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, 2011


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

(Address of principal executive offices)
84120

(Zip Code)





(801) 974-9474


(Registrant's telephone number, including area code)





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 23, 2011, the registrant had 28,065,663 shares of common stock outstanding.


1


ActiveCare, Inc.





Quarterly Report on Form 10-Q





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
16Item 3. Quantitative and Qualitative Disclosures About Market Risk
25Item 4.  Controls and Procedures
25PART II – OTHER INFORMATION
25Item 1. Legal Proceedings
25Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
26Item 3. Defaults Upon Senior Securities
26Item 6. Exhibits
26SIGNATURES
27


2


PART I – FINANCIAL INFORMATION





Item 1.  Financial Statements







ActiveCare, Inc.


Condensed Consolidated Balance Sheets (Unaudited)




March 31, 2011


September 30, 2010AssetsCurrent assets:Cash

$
127,186


$
1,713,923Accounts receivable, net of allowance for doubtful accounts of$7,222 and $3,000, respectively


113,903



106,142Inventories, net of reserve and inventory valuation of $4,075 and$4,326, respectively


51,245



41,516Prepaid expenses and other assets


114,922



243,882Total current assets


407,256



2,105,463Property and equipment, net of accumulated depreciation of$450,928 and $427,827, respectively


260,740



88,455Deposits


15,894



128,883Domain Name, net of amortization of $1,072 and $715 respectively


13,228



13,585Leased Equipment, net of amortization of $50,375 and $21,921,respectively


182,475



96,544License agreement, net of amortization of $64,487 and$47,664,  respectively


235,513



252,336Investment, net of impairment of $50,000 and $0, respectively


-



50,000Total assets

$
1,115,106


$
2,735,266











See accompanying notes to condensed consolidated financial statements


3


ActiveCare, Inc.


Condensed Consolidated Balance Sheets (Unaudited) (cont.)


March 31, 2011


September 30, 2010Liabilities and Stockholders’ EquityCurrent liabilities:Accounts payable

$
585,340


$
639,568Accrued expenses


211,506



236,219Deferred revenue


46,435



25,921Related party notes payable


-



25,000Note payable, net of discount of $0 and $6,164, respectively


-



23,836Accrued payable on license agreement


300,000



300,000Total current liabilities


1,143,281



1,250,544Total liabilities


1,143,281



1,250,544Stockholders’ equityPreferred stock; $.00001 par value, 10,000,000 shares authorized;0 shares issued and outstanding


-



-Common stock, $.00001 par value, 50,000,000 shares authorized;26,300,663 and 25,039,160 shares issued and outstanding,respectively


263



251Additional paid in capital


20,361,121



18,522,033Accumulated deficit


(20,389,559
)


(17,037,562
)Total stockholders’ equity (deficit)


(28,175
)


1,484,722Total liabilities and stockholders’ equity

$
1,115,106


$
2,735,266











See accompanying notes to condensed consolidated financial statements


4


ActiveCare, Inc.


Condensed Consolidated Statements of Operations (Unaudited)


Three months ended


Six months endedMarch 31,


March 31,2011


2010


2011


2010Revenues:Care Services

$
66,673


$
12,058


$
122,527


$
16,491Reagents


102,588



113,448



221,174



221,869Total revenues


169,261



125,506



343,701



238,360Cost of RevenueCare Services


155,760



61,466



294,974



122,087Reagents


81,509



89,572



196,326



186,610Total cost of revenues


237,269



151,038



491,300



308,697Gross deficit


(68,008
)


(25,532
)


(147,599
)


(70,337
)Operating expensesResearch and development


49,604



32,639



228,011



196,969Selling, general and administrative (including $929,129,  $413,170,  $1,611,600, $826,340, respectively, of compensation expense paid in stock or as a result of amortization of stock options/warrants)


1,497,950



1,610,751



2,911,013



2,641,083Loss from operations


(1,615,562
)


(1,668,922
)


(3,286,623
)


(2,908,389
)Other income (expenses):Gain on derivative liability


-



278,565



-



638,629Loss on disposal of equipment


(402
)


-



(4,235
)


-Interest income


184



-



357



-Interest expense


(558
)


(293,666
)


(11,497
)


(651,850
)Other expenses


(50,000
)


(399
)


(50,000
)


(342
)Net loss

$
(1,666,338
)

$
(1,684,422
)

$
(3,351,998
)

$
(2,921,952
)Dividends on preferred stock

$
-


$
(21,534
)

$
-


$
(46,082
)Net loss attributable to common shareholders

$
(1,666,338
)

$
(1,705,956
)

$
(3,351,998
)

$
(2,968,034
)Net loss per common share – basic and diluted

$
(0.06
)

$
(0.14
)

$
(0.13
)

$
(0.24
)Weighted average shares – basic and diluted


25,656,000



12,463,000



25,433,000



12,139,000





See accompanying notes to condensed consolidated financial statements


5


ActiveCare, Inc.


Condensed Consolidated Statements of Cash Flows (Unaudited)


Six Months EndedMarch 31,2011


2010Cash flows from operating activities:Net loss

$
(3,351,998
)

$
(2,968,034
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization


81,839



734,187Amortization of deferred consulting and financing


-



100,050Stock based compensation expense


1,611,600



175,068Warrants issued for services


-



826,340Loss on impairment of investment


50,000



-Amortization of debt discount recorded as interest expense


6,164



638,954Common stock issued for interest


-



45,161Gain on derivative liability


-



(638,629
)Loss on disposal of property & leased equipment


4,235



2,475Changes in operating assets and liabilities:Accounts receivable


(7,761
)


(9,819
)Inventories


(9,729
)


9,924Prepaid expenses and other assets


241,949



52,945Accounts payable


(54,225
)


83,180Accrued expenses


(9,713
)


57,652Deferred revenue


20,514



4,989Net cash used in operating activities


(1,417,125
)


(885,557
)Cash flows from investing activities:Purchase of assets for operations


(202,592
)


(25,853
)Purchase of leased equipment


(124,520
)


(71,500
)Purchase of intangibles


-



(14,300
)Net cash used in investing activities


(327,112
)


(111,653
)Cash flows from financing activities:Proceeds from  related-party note payable


-



100,000Issuance of Series B preferred stock


-



600,000Payment to related-party note payable


(25,000
)


-Payment to  note payable


(30,000
)


-Proceeds from exercise of warrants


212,500



-Net cash provided by financing activities


157,500



700,000Net decrease in cash


(1,586,737
)


(297,210
)Cash, beginning of period


1,713,923



830,931Cash, end of period

$
127,186


$
533,721





See accompanying notes to condensed consolidated financial statements


6


ActiveCare, Inc.


