrast with a typical call
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 CareSpecialist’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.




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:




·
            It
      requires assumptions to be made that were uncertain at the time the
      estimate was made, and




·
            Changes
      in the estimate or different estimates that could have been selected could
      have a material impact on our consolidated results of operations or
      financial condition.




Use
of Estimates in the Preparation of Financial Statements




The
preparation of financial statements requires management to make significant
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses during the reporting period.  By their nature,
these estimates and judgments are subject to an inherent degree of
uncertainty.  On an on-going basis, we evaluate our estimates,
including those related to bad debts, inventories, intangible assets, warranty
obligations, product liability, revenue recognition, and income
taxes.  We base our estimates on historical experience and other facts
and circumstances that are believed to be reasonable and the results provide a
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources.  Actual results may
differ from these estimates under different assumptions or conditions, and these
differences may be material.




With
respect to concentration of credit risk, allowances for doubtful accounts
receivable, inventories, impairment of assets, revenue recognition, and research
and development, those material accounting policies that we believe are critical
to an understanding of our financial results and condition are as
follows:




Concentration
of Credit Risk




We have
cash in bank accounts that, at times, may exceed federally insured
limits.  We have not experienced any losses in such
accounts.




In the
normal course of business, we provide credit terms to our customers.
Accordingly, we perform ongoing credit evaluations of customers' financial
condition and require no collateral from customers.  We maintain an
allowance for uncollectable accounts receivable based upon the expected
collectability of all accounts receivable.




Accounts
Receivable




Accounts
receivable are carried at original invoice amount less an estimate made for
doubtful receivables based on a review of all outstanding amounts on a monthly
basis.  Specific reserves are estimated by management based on certain
assumptions
and variables, including the customer’s financial condition, age of the
customer’s receivables and changes in payment histories.  Trade
receivables are written off when deemed uncollectible.  Recoveries of
trade receivables previously written off are recorded when
received.  A trade receivable is considered to be past due if any
portion of the receivable balance has not been received by the contractual pay
date.  Interest is not charged on trade receivables that are past
due.




21




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 three sources: (i) sales from care
services; (ii) diagnostic equipment product sales; and (iii) sales of medical
diagnostic stains.




Care
Services




Care
services include lease contracts in which we provide care services and leases
devices to distributors or end users and we retain ownership of the leased
device.




We
typically lease devices on a month-to-month contract with customers (members)
that use our care services.  However, these contracts may be cancelled by
either party at anytime with 30 days notice.  Under our standard contract,
the leased device becomes billable on the date the customer (member) orders the
product, and remains billable until the device is returned to us.  We
recognize revenue on leased devices at the end of each month that care services
have been provided.  In those circumstances in which we receive payment in
advance, we record these payments as deferred revenue.




The
Company recognizes Care services revenue when persuasive evidence of an
arrangement with the customer exists, title passes to the customer, prices are
fixed or determinable and collection is reasonably assured.


Shipping
and handling fees are included as part of net sales. The related freight costs
and supplies directly associated with shipping products to customers are
included as a component of cost of goods sold. Neither the sale of diagnostic
equipment nor the sale of medical diagnostic stains contains multiple
deliverables.





Customers
order either of the Company’s product lines by phone or website.  The
Company does not enter into long-term contracts.  All of the Company’s
sales are made with net 30-day payment terms.





In
connection with generally accepted accounting principles to qualify for the
recognition of revenue at the time of sale, the Company notes the
following:





·
            The
      Company’s price to the buyer is fixed or determinable at the date of
      sale.


·
            The
      buyer has paid the Company, or the buyer is obligated to pay the Company
      within 30 days, and the obligation is not contingent on resale of the
      product.


·
            The
      buyer's obligation to the Company would not be changed in the event of
      theft or physical destruction or damage of the
  product.


·
            The
      buyer acquiring the product for resale has economic substance apart from
      that provided by the Company.


·
              The
      Company does not have significant obligations for future performance to
      directly bring about resale of the product by the
  buyer.
 ·
              The
      amount of future returns can be reasonably estimated and they are
      negligible.