Condensed Consolidated Statements of Cash Flows (Unaudited) contd.





Six Months EndedMarch 31,2011


2010Supplemental Cash Flow Information:Cash paid for income taxes

$
-


$
-Cash paid for interest

$
6,694


$
-Non-Cash Investing and Financing:Issuance of stock for loan origination fees

$
-


$
50,500Exercise of warrants from accrued board fees

$
15,000


$
-








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 condensed 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 (“GAAP”) have been condensed or omitted pursuant to such rules and regulations.  In the opinion of management, the accompanying interim condensed 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, 2011, and results of its operations for the three months and six months ended March 31, 2011 and 2010.  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, 2010.  The results of operations for the three months and six months ended March 31, 2011 may not be indicative of the results for the fiscal year ending September 30, 2011.





Going Concern


The Company incurred a negative gross margin and has negative cash flows from operating activities for the years ended September 30, 2010 and 2009, and for the period ended March 31, 2011.  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 and increase the sales of the Company services and products.  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 GAAP 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 two sources: (i) sales from Care Services; and (ii) sales of medical diagnostic stains from reagents.





Care Services


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





The Company recognizes Care Services revenue when persuasive evidence of an arrangement with the customer exists, title passes to the customer, prices are fixed or determinable and collection is reasonably assured.  Shipping and handling fees are included as part of net sales. The related freight costs and supplies directly associated with shipping products to customers are included as a component of cost of goods sold. Customers order the Company’s product lines by phone or website.  The Company does not enter into long-term contracts.  All of the Company’s Care Services sales are made with net 30-day payment terms.


8





In connection with GAAP, to qualify for the recognition of revenue at the time of sale, the Company notes the following:





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


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


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


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


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


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





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





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





A customer qualifies as a distributor by completing a distributor application and proving its sales tax status.  The Company’s distributors are not required to maintain specified amounts of product on hand, and distributors are not required to make minimum purchases to maintain distributor status.  Distributors have no stock rotation rights or additional rights of return.  Revenues from products sold with long-term service contracts are recognized ratably over the expected life of the contract.  Sales to distributors are recorded net of discounts.





Sales returns have been negligible, and any and all discounts are known at the time of sale.  Sales are recorded net of sales returns and sales discounts.  There are no significant judgments or estimates associated with the recording of revenues.





The majority of our revenue transactions do not have multiple elements.  On occasion, we have revenue transactions that have multiple elements (such as device sales to distributors).  For revenue arrangements that have multiple elements, we consider whether: (i) the deliverables have value on a standalone basis to the distributors and (ii) if the distributors have a general right of return.  Based on these criteria, the Company has determined that the elements do not have standalone value to distributors.  The Company defers and amortizes the selling price of the element over a twenty-four month period, which is the expected life of the contracts.





Reagents


The Company recognizes medical diagnostic stains (“Reagents”) revenue when persuasive evidence of an arrangement with the customer exists, title passes to the customer, prices are fixed or determinable and collection is reasonably assured.





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





Customers order the Company’s diagnostic stain product lines by purchase order.  The Company does not enter into long-term contracts.  Its medical diagnostic stain sales were $102,588 the quarter ended March 31, 2011.  All of the Company’s Reagents sales are made with net 30-day payment terms.




9


In connection with GAAP, 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 eight months. Customers must obtain prior authorization for a product return.


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





The Company has 70 types of products based on the number of individual stock-keeping units (“SKUs”) in its inventory.  Most of these 70 SKUs are for medical diagnostic stain inventory.  For example, certain medical diagnostic stains are packaged in different sizes, and each packaged size (i.e. 16 oz., 32 oz., and 48 oz.) has a unique SKU in inventory.  Accounting standards state that, “an enterprise shall report revenues from external customers for each product and service or each group of similar products and services unless it is impractical to do so.”  The vast majority of the Company’s stains sales are of medical diagnostic stains, with a minimal portion of sales being diagnostic equipment.





Although not the focus of the Company’s new business model, the Company also sells diagnostic devices in certain situations.  The Company recognizes device sales revenue when persuasive evidence of an arrangement with the customer exists, title passes to the customer and the customer cannot return the devices, prices are fixed or determinable and collection is reasonably assured.  Because diagnostic equipment sales are not material to the financial statements, the Company discloses the sales as one line item for Reagents in the statement of operation.





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.  As of March 31, 2011 and 2010, there were 12,379,000 and 15,148,979 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.


10


4.
Recent Accounting Pronouncements





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 was effective at the beginning of the first fiscal year beginning after November 15, 2009.  The Company adopted this guidance on October 1, 2010.  The application of this guidance did not have a material impact on the Company’s financial statements.





In September 2009, the FASB issued guidance that changes the existing multiple-element revenue arrangements guidance currently included under its Revenue Arrangements with Multiple Deliverables codification. The revised guidance primarily provides two significant changes: 1) eliminates the need for objective and reliable evidence of the fair value for the undelivered element in order for a delivered item to be treated as a separate unit of accounting, and 2) eliminates the residual method to allocate the arrangement consideration. In addition, the guidance also expands the disclosure requirements for revenue recognition. This was effective for the first annual reporting period beginning on or after June 15, 2010, with early adoption permitted provided that the revised guidance is retroactively applied to the beginning of the year of adoption.  The Company adopted this guidance on October 1, 2010.  The application of this guidance did not have a material impact on the Company’s 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 interim periods 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 Company adopted this guidance on October 1, 2010.  The application of this guidance did not have a material impact on the Company’s financial statements.





5.
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, 2011 and September 30, 2010, were as follows:





March 31


September 30Raw materials

$
41,997


$
35,127Work in process


6,288



3,086Finished goods


7,035



7,629Reserve for inventory obsolescence


-



(251
)Inventory Valuation


(4,075
)


(4,075
)Total inventory

$
51,245


$
41,516







Provisions, when required, are made to reduce excess and obsolete inventories to their estimated net realizable values.  Due to competitive pressures and technological innovation, it is possible that estimates of the net realizable value could change in the near term.





6.
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.





11


Property and equipment consisted of the following as of March 31, 2011 and September 30, 2010:




March 31


September 30Equipment

$
228,040


$
195,499Software


28,029



20,032Leasehold improvements


402,016



274,437Furniture and fixtures


53,583



26,314711,668



516,282Accumulated depreciation


(450,928
)


(427,827
)Property and equipment, net of accumulated depreciation

$
260,740


$
88,455





Depreciation expense for the six months ended March 31, 2011, and 2010, was $25,318, and $10,719, respectively.





7.
Leased Equipment





Leased equipment at March 31, 2011 and September 30, 2010, is as follows:





March 31


September 30Leased equipment

$
232,850


$
118,465Less accumulated depreciation


(50,375
)


(21,921
)Leased Equipment, net

$
182,475


$
96,544





The Company began leasing monitoring equipment to customers for Care Services in October 2009.  The leased equipment is depreciated on the straight-line method over the estimated useful lives of the related assets over three years regardless if the equipment is leased to a customer or remaining in stock.  Customers have the right to cancel the service agreements anytime.  The leased equipment depreciation expense is recorded under Cost of Revenue for Care Services.





Leased equipment depreciation expense for the six months ended March 31, 2011, and 2010, was $39,698 and $11,327, respectively.





8.
Investment





On May 21, 2010, the Company entered into a “Co-Development and Exclusive Distribution Agreement” with Vista Therapeutics, Inc. (“Vista”) for the development and co-marketing of NanoBiosensorTM -based biomarker assessment products for use with the Company’s proprietary line of continuous patient monitoring products marketed to the elderly and senior market.  In connection with the Co-Development Agreement, the Company made an investment in Vista’s Series B Preferred Stock in the amount of $50,000.  The Vista Series B Preferred Stock is convertible into Common Stock of Vista under certain conditions and grants to the holder certain rights and preferences, subject to prior rights granted to the holders of Vista’s Series A-1 Preferred Stock and Series A-2 Preferred Stock.  The Company impaired the full value of the investment during the quarter ended March 31, 2011.





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 nine years.  The Company has recognized $16,822 of amortization expense as of the six months ended March 31, 2011 and 2010, respectively.  The Company had not paid the $300,000 as of March 31, 2011, but is in negotiations to cure the default.




10.
Notes Payable
 
 During the six months ended March 31, 2011, the Company owed $25,000 to one of its officers.  The note had an annual interest rate of 12% and was due on demand.  The Company repaid the loan together with $1,915 of interest during the quarter ended December 31, 2010.  During the same period, the Company also owed $30,000 to an unrelated party.  The note had an annual interest rate of 12% and was due on December 31, 2010.  The Company repaid the loan together with $1,659 of interest during the quarter ended December 31, 2010.


12





11.
Common Stock





During the six months ended March 31, 2011, the Company issued 850,000 shares of common stock for warrants exercised for proceeds of $212,500 and 12,000 shares of common stock for warrants exercised for accrued board member fees of $15,000.  During the same period, the Company also issued 399,500 shares of common stock for marketing services provided with value of $385,950.





In March 2010, the Company issued 2,000,000 shares of common stock with a fair value on the date of grant of $2,020,000 for a 15-month consulting services agreement.  The Company has been recognizing the consulting expense over a 15-month period starting March 2010.  For the six month ended March 31, 2011, the Company recognized $808,000 of consulting expense related to the issuance of these shares.





12.
Warrants





During September 2010, the Company issued warrants for the purchase of 500,000 shares of common stock under a 12-month consulting services agreement.  The warrants vested immediately and are exercisable for the purchase of shares of the Company’s common stock at $1.00 per share through September 30, 2015.  The fair value of the warrants issued at the date of grant was $507,538, and was measured using the Black-Scholes valuation model using the following assumptions: exercise price of the warrants at $1.00; risk free interest rate of 0.64%; expected life of 2.5 years; expected dividend of zero; a volatility factor of 129%; and market price on date of grant of $1.37.  Expected volatilities are based on historical volatility of a peer company’s common stock, among other factors. The Company uses the simplified method within the valuation model due to the Company’s short trading history.  The risk-free rate for periods within the contractual life of the warrants is based on the U.S. Treasury yield curve in effect at the time of grant.  The Company has been recognizing the related consulting compensation expense over a 12-month period starting September 2010.  During the three and six months ended March 31, 2011, the Company recognized $126,884 and $253,769 of consulting expense related to the grant of these warrants.





The following table summarizes information about stock options and warrants outstanding as of March 31, 2011:


Options

Number of Options

and Warrants


Weighted-Average

Exercise PriceOutstanding as of September 30, 2010


12,604,000


0.47Granted


-


-Exercised


(250,000
)

0.25Forfeited


-


-Outstanding as of December 31, 2010


12,354,000


0.47Granted


-


-Exercised


(612,000
)

0.27Forfeited


-


-Outstanding as of March 31, 2011


11,742,000


0.48





As of March 31, 2011, the total aggregate intrinsic value of the outstanding warrants is $3,151,000, and the weighted average remaining term of the warrants is 3.34 years.





13.
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 Care Services segment is engaged in the business of developing, distributing and marketing mobile health monitoring and concierge services to distributors and customers.


13




The following table reflects certain financial information relating to each reportable segment for the three-month and six-month periods ended March 31, 2011 and 2010:




Care Services


Stains and Reagents


TotalThree Months Ended March 31, 2011Sales to external customers

$
66,673


$
102,588


$
169,261Segment loss

$
(1,640,990
)

$
(25,348
)

$
(1,666,338
)Segment assets

$
907,393


$
207,713


$
1,115,106Depreciation and amortization

$
46,082


$
3,489


$
49,571Three Months Ended March 31, 2010Sales to external customers

$
12,058


$
113,448


$
125,506Segment loss

$
(1,688,881
)

$
(17,075
)

$
(1,705,956
)Segment assets

$
918,691


$
179,744


$
1,098,435Depreciation and amortization

$
386,538


$
205,534


$
592,072Six Months Ended March 31, 2011Sales to external customers

$
122,527


$
221,174


$
343,701Segment loss

$
(3,282,178
)

$
(69,820
)

$
(3,351,998
)Segment assets

$
907,393


$
207,713


$
1,115,106Depreciation and amortization

$
74,684


$
7,155


$
81,839Six Months Ended March 31, 2010Sales to external customers

$
16,491


$
221,869


$
238,360Segment loss

$
(2,501,432
)

$
(466,602
)

$
(2,968,034
)Segment assets

$
918,691


$
179,744


$
1,098,435Depreciation and amortization

$
479,350


$
254,837


$
734,187





14.
Commitments and Contingencies




The Company leases a CareCenter facility and an office facility with lease contracts expiring in February 2014, and November 2015, respectively.  The Company is also party to two equipment lease contracts expiring in June 2012 and August 2013.  Future minimum rental payments under the non-cancelable operating lease as of March 31, 2011, are approximately as follows:





Lease ObligationsYear Ending September 30:2011


74,3932012


144,0532013


142,1042014


93,1062015


66,2162016


11,036Total

$
530,908





14


Rent expense related to the CareCenter and office facility leases was approximately $37,100 and $20,100 including base real property taxes for the quarters ended March 31, 2011, and 2010, respectively.  For the six months ended March 31, 2011, and 2010, the expense was $58,200 and $51,225, respectively.