22




Accounting
standards state that, “an enterprise shall report revenues from external
customers for each product and service or each group of similar products and
services unless it is impractical to do so.”  The vast majority of the
Company’s sales are Care service revenue.  Because Care service
equipment sales are not material to the financial statements, the Company
discloses sales as one line item.





The
Company’s revenue recognition policy for sales to distributors is the same as
the policy for sales to end-users.





A
customer qualifies as a distributor by completing a distributor application and
proving its sales tax status.  Upon qualifying as a distributor, the
distributor receives a 20% 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.




Diagnostic Equipment Product
Sales




Although not the focus of our new
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 medical diagnostic stains
revenue when persuasive evidence of an arrangement with the customer exists,
title passes to the customer, prices are fixed or determinable, and collection
is reasonably assured.




Shipping
and handling fees are included as part of net sales. The related freight costs
and supplies directly associated with shipping products to customers are
included as a component of cost of goods sold.




We have no sales that contain multiple
deliverables.  All of our revenues consist of sales of products,
either (1) diagnostic equipment or (2) medical diagnostic stains.  The
diagnostic equipment does not require installation or
customization.




Historically
and consistently all of our sales are made with net 30-day payment
terms.  We have not changed our payment terms in the recent past (at
least for five years).  We have no plans to change our payment terms
in the future.




Our
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 Accounting standards
criteria to qualify for the recognition of revenue at the time of sale, we note
the following:




·
            The
      price to the buyer is fixed or determinable at the date of
      sale.·
            The
      buyer has paid us, or the buyer is obligated to pay us within 30 days, and
      the obligation is not contingent on resale of the
  product.





·
            The
      buyer's obligation to us 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 us.·
            We
      do not have significant obligations for future performance to directly
      bring about resale of the product by the buyer.·
            The
      amount of future returns can be reasonably estimated and they are
      negligible.




23




We have
70 types of products based on the number of individual stock-keeping units
(“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.  Accounting
standards  state that, “an enterprise shall report revenues from
external customers for each product and service or each group of similar
products and services unless it is impractical to do so.”  The vast
majority of our sales are of medical diagnostic stains, with a minimal portion
of sales being diagnostic equipment. Because diagnostic equipment sales are not
material to the financial statements, we disclose sales as one line
item.




Our
revenue recognition policy for sales to distributors is the same as the policy
for sales to end-users.




A
customer qualifies as a distributor by completing a distributor application and
proving its sales tax status.  Upon qualifying as a distributor, a
customer receives a 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 sales.  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.




Results
of Operations




Three
Months Ended March 31, 2010 and 2009




Net
Sales




Our
fiscal year ends on September 30.  During the fiscal quarter ended
March 31, 2010, we had net sales of $125,506 compared to $126,760 in the fiscal
quarter ended March 31, 2009.  Stains and reagent revenue accounted
for $113,448 and our Care Services, including revenue for the ActiveOneTM service
accounted for $12,058 of the total revenue.




Cost
of Revenue




Cost of revenue totaled $151,038 in the
fiscal quarter ended March 31, 2010, compared to $100,841 for the quarter ended
March 31, 2009.  Of the total cost of revenues, stains and reagents
accounted for $89,572 and Care Services accounted for $61,466.  The
increase between the comparable quarters is due to the operation of our 24 hour
a day, 7 days a week and 52 weeks a year CareCenter.




Research
and Development Expenses




During
the quarter ended March 31, 2010, we incurred research and development expenses
of $32,639 compared to $20,468 in research and development expense incurred
during the fiscal quarter ended March 31, 2009. The research and development
expenses in the quarter ended March 31, 2010 has increased due to expenses
related to the development of the ActiveOne+TM product.