15.
Subsequent Event





Subsequent to March 31, 2011, the Company issued 1,540,000 shares of common stock for cash proceeds of $385,000 for warrants exercise.  The Company also received $225,000 of short term loans from an unrelated party.  The loans were issued with a 12% interest rate and with loan origination fees paid by the issuance of 225,000 shares of common stock.








15




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 our operations and our present business environment.  This MD&A is provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements for the fiscal years ended September 30, 2010, and 2009, and the accompanying notes thereto contained in our Annual Report on Form 10-K. Unless otherwise indicated, the terms “ActiveCare,” the “Company,” “we,” and “our” refer to ActiveCare, Inc., a Delaware 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.  In May 2009, we obtained worldwide and exclusive rights to additional patents and patent applications, including the Panic Button Phone, Emergency Phone with Single Button Activation, Emergency Phone for Automatically Summoning Multiple Emergency Response Services, and Emergency Phone with Alternate Number Calling Capability.Our business plan is to develop and market products for monitoring the health of and providing assistance to mobile and homebound seniors and the chronically ill, including those who may require a personal assistant to check on them during the day to ensure their safety and well being.




Recent Developments




We have financed operations almost exclusively through the sale of equity securities and borrowing under short-term debt instruments.  Accordingly, if our revenues continue to be insufficient to meet our needs, we will attempt to secure additional financing through traditional bank financing or the sale of debt or equity securities.  However, because of the development stage nature of the 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 to raise funds through a debt or equity offering. If we only have nominal funds with which to conduct our business activities, this will negatively impact our results of operations and financial condition.




During December 2010, we announced the market launch of a comprehensive in-home wellness solution that complements and integrates with our current CareCenter service and ActiveOneTM mobile health product. The ActiveHomeTM solution integrates several in-home health and wellness monitoring and convenience products and services to ensure members’ well-being, safety and convenience.  A public open house introducing the ActiveHomeTM solution was held in January 2011.




Marketing and Market




There are three distinct target segments that will purchase and subscribe to our products and services:




1.
Users – The typical end user is a senior living at home and concerned with his or her ability to remain in the home.2.
Caregivers – Includes family members concerned with an older relative’s ability to remain independent, who actively provides some assistance or desires to do so.3.
Insurers – Medicare and private insurers who are willing to pay for the service in order to reduce future medical costs.




As we begin to market our products and services, it is important to understand the characteristics of each of these segments.




Users Segment




This segment is characterized by seniors still living in their own homes that are typically at least 75 or older, most likely female and semi-independent.  They are most likely beginning to have some difficulty maintaining their independence.  They are well aware of diminished capacities, but weary of addressing the issue.  Their greatest fears are loss of independence and moving out of their home into a nursing home or similar care facility.  These fears are triggered by health problems, memory problems and the inability to drive and/or get around on their own.  Seniors who do require help from others receive assistance with household maintenance, transportation and healthcare.  This group places value in products that simplify life and generate convenience, and that give them peace of mind in confronting their health and emergency needs.




16




Caregivers Segment




Caregivers are typically part of the “sandwich” generation: they are baby boomers who have a living parent as well as children of their own.  They most likely provide support to the aging parent either physically or financially.  The majority of elderly parents requiring care from children are mothers.  Baby Boomers fear that their parents will be mistreated in a nursing home and fear their parents will be depressed.  It is important for these caregivers that their senior parents are allowed to age in place and that the caregivers need not be concerned about financially supporting their parents.  The caregivers would help monitor their parents’ safety and wellbeing.  This segment is concerned about seeing that their parents’ medical needs are being handled appropriately and knowing what may happen in an emergency situation.




Insurers Segment




This segment is concerned primarily with medical costs and how to reduce them while improving care.  Insurers, whether private or government, are concerned about expensive hospital stays that drive up healthcare costs.  These costs are normally driven up by acute events caused by the mismanagement of chronic diseases.  The insurers know that the quicker a medical problem is addressed the less expensive the ultimate outcome.  Insurers will adopt technologies once they have been verified to save them money.




Our marketing program is focused on reaching out to each of these three segments as follows:




Insurers Channel




We have created strategic relationships with various insurance companies such as AmeriLife and Universal Health Care.  The primary business model and motivator for the insurance segment is saving money.  These savings are generated by the reduction in health care costs associated with utilization of skilled nursing facilities.  We have focused our efforts in dealing with insurance companies that are early adopters in this arena.




Healthcare Providers Channel




We have created strategic relationships with healthcare providers.  We coordinate our efforts with hospitals and physicians and assist their patients once they are released from the hospital.  This includes managed care, skilled nursing facilities, hospice, home health and personal care, therapy services, and independent assisted living.  In essence the healthcare agency would like the patient to continue to use it as his or her health provider after the patient is released from the hospital.  The current value proposition we offer to healthcare agencies is that our services and products allow the agencies to keep “ownership” of the patient as we provide all of the interim needs for two to five years while the senior desires to stay in his or her own home.  As patients are released from nursing homes and rehabilitation centers, the agency then recommends the ActiveCare product offerings to them.  In turn, when health problems arise, our CareSpecialist recommends the agency as a possible solution.  In this way the patient stays within the agency’s system.




Direct Marketing Channel




In addition to the marketing initiatives described above, we have also focused on direct marketing to caregivers.  In a lot of cases, caregivers along with their senior parents pay for the costs associated with institutionalized care.  Therefore, we estimate that not only could they derive significant savings associated with our product offerings, but using our products and services will also allow their senior parents to continue to live in their own homes with greater peace of mind and with less disruption.




One of the most effective ways to make a sale in this industry requires a person to actually experience the ActiveHome System.  Therefore, a pilot direct marketing program will be initiated in the Salt Lake City area to 90,786 seniors.  It is estimated that somewhere between 5,000 and 17,000 of these seniors are in immediate need of the ActiveCare service.  After we have perfected the sales approach in our local Utah market we will begin a roll-out to the national market.  Initially we expect to build our program in the major cities of the western states for ease of management and more certainty of success before moving selectively to the major eastern states.  After success in Salt Lake City, we expect to open a new office every 6 months in the following cities:  Seattle, Washington; San Francisco, California; San Diego, California; Denver, Colorado; and Dallas, Texas.




The marketing program calls for initially acquiring lists of potential clients age 75 and over who own a home, have a credit card and live in affluent areas.  These lists of potential clients will be scrubbed and mined in compliance with national solicitation laws.  We will also generate leads for our marketers using proven sources like box lead programs at local pharmacies, targeted restaurants along with affiliations with home health care providers, senior recreation centers, medical equipment companies and the like.  This list of leads will be continually expanded, shaped and culled as we progress with our plan.




17




The sales program will utilize several different distribution channels simultaneously as follows:




·
In-home program.  Using a highly targeted market approach, we will identify the affluent seniors and their care givers and approach them in their homes with a mobile sales force.  This program will consist of a marketing team acquiring a focused list of senior targets who will be approached for in-home presentations at times convenient for them.  They will have the product with its features and benefits explained to them and will be shown a video of someone walking through our senior accessorized smart home.  The client will be offered a gift for their time of a dinner for two at a local or national restaurant.




·
In-office program.  We have built an actual smart, technology-rich test home inside our office to which we will invite our targeted clientele.  We will invite them to walk through the test home accompanied by a professional sales representative at scheduled times throughout the day.  This in-office program will also allow us to follow up effectively with our in-home clients who need a second tactile experience for the client or the care giver and allow them to physically see the product in action.




·
We will also advertise the ActiveHome System using the traditional marketing and sales media such as newspapers, television, radio and Internet to support the above mentioned sales approaches.  Our targeted market may be the last generation who reads a daily newspaper and watches the news each day to get their information.  This will help us achieve initial credibility with our market.




·
Additionally, we will enact a strong affiliate program by working closely with health care providers, hospitals, senior centers, assisted living facilities and doctors to locate potential clients with specific needs that can be satisfied by our ActiveHome System.




·
Along with the above mentioned programs we will establish parallel programs to lobby U.S. lawmakers to understand how our program benefits individual seniors, caregivers, families, communities, cities, states and importantly our exploding health care budget issue.




Research and Development Program




General Information




GPS technology utilizes highly accurate clocks on 24 satellites orbiting the earth owned and operated by the U.S. Department of Defense.  These satellites are designed to transmit their identity, orbital parameters and the correct time to earthbound GPS receivers at all times.  Supporting the satellites are several radar-ranging stations maintaining exact orbital parameters for each satellite and transmitting that information to the satellites for rebroadcast at frequencies between 1500 and 1600 MHz.




A GPS receiver (or engine) scans the frequency range for GPS satellite transmissions.  If the receiver can detect three satellite transmissions, algorithms within the engine deduce its location, usually in terms of longitude and latitude, on the surface of the earth as well as the correct time.  If the receiver can detect four or more GPS satellite transmissions, it can also deduce its own elevation above sea level.  The effectiveness of GPS technology is limited by obstructions between the device and the satellites and, therefore, service can be interrupted or may not be available at all if the user is located in the lower floors of high-rise buildings or underground.




During the six months ended March 31, 2011, we spent $228,011 on research and development (“R&D”).  R&D expense during the period involved the ActiveOneTM, a one button actuated GPS/Cellular communications device (“Companion Device”) that links to our CareCenter.  This device includes fall detection, Geo Fencing, automatic calls to the CareCenter, text messaging, hands free speakerphone and other features.  Also in development is the ActiveOne+TM (ActiveOnePlus), which will communicate through Bluetooth technology with the Companion Device.  Our goal is to develop a wristwatch-size monitoring device for senior citizens.  The wrist device will be water resistant, include fall detection, speakerphone, vibration alerts, audible alerts, and LED’s for status monitoring.  The watch will be universal for women and men with an adjustable strap.  We have identified and are working with several vendors for services that will further these objectives.




An important part of this R&D program is our relationship with Quectel Wireless Solutions, Ltd. (“Quectel”), to assist in development of the ActiveOneTM and the next generation device, the ActiveOne+TM.




18


Quectel’s focus is on the wireless machine-to-machine (“M2M”) market sector.  Quectel designs and manufactures a variety of wireless modules to fulfill many industrial standards and requirements.  Quectel products have been developed for the wireless M2M sectors such as smart metering, automotive, sales and payment, security, tracking and tracing, remote control and monitoring, and mobile computing.




The core team members of Quectel are the pioneers of the wireless module industry in China.  Quectel’s R&D team is dedicated to quality and reliability, and realizes that these are the key factors to continued success in the wireless M2M business.  The team far exceeds the typical industrial standards and rules, to manage the R&D and manufacturing processes. Quectel products are capable of maintaining reliable performance, even in extreme environments.




CareCenter




In concert with the development of our products, we also created the CareCenter.  In contrast to a typical monitoring center, the CareCenter is equipped with hardware and software that pinpoints the location of the incoming caller by utilizing GPS and/or cellular triangulation technology.  This capability is referred to as telematics.  The operator (or CareSpecialist) will be able to locate the caller’s precise location on a detailed map.  In addition the CareCenter software will identify the caller, provide location services, emergency dispatch, medical history to emergency responders, and concierge services.




We believe the CareCenter is and will be the cornerstone of our business.  The CareCenter services include highly trained CareSpecialists to assist the elderly in managing their daily lives 24 hours per day, seven days per week.  In order for the CareCenter to service our customers, we have developed and continue to develop numerous products designed to assist the elderly maintain a more active and mobile lifestyle.  The first product that we introduced is the ActiveOneTM device.  The ActiveOneTM is a patented mobile personal emergency response ("PERS") device that allows the user to contact our CareCenter at the push of a button.  The ActiveOneTM constantly communicates its location to the CareCenter by utilizing GPS technology.  This allows the CareCenter Specialists to constantly help and assist the elderly customer no matter where they may be.