24




Selling,
General and Administrative Expenses




During
the three months ended March 31, 2010, selling, general and administrative
expenses totaled $1,610,751, compared to the same period one year ago, which
totaled $156,806.  The increase in 2010 is the result of the
following:




·
            Other
      general and administration expenses including salaries of
      $122,000


·
            Advertising
      expense associated with the ActiveOne product of
  $93,205


·
            Non
      cash expense associated with the issuance of stock and warrants of
      $413,170


·
            Non
      cash amortization of patents and other intangible assets of
      $580,910


·
            Consulting
      expenses of $207,972


·
            Travel
      expenses of $36,688






Other
Income and Expense




During
the quarter ended March 31, 2010, interest income was $0, compared to $4,341 in
the quarter ended March 31, 2009.





Net Loss




We had a
net loss for the three months ended March 31, 2010 totaling $1,705,956, compared
to a net loss of $112,982 for the same period one year ago.  This
increase in net loss is due to the items described above.




Six
Months Ended March 31, 2010 and 2009




Net
Sales




During
the six months ended March 31, 2010, we had net sales of $238,360 compared to
$231,067 in the six months ended March 31, 2009.  Stains and reagent
revenue accounted for $221,869 and our Care Services, including revenue for the
ActiveOneTM service accounted for $16,491 of the total revenue.




Cost
of Revenue




Cost of
goods sold totaled $308,697 in the first six months ended March 31, 2010,
compared to $203,913 for the six months ended March 31, 2009.  Of the
total cost of revenues, stains and reagents accounted for $186,610 and Care
Services accounted for $122,087.  The increase between the comparable
quarters is due to the operation of our 24 hour a day, 7 days a week and 52
weeks a year CareCenter.




Research
and Development Expenses




During
the six months ended March 31, 2010, we incurred research and development
expenses of $196,969 compared to $126,406 during the six months ended March 31,
2009. The research and development expenses in the six months ended March 31,
2010 are for the development of the ActiveOne+ TM.




Selling,
General and Administrative Expenses




During
the six months ended March 31, 2010, selling, general and administrative
expenses totaled $2,641,083 compared to the same period one year ago, which
totaled $405,810.  The increase in 2010 is the result of the
following:




·
            Other general and administration expenses including salaries of
      $206,602


·
            Advertising
      expense associated with the ActiveOne product of
  $169,780


·
            Non
      cash expense associated with the issuance of stock and warrants of
      $826,340


·
            Non
      cash amortization of patents and other intangible assets of
      $712,140


·
            Consulting
      expenses of $278,722


·
            Travel
      expenses of $41,689






25




Other
Income and Expense




During
the six months ended March 31, 2010, interest expense was $697,932, compared to
interest income of $11,964 in the six months ended March 31, 2009.




Net
Loss




We had a
net loss for the six months ended March 31, 2010 totaling $2,968,034, compared
to a net loss of $459,891 for the same period one year ago.  This
increase in net loss is due primarily to the items described above.




Liquidity
and Capital Resources




Six
Months ended March 31, 2010




We have
not historically financed operations entirely from cash flows from operating
activities.  During the year ended September 30, 2009, we supplemented
cash flows with funding from the sale of equity securities.




At March
31, 2010, we had unrestricted cash of $533,721, compared to cash of $830,931 at
September 30, 2009. At September 30, 2009, we had a working capital deficit of
$131,471, compared to a working capital deficit of $2,337,312 at March 31,
2010.




During
the six months ended March 31, 2010, operating activities used cash of
$888,032.




Investing
activities for the six months ended March 31, 2010 used cash of
$109,178.




Financing
activities for the six months ended March 31, 2010 provided $700,000 of net
cash.




For the
six months ended March 31, 2010, we had a net loss of $2,968,034 and negative
cash flows from operating activities totaling $888,032, compared to a net loss
of $459,891 and negative cash flows from operating activities of $374,112 for
the six months ended March 31, 2009.  As of September 30, 2009, our
working capital deficit was $131,471 compared to a working capital deficit of
$2,337,312 at March 31, 2010.  As of March 31, 2010, we had an
accumulated deficit of $8,366,801 compared to $5,057,151 at September 30, 2009,
and stockholders’ deficit at March 31, 2010, was $1,889,413, compared to
stockholder’s equity of $986,437 at September 30, 2009.