Our plan is to continue to invest monies into research, development and patents as we broaden the services offered by our CareCenter.  Eventually we intend to add to the functionality of the ActiveOneTM to allow for vital sign monitoring for the chronically ill and additional services to assist both the mobile and homebound seniors, including those who may require a personal assistant to check on them during the day to ensure their safety and well being and know where they are at all times.




ActiveOne+




ActiveOne+ is the second-generation PAL (“Personal AssistanceLink”) handset, which includes one button connection to the CareCenter, GPS locating and fall detection technology all in one unit.  The ActiveOne+ features enhanced fall detection to better detect when a fall occurs as well as enhanced locating technology that combines both GPS and cellular triangulation that allows our CareCenter to locate a member within several meters 24 hours per day, 7 days a week, to better respond to any emergency condition.  In addition the ActiveOne+ has built-in receptors utilizing Bluetooth technologies to accommodate body-worn devices that can communicate vital sign data to the CareCenter.  We are currently seeking FCC certification of the ActiveOne+.




ActiveWatch




The ActiveWatch incorporates all of the core features of the PAL handsets into an easy to wear wrist device.  The ActiveWatch combines GPS, Cellular and fall detection technology that communicates directly to the CareCenter.  The device is also water resistant and can be worn in the shower, providing protection wherever the member may be.  The ActiveWatch also incorporates heart rate sensors that can alert the CareCenter when the heart rate is irregular; it also incorporates Bluetooth technology that accommodates other body-worn devices.




ActiveHomeTM




We have recently launched our comprehensive in-home wellness solution that complements and integrates with our current CareCenter service and ActiveOneTM mobile health products.  The ActiveHomeTM solution integrates several in-home health and wellness monitoring and convenience products and services available from various manufacturers and service providers to ensure members’ well-being, safety and convenience.




The ActiveHomeTM integrates technological solutions including: (1) remote home monitoring to detect changes in members’ activity patterns that might indicate health emergency situations so our CareSpecialists can proactively avert emergencies; (2) an electronic pillbox to ensure prescription compliance; (3) remote in-home actions initiated from our CareCenter, such as locking and unlocking doors and turning off unattended stoves; (4) electronic conveniences, including automatic illumination of house lights; and (5) wireless transmission of health data including weight, blood pressure, and blood glucose so our trained CareSpecialists can act upon potentially life-threatening changes.  In addition to technological solutions, the ActiveHomeTM comprehensive offering includes installation of in-home safety and convenience items including easy access bathtubs and bed and chair support rails.


All ActiveHomeTM components are linked through Bluetooth and wireless connections to an easy to use portal in the home, and the entire home is linked 24/7 to trained CareSpecialists at our ActiveCare CareCenter through the portal and the ActiveOneTM mobile unit.




19




Critical Accounting Policies




The following summary includes accounting policies that we deem to be most critical to our business.  Management considers an accounting estimate to be critical if:




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




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




Use of Estimates in the Preparation of Financial Statements




We have prepared and included with this report condensed consolidated unaudited financial statements in conformity with GAAP.




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 described below.




Concentration of Credit Risk




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




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




Accounts Receivable




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




Inventories




Inventories are recorded at the lower of cost or market, cost being determined on a first-in, first-out ("FIFO") method. 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.




20


Property and Equipment




Property and equipment are stated at cost, less accumulated depreciation and amortization.  Depreciation and amortization are determined using the straight-line method over the estimated useful lives of the assets, typically three to seven years.  Leasehold improvements are amortized over the shorter of the estimated useful lives of the asset or the term of the lease.  Expenditures for maintenance and repairs are expensed while renewals and improvements over $500 are capitalized.  When property and equipment are disposed, any gains or losses are included in the results of operations.




Leased Equipment




Our leased equipment is stated at cost less accumulated depreciation and amortization.  We amortize the cost of leased equipment on the straight line method over thirty six months, which is the estimated useful life of the equipment.  Amortization of leased equipment is recorded as cost of sales.




Revenue Recognition




Our revenue has historically been from two sources: (i) sales from Care Services; (ii) sales of medical diagnostic stains from reagents.




Care Services




“Care Services” include lease contracts in which we provide Care Services and lease devices to distributors or end users and retain ownership of the leased device.  We typically lease devices on a month-to-month contract with customers (members) that use our Care Services.  However, these contracts may be cancelled by either party at anytime with 30 days notice.  Under our standard contract, the leased device becomes billable on the date the member orders the product, and remains billable until the device is returned.  We recognize revenue on leased devices at the end of each month that Care Services have been provided.  In those circumstances in which we receive payment in advance, these payments are recorded as deferred revenue.




Customers order our products by phone or website.  We do not enter into long-term contracts.




In connection with GAAP, to qualify for the recognition of revenue at the time of sale, we note the following:




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




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




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




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




·
We do not have significant obligations for future performance to directly bring about resale of the product by the buyer.




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




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




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




A customer qualifies as a distributor by completing a distributor application and proving its sales tax status.  Upon qualifying as a distributor, a customer receives a discount from retail prices or receives commission per sale according to the contract.  Our distributors are not required to maintain specified amounts of inventory on hand, and distributors are not required to make minimum purchases to maintain distributor status.  Distributors have no stock rotation rights or additional rights of return.  Sales to distributors are recorded net of discounts.




Sales returns have been negligible, and any and all discounts are known at the time of sale.  Sales are recorded net of sales returns and sales discounts.  There are no significant judgments or estimates associated with the recording of revenues.




The majority of our revenue transactions do not have multiple elements.  On occasion, we have revenue transactions that have multiple elements (such as device sales to distributors).  For revenue arrangements that have multiple elements, we consider whether: (i) the deliverables have value on a standalone basis to the distributors and (ii) if the distributors have a general right of return.  Based on these criteria, the Company has determined that the elements do not have standalone value to distributors.  The Company defers and amortizes the selling price of the element over a twenty-four month period, which is the expected life of the contracts.


21





Reagents




We recognize medical diagnostic stains revenue when persuasive evidence of an arrangement with the customer exists, title passes to the customer, prices are fixed or determinable and collection is reasonably assured.  Shipping and handling fees are included as part of net sales.  The related freight costs and supplies directly associated with shipping products to customers are included as a component of cost of goods sold.  Neither the sale of diagnostic equipment nor the sale of medical diagnostic stains contains multiple deliverables.




Customers order the diagnostic stain product lines by purchase order.  We do not enter into long-term contracts.  The medical diagnostic stain sales were $102,588 for the quarter ended March 31, 2011.  All of these sales were made with net 30-day payment terms.




Under GAAP we recognize revenue from our diagnostic stain products at the time of sale by applying the following principles:




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




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




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




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




·
We do not have significant obligations for future performance to directly bring about resale of the product by the buyer.




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




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




Our diagnostic stain products have not been modified significantly for several years.  There is significant history on which to base our estimates of sales returns.  These sales returns have been negligible.




We have approximately 70 types of products based on the number of individual stock-keeping units (“SKUs”) in the inventory.  Most of these 70 SKUs are for medical diagnostic stain inventory.  For example, certain medical diagnostic stains are packaged in different sizes, and each packaged size (i.e. 16 oz., 32 oz., and 48 oz.) has a unique SKU in inventory.  Accounting standards state that, “an enterprise shall report revenues from external customers for each product and service or each group of similar products and services unless it is impractical to do so.”  The vast majority of our sales are of medical diagnostic stains, with a minimal portion of sales being diagnostic equipment.




Although not the focus of our new business model, we also sell diagnostic devices in certain situations.  We recognize device sales revenue when persuasive evidence of an arrangement with the customer exists, title passes to the customer and the customer cannot return the devices, prices are fixed or determinable and collection is reasonably assured.  Because diagnostic equipment sales are not material to the financial statements, we disclose the sales as one line item for reagents in the statement of operation.




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




A customer qualifies as a distributor by completing a distributor application and proving its sales tax status.  Upon qualifying as a distributor, a customer receives a 35% discount from retail prices, and the distributor receives an additional 5% discount when product is purchased in case quantities.  The distributors are not required to maintain specified amounts of product on hand, and distributors are not required to make minimum purchases to maintain distributor status.  Distributors have no stock rotation rights or additional rights of return.  Sales to distributors are recorded net of discounts.




Sales returns have been negligible, and any and all discounts are known at the time of sale.  Sales are recorded net of sales returns and sales discounts.  There are no significant judgments or estimates associated with the recording of revenues.




22


Results of Operations




Three Months Ended March 31, 2011 and 2010




Net Sales




During the fiscal quarter ended March 31, 2011, we had net sales of $169,261 compared to $125,506 in the fiscal quarter ended March 31, 2010.  Stains and reagent revenue accounted for $102,588 and $113,448 in the quarter ended March 31, 2011 and 2010, respectively.  Our Care Services, including revenue for the ActiveOneTM service, accounted for $66,673 and $12,058 of the total revenues in the quarters ended March 31, 2011 and 2010, respectively.  The reason for the revenue increase is the introduction and revenue from services of the ActiveOneTM during 2011.




Cost of Revenue




Cost of revenue totaled $237,269 in the fiscal quarter ended March 31, 2011, compared to $151,038 for the quarter ended March 31, 2010.  During the quarter ended March 31, 2011, of the total cost of revenues, stains and reagents accounted for $81,509 and Care Services accounted for $155,760, compared to the fiscal quarter ended March 31, 2010, the stains and reagents accounted for $89,572 and Care Services accounted for $61,466.  The increase of the cost of revenue for Care Services between the comparable quarters is due to expenses incurred in the expanded services of the CareCenter and the associated cost of ActiveOneTM.




Research and Development Expenses




During the quarter ended March 31, 2011, we incurred research and development expenses of $49,604 compared to $32,639 in research and development expense incurred during the fiscal quarter ended March 31, 2010.  The research and development expenses in the quarter ended March 31, 2011 increased due to expenses related to the development of the ActiveOne+TM and the ActiveHomeTM products.  We expect research and development expenses to increase in future quarters.




Selling, General and Administrative Expenses




During the three months ended March 31, 2011, selling, general and administrative expenses totaled $1,497,950, compared to the same period one year ago, which totaled $1,610,751.  The decrease is due to the accelerated amortization of an intangible asset during the quarter ended March 31, 2010.  For the quarters ended March 31, 2011 and 2010, the non-cash expense associated with the issuance of stock and warrants of $929,129 and $413,170, respectively.  The increase is the result of the marketing and distribution of our products and services.  The primary emphasis was to establish a platform for building brand awareness and introducing our product to the market, which we believe will lead to increased sales and revenues in future periods.




Other Income and Expense




Derivative gain was $0 and $278,565 in the quarter ended March 31, 2011 and 2010, respectively.  We no longer hold convertible debt instruments that are recorded as derivative liability.  We do not anticipate incurring any derivative gain or loss in the current fiscal year.  Interest expense was $558 and $293,666 in the quarter ended March 31, 2011 and 2010, respectively.  The decrease was due to non-cash expense related to the amortization of Series A discount during the quarter ended March 31, 2010.  Other expenses were $50,000 and $399 for the quarter ended March 31, 2011 and 2010, the increase is due to the impairment of investment in Vista Therapeutics during the quarter ended March 31, 2011.




Net Loss




We had a net loss for the three months ended March 31, 2011 totaling $1,666,338, compared to a net loss of $1,705,956 for the same period one year ago.  This decrease in net loss is due to the items described above.




Six Months Ended March 31, 2011 and 2010




Net Sales




During the six months ended March 31, 2011, we had net sales of $343,701 compared to $238,360 in the six months ended March 31, 2010.  Stains and reagent revenue accounted for $221,174 and $221,869 in the six months ended March 31, 2011 and 2010, respectively.  Our Care Services, including revenue for the ActiveOneTM service, accounted for $122,527 and $16,491 of the total revenues in the six months ended March 31, 2011 and 2010, respectively.  The reason for the revenue increase is the introduction and revenue from services of the ActiveOneTM during 2011.




Cost of Revenue




Cost of revenue totaled $491,300 in the six months ended March 31, 2011, compared to $308,697 for the six months ended March 31, 2010.  During the six months ended March 31, 2011, of the total cost of revenues, stains and reagents accounted for $196,326 and Care Services accounted for $294,974, compared to the six months ended March 31, 2010, the stains and reagents accounted for $186,610 and Care Services accounted for $122,087.  The increase of the cost of revenue for Care Services between the comparable periods is due to expenses incurred in the expanded service of the CareCenter and the associated cost of ActiveOneTM.




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Research and Development Expenses




During the six months ended March 31, 2011, we incurred research and development expenses of $228,011 compared to $196,969 in research and development expense incurred during the six months ended March 31, 2010.  The research and development expenses in the six months ended March 31, 2011 increased due to expenses related to the development of the ActiveOne+TM and the ActiveHomeTM products.  We expect research and development expenses to increase in future quarters.