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.  We
adopted this guidance on October 1, 2009.  This guidance did not 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 adopted this guidance on October 1,
2009.  This guidance did not have a material impact 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 adopted this
guidance on October 1, 2009.  This guidance did not have a material
impact on our financial statements.


26




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. We adopted this guidance on October 1, 2009. The
adoption was considered a change in accounting principle, and the cumulative
effect from the adjustment was applied to the opening balance of accumulated
deficit. See Note 5 of the financial statement for further
discussion.




In June
2009, the FASB issued accounting guidance on the consolidation of variable
interest entities (VIEs). This new guidance revises previous guidance by
eliminating the exemption for qualifying special purpose entities, by
establishing a new approach for determining who should consolidate a
variable-interest entity and by changing when it is necessary to reassess who
should consolidate a variable-interest entity.  This guidance will be
effective at the beginning of the first fiscal year beginning after November 15,
2009. Early application is not permitted. We adopted this guidance during the
quarter ended December 31, 2009.  This guidance did not have a
material impact on the financial statements.




In
September 2009, the FASB issued guidance that changes the existing
multiple-element revenue arrangements guidance currently included under its
Revenue Arrangements with Multiple Deliverables codification. The revised
guidance primarily provides two significant changes: 1) eliminates the need for
objective and reliable evidence of the fair value for the undelivered element in
order for a delivered item to be treated as a separate unit of accounting, and
2) eliminates the residual method to allocate the arrangement consideration. In
addition, the guidance also expands the disclosure requirements for revenue
recognition. This will be effective for the first annual reporting period
beginning on or after June 15, 2010, with early adoption permitted provided that
the revised guidance is retroactively applied to the beginning of the year of
adoption. We are currently assessing the future impact of this new accounting
update to its financial statements.




In
October 2009, the FASB issued guidance on share-lending arrangements entered
into on an entity's own shares in contemplation of a convertible debt offering
or other financing.  This new guidance is effective for fiscal years
beginning on or after December 15, 2009, and fiscal years within those fiscal
years for arrangements outstanding as of the beginning of those years.
Retrospective application is required for such arrangements and early
application is not permitted.  The adoption of this guidance is not
expected to significantly impact our results of operations and financial
position.




In
January 2010, the FASB issued guidance which requires an entity to disclose the
following:




·
            Separately
      disclose the amounts of significant transfers in and out of Level 1 and
      Level 2 fair value measurements and describe reasons for the
      transfers.




·
              Present separately information about purchases, sales, issuances
      and settlements, on a gross basis, rather than on one net number, in the
      reconciliation for fair value measurements using significant unobservable
      inputs (Level 3).


·
              Provide
      fair value measurement disclosures for each class of assets and
      liabilities.
 
 ·
              Provide
      disclosures about the valuation techniques and inputs used to measure fair
      value for both recurring and nonrecurring fair value measurements for fair
      value measurements that fall in either Level 2 or level
  3.
  This
guidance is effective for interim and annual reporting periods beginning after
December 15, 2009, except for the disclosures about purchases, sales, issuances,
and settlements in the roll forward of activity in Level 3 fair value
measurements.  Those disclosures are effective for fiscal years
beginning after December 15, 2010. We adopted this guidance during the quarter
ended December 31, 2009.  This guidance did not have a material impact
on the financial statements.


27





Going
Concern




The
significant accumulated deficits and negative cash flows of the Company raise
substantial doubt about our 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 our
Care Services, to complete 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, we will be unable to
continue the development of its products and would likely cease
operations.




Item
3.  Quantitative and Qualitative Disclosures about Market
Risk




None.




Item
4.  Controls and Procedures.




Under the supervision and with the
participation of our management, including our Chief Executive Officer and our
Chief Financial Officer, we evaluated the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rules
13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based
upon that evaluation, the Chief Executive Officer and the Chief Financial
Officer concluded that, as of the end of the period covered by this report, our
disclosure controls and procedures were not effective.  We and our
auditors identified a material weakness discussed below in the management’s
report on internal control over financial reporting.




Report
of Management on Internal Control over Financial Reporting




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) under the
Exchange Act. Our internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with U.S. generally accepted accounting principles. Our internal control over
financial reporting includes those policies and procedures that:




(i)
            pertain
      to the maintenance of records that, in reasonable detail, accurately and
      fairly reflect the transactions and dispositions of our
      assets;





(ii)
            provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with U.S. generally
      accepted accounting principles, and that our receipts and expenditures are
      being made only in accordance with authorizations of our management and
      directors; and





(iii)
            provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of assets that could have a
      material effect on the financial
statements.




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions or that the degree of compliance
with the policies or procedures may deteriorate.




Management
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.  A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement to our annual or interim
financial statements will not be prevented or detected.


28


In the course of the management's
assessment, it has identified the following material weakness in internal
control over financial reporting.  Because of our small size, in terms
of the number of employees, we lack segregation of duties and that is a material
weakness.  As we grow, this weakness will be mitigated.
  We are in
the process of improving our internal control over financial reporting in an
effort to eliminate these material weaknesses through improved supervision and
training of our staff, but additional effort is needed to fully remedy these
deficiencies. Our management, audit committee, and directors will continue to
work with our auditors and outside advisors to ensure that our controls and
procedures are adequate and effective.




PART
II – OTHER INFORMATION




Item
1. Legal Proceedings.




We are
not involved in any legal proceedings which management believes will have a
material effect upon the financial condition of the Company, nor are any such
material legal proceedings anticipated.




We are
not aware of any contemplated legal or regulatory proceeding by a governmental
authority in which we may be involved.




Item
2. Unregistered Sales of Equity Securities and Use of Proceeds.




On March
25, 2010, we sold 342,857 shares newly designated Series B Convertible Preferred
Stock (the “Series B Preferred”). The aggregate purchase price of the Series B
Preferred was $600,000 or $1.75 per share. The purchasers of the Series B
Preferred shares were Gemini Master Fund, Ltd. and Harborview Master Fund, LP.
The purchasers also received common stock purchase warrants to purchase 342,857
shares of the registrant’s common stock at a price of $3.00 per share. A copy of
the Stock Purchase Agreement is included with this report as an exhibit under
Item 9.01(d).




The
Series B Preferred is convertible to common stock at a conversion price of $1.75
per share, subject to adjustment under conditions enumerated in the Designation.
The right of conversion is subject to the limitation that at no time may a
holder of shares of the Series B Preferred convert such shares if the number of
shares of common stock to be issued pursuant to such conversion would cause the
Holder to be directly or indirectly the beneficial owner (as determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended, and the rules thereunder) of more than 4.99% of the issued and
outstanding common stock of the registrant. The holder may waive this limitation
under certain circumstances by giving advance written notice to the registrant,
as provided in the Designation.




The offer
and sale of the Series B Preferred were not registered under the Securities Act
of 1933, in reliance upon exemptions from registration available for private
sales of securities under Section 4(2) of the Securities Act and Regulation D
promulgated under the Securities Act. The purchasers of the Series B Preferred
shares are accredited investors.




As part
of the transaction involving the sale of the Series B Preferred, the registrant
also amended its agreement for the sale of its previously designated Series A
Preferred. Under the amended agreement with the holders of the Series A
Preferred, the parties agreed to remove the requirement that the registrant file
a registration statement covering the shares of common stock issuable upon
conversion of the Series A Preferred. The parties also agreed to amend the
warrants issued in connection with the sale of the Series A Preferred to conform
with the terms, including the expiration date, of the warrants issued in
connection with the sale of the Series B Preferred. Copies of the form of the
warrants and amended warrants are included as exhibits to this Current
Report.




Proceeds
from the sale of the Series B Preferred will be used by the registrant for
general administrative and operating expenses.




Item
3.  Defaults Upon Senior Securities.




None.




29




Item
6. Exhibits.