Selling, General and Administrative Expenses




During the six months ended March 31, 2011, selling, general and administrative expenses totaled $2,911,013, compared to the same period one year ago, which totaled $2,641,083.  For the six months ended March 31, 2011 and 2010, the non-cash expense associated with the issuance of stock and warrants of $1,611,600 and $826,340, respectively.  The increase is the result of the marketing and distribution of our products and services.  The primary emphasis was to establish a platform for building brand awareness and introducing our product to the market, which we believe will lead to increased sales and revenues in future periods.




Other Income and Expense




Derivative gain was $0 and $638,629 in the six months ended March 31, 2011 and 2010, respectively.  We no longer hold convertible debt instruments that are recorded as derivative liabilities.  We do not anticipate incurring any derivative gain or loss in the current fiscal year.  Interest expense was $11,497 and $651,850 in the six months ended March 31, 2011 and 2010, respectively.  The decrease was due to non-cash expense related to the amortization of Series A discount during the six months ended March 31, 2010.  Other expense was $50,000 and $342 for the six months ended March 31, 2011 and 2010, the increase is due to the impairment of investment in Vista Therapeutics during the six months ended March 31, 2011.




Net Loss




We had a net loss for the six months ended March 31, 2011 totaling $3,351,998, compared to a net loss of $2,968,034 for the same period one year ago.  This increase in net loss is due to the items described above.




Liquidity and Capital Resources




Our primary sources of liquidity are the proceeds from the sale of our equity securities and from borrowing.  We have not historically financed operations entirely from cash flows from operating activities.  We anticipate that we will continue to seek funding to supplement revenues from the sale of our products and services through the sale of our securities until we begin to have positive cash flows from operating activities under our new business plan.




At March 31, 2011, we had cash of $127,186, compared to cash of $1,713,923 at September 30, 2010.  At September 30, 2010, we had working capital of $854,919, compared to a working capital deficit of $736,025 at March 31, 2011.  The decrease of cash and working capital are due to less cash proceeds from financing activities during the quarter ended March 31, 2011.




During the six months ended March 31, 2011 and 2010, operating activities used cash of $1,417,125 and $885,557, respectively.  The increased cash used in operating activities is due to the marketing and distribution of our products and services.  Investing activities for the six months ended March 31, 2011 and 2010, used cash of $327,112 and $111,653, respectively.  The increased use of cash in investing activities is due to the additions of fixed assets and leased equipment.  Financing activities for the six months ended March 31, 2011 and 2010, provided cash of $157,500 and $700,000, respectively.  The decrease is due to our sales of common stock during the prior period.




For the six months ended March 31, 2011, we had a net loss of $3,351,998 and negative cash flows from operating activities totaling $1,417,125, compared to a net loss of $2,968,034 and negative cash flows from operating activities of $885,557 for the six months ended March 31, 2010.  The increase of net loss and negative cash flow from operating activities are due to the expanded service  of CareCenter and the marketing and distribution of our ActiveCare products and services.




As of March 31, 2011, we had an accumulated deficit of $20,389,559 compared to $17,037,562 at September 30, 2010, and stockholders’ equity at March 31, 2011, was negative $28,175, compared to stockholder’s equity of $1,484,722 at September 30, 2010.  These changes are due to less cash proceeds from financing activities and negative cash flow from operating activities during the quarter ended March 31, 2011.




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Recent Accounting Pronouncements




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 was effective at the beginning of the first fiscal year beginning after November 15, 2009.  We adopted this guidance on October 1, 2010.  The application of this guidance did not have a material impact on our financial statements.




In September 2009, the FASB issued guidance that changes the existing multiple-element revenue arrangements guidance currently included under its Revenue Arrangements with Multiple Deliverables codification.  The revised guidance primarily provides two significant changes: 1) eliminates the need for objective and reliable evidence of the fair value for the undelivered element in order for a delivered item to be treated as a separate unit of accounting, and 2) eliminates the residual method to allocate the arrangement consideration.  In addition, the guidance also expands the disclosure requirements for revenue recognition.  This was effective for the first annual reporting period beginning on or after June 15, 2010, with early adoption permitted provided that the revised guidance is retroactively applied to the beginning of the year of adoption.  We adopted this guidance on October 1, 2010.  The application of this guidance did not have a material impact on our 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 interim periods 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.  We adopted this guidance on October 1, 2010.  The application of this guidance did not have a material impact on our financial statements.




Item 3.  Quantitative and Qualitative Disclosures about Market Risk




Information about the Company’s exposure to market risk was disclosed in its Annual Report on Form 10-K for the year ended September 30, 2010, which was filed with the Securities and Exchange Commission on November 30, 2010. There have been no material quantitative or qualitative changes in market risk exposure since the date of that filing.





Item 4.  Controls and Procedures




Disclosure Controls and Procedures




We maintain disclosure controls and procedures that are designed to ensure that information that is required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods that are specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding any required disclosure.  In designing and evaluating these disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.




As of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a- 15(e) under the Exchange Act).  Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2011.




Changes in Internal Control Over Financial Reporting




There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.




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.




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




Recent Sales of Unregistered Securities




During the six months ended March 31, 2011, we issued 399,500 shares of common stock for services provided by unrelated parties.  During the same period, we also issued 862,000 shares of common stock upon exercise of warrants.  The holders of these warrants were employees and affiliates of the Company.  These shares of common stock issued were not registered under the Securities Act in reliance upon exemptions from registration under Section 4(2) of the Securities Act, promulgated under the Securities Act.




Item 3.   Defaults Upon Senior Securities




None.




Item 6.   Exhibits




Exhibit Number                                                                Description





(10)(x)

Office Lease Agreement between the Company and Reef Parkway, LLC (filed previously as exhibit to report on Form 10-Q, filed February 10, 2011)(10)(xi)

Lease Addendum between the Company and Reef Parkway, LLC  (filed previously as exhibit to report on Form 10-Q, filed February 10, 2011)(10)(xii)

Office Lease Agreement between the Company and Phoenix 2006 Partners, LLC (filed previously as exhibit to report on Form 10-Q, filed February 10, 2011)31.1

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.32

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


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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 23, 2011





/s/  Michael G. ActonMichael G. Acton

Chief Financial Officer (Principal

Financial and Accounting Officer)





Date: May 23, 2011







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