Exhibit
      Number                                                                                                    
      Description(3)(i)
            Articles
      of Incorporation of Registrant (previously filed as an exhibit to the
      Company’s Registration Statement on Form S-1 and incorporated herein by
      reference).(3)(i)
            Articles
      of Amendment to Articles of Incorporation of Registrant (previously filed
      as an exhibit to the Company’s Registration Statement on Form S-1 and
      incorporated herein by reference).(3)(i)
            First
      Amended and Restated Certificate of Designation of Rights and Preferences
      of the Series A Convertible Preferred Stock of ActiveCare, Inc., filed
      March 25, 2010.(3)(ii)
            Bylaws
      of Registrant (previously filed as an exhibit to the Company’s
      Registration Statement on Form S-1 and incorporated herein by
      reference).(3)(ii)
            Certificate
      of Designation of Rights and Preferences of the Series B Convertible
      Preferred Stock of ActiveCare, Inc. filed March 25,
  2010.(3)(iii)
            Designation
      of Rights and Preferences of Series A Convertible Preferred Stock,
      September 10, 2009 (previously filed as exhibit to Current Report on Form
      8-K, filed September 11, 2009, incorporated by
  reference).(3)(iv)
            Articles
      of Amendment to Articles of Incorporation changing name to ActiveCare,
      Inc. (incorporated by reference from the Company’s 10-K for the year ended
      September 30, 2009) from the Company’s 10-K for the year ended September
      30, 2009)(3)(v)
            Certificate
      of Incorporation in Delaware, July 15, 2009, (incorporated by reference to
      exhibit filed with the Company’s 10-K for the year ended September 30,
      2009)(3)(vi)
            By
      Laws of Company reflecting name change (incorporated by reference to
      exhibit filed with the Company’s annual report on Form 10-K for the year
      ended September 30, 2009).(4)
            Specimen
      of common stock certificate (previously filed as an exhibit to the
      Company’s Registration Statement on Form S-1 and incorporated herein by
      reference).(4)(i)
            Amended
      and Restated Class A Warrant to Purchase Common Stock of ActiveCare,
      Inc.(4)(ii)
            Class
      B Warrant to Purchase Common Stock of ActiveCare, Inc.(4)(iii)
            Class
      C Warrant to Purchase Common Stock of ActiveCare, Inc.(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 and incorporated herein by
    reference).(10)(i)
            Series
      B Convertible Preferred Stock Purchase Agreement dated March 25,
      2010(10)(ii)
            Loan
      Agreement between the Company and SecureAlert (previously filed as in
      exhibit to the Company’s Registration Statement on Form S-1 and
      incorporated herein by reference).(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 and incorporated herein by
      reference).(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 and incorporated
      herein by reference).




30





(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 and incorporated herein by
      reference).(10)(vi)
            License
      Agreement between the Company and SecureAlert (incorporated by reference
      to exhibit filed with 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
      (incorporated by reference to exhibit filed with the Company’s report on
      Form 10-Q for the period ended June 30, 3009).(10)(viii)
            License
      Agreement between the Company and euromicron (incorporated by reference to
      exhibit filed with the Company’s report on Form 10-Q for the period ended
      June 30, 2009).(10)(ix)
            Statement
      of Work between Company and Quectel Wireless Solutions, Ltd. (incorporated
      by reference to exhibit to Company’s report on Form 10-K for the year
      ended September 30, 2009).(11)
            Computation
      of Statement of Earnings (included in financial statements filed
      herewith)(31)(i)
            Rule
      13a–14(a)/15d–14(a) Certifications(32)
            Section
      1350 Certifications(99)(i)
            Press
      Release dated March 29, 2010




31





SIGNATURES





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





ActiveCare,
      Inc./s/  James
      DaltonJames
      Dalton
              Chairman
      of the Board of Directors
              and
      Chief Executive Officer
              (Principal
      Executive Officer)





Date:
      May 17, 2010





/s/  Michael
      G. ActonMichael
      G. Acton
              Chief
      Financial Officer
              (PrincipalFinancial
      and Accounting Officer)





Date:
      May 17, 2010









32