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: June 30, 2013

or

o 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.)
1365 West Business Park Drive Orem, UT (Address of principal executive offices)	84058 (Zip Code)

(877) 219-6050

(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 o 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x     No o

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 o	Accelerated filer o
Non-accelerated filer o  (Do not check if a smaller reporting company)	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 o    No  x

As of August 27, 2013, the registrant had 11,919,343 shares of common stock outstanding.

ActiveCare, Inc.

Quarterly Report on Form 10-Q

Table of Contents

	Page
PART I – FINANCIAL INFORMATION	3
Item 1.  Financial Statements	3
Condensed Consolidated Balance Sheets (unaudited)	3
Condensed Consolidated Statements of Operations (unaudited)	5
Condensed Consolidated Statements of Cash Flows (unaudited)	6
Notes to Condensed Consolidated Financial Statements (unaudited)	8
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations	26
Item 3.  Quantitative and Qualitative Disclosures About Market Risk	32
Item 4.  Controls and Procedures	32
PART II – OTHER INFORMATION	33
Item 1.  Legal Proceedings	33
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 3.  Defaults Upon Senior Securities	34
Item 5.  Other Information	34
Item 6.  Exhibits	35
SIGNATURES	36

2

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

ActiveCare, Inc.
Condensed Consolidated Balance Sheets (unaudited)
	June 30, 2013		September 30, 2012
Assets
Current assets:
Cash	$	122,330	$	529,839
Accounts receivable, net of allowance for doubtful accounts of $30,524 and $20,195, respectively		8,205,185		644,974
Inventories, net of valuation allowances of $0 and $4,984, respectively		1,048,649		290,768
Prepaid expenses and other		20,976		7,277
Total current assets		9,397,140		1,472,858
Customer contracts, net of accumulated amortization of $727,103 and $102,330, respectively		1,642,779		2,267,552
Goodwill		825,894		825,894
Patents, net of accumulated amortization of $323,741 and $228,587, respectively		598,637		693,790
Equipment leased to customers, net of accumulated depreciation of$274,307 and $144,905, respectively		403,034		312,993
Property and equipment, net of accumulated depreciation of $198,675 and $625,401, respectively		234,968		266,078
Deposits and other		105,841		24,634
Domain name, net of accumulated amortization of $2,681 and $2,145, respectively		11,619		12,155
Total assets	$	13,219,912	$	5,875,954

See accompanying notes to condensed consolidated financial statements.

3

ActiveCare, Inc.
Condensed Consolidated Balance Sheets (Unaudited)
(Continued)
	June 30, 2013			September 30, 2012
Liabilities and Stockholders’ Deficit
Current liabilities:
Accounts payable	$	6,859,401		$	1,132,611
Accounts payable, related-party		220,438			150,395
Accrued expenses		1,715,784			2,104,623
Derivatives liability		-			4,015,855
Current portion of notes payable		3,536,216			2,569,221
Current portion of notes payable, related-party		3,676,810			1,563,923
Deferred revenue		50,104			61,608
Dividends payable		80,338			18,322
Total current liabilities		16,139,091			11,616,558
Notes payable, net of current portion		2,523,239			1,804,929
Notes payable, related-party, net of current portion		1,677,211			169,857
Total long-term liabilities		4,200,450			1,974,786
Total liabilities		20,339,541			13,591,344
Stockholders’ deficit:
Preferred stock, $.00001 par value: 10,000,000 shares authorized; 480,000 and 480,000 shares of Series C; and 818,201 and 386,103 shares of Series D, outstanding, respectively		13			9
Common stock, $.00001 par value: 50,000,000 shares authorized; 6,026,996 and 4,636,977 shares outstanding,  respectively		60			46
Additional paid-in capital		39,606,073			29,643,769
Accumulated deficit		(46,725,775	)		(37,359,214	)
Total stockholders’ deficit		(7,119,629	)		(7,715,390	)
Total liabilities and stockholders’ deficit	$	13,219,912		$	5,875,954

See accompanying notes to condensed consolidated financial statements.

4

ActiveCare, Inc.
Condensed Consolidated Statements of Operations (unaudited)
	Three Months Ended						Nine Months Ended
	June 30						June 30
	2013			2012			2013			2012
Revenues:
Chronic illness monitoring	$	3,912,300		$	230,625		$	10,121,916		$	233,743
CareServices		415,377			66,035			1,292,178			190,662
Total revenues		4,327,677			296,660			11,414,094			424,405
Cost of revenues:
Chronic illness monitoring		2,853,557			169,264			7,438,980			170,544
CareServices		560,205			165,038			2,027,829			495,743
Total cost of revenues		3,413,762			334,302			9,466,809			666,287
Gross margin (deficit)		913,915			(37,642	)		1,947,285			(241,882	)
Operating expenses:
Selling, general and administrative (including $678,596, $61,563, $2,181,098 and $4,185,673, respectively, of stock-based compensation)		2,733,452			793,232			7,606,290			6,145,136
Research and development		121,011			63,906			589,723			112,807
Total operating expenses		2,854,463			857,138			8,196,013			6,257,943
Loss from operations		(1,940,548	)		(894,780	)		(6,248,728	)		(6,499,825	)
Other income (expense):
Gain (loss) on derivatives liability		-			(1,320,918	)		45,697			(1,346,174	)
Interest expense, net		(1,065,414	)		(223,379	)		(2,856,397	)		(459,195	)
Loss on disposal of property and equipment		(101,421	)		-			(101,421	)		-
Other income (expense)		(2,636	)		-			12,795			-
Total other expense, net		(1,169,471	)		(1,544,297	)		(2,899,326	)		(1,805,369	)
Net loss from continuing operations		(3,110,019	)		(2,439,077	)		(9,148,054	)		(8,305,194	)
Loss from discontinued operations		(12,301	)		(3,629	)		(5,312	)		(104,968	)
Net loss		(3,122,320	)		(2,442,706	)		(9,153,366	)		(8,410,162	)
Dividends on preferred stock		(79,219	)		(14,057	)		(213,192	)		(40,842	)
Net loss attributable to common stockholders	$	(3,201,539	)	$	(2,456,763	)	$	(9,366,558	)	$	(8,451,004	)
Net loss per common share - basic and diluted
Continuing operations	$	(0.59	)	$	(0.55	)	$	(1.91	)	$	(2.00	)
Discontinued operations		(0.00	)		(0.00	)		0.00			(0.03	)
Net loss per common share	$	(0.59	)	$	(0.55	)	$	(1.91	)	$	(2.03	)
Weighted average common shares outstanding – basic and diluted		5,424,000			4,434,600			4,909,000			4,153,500

SeSee accompanying notes to condensed consolidated financial statements.

5

ActiveCare, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
	Nine Months Ended
	June 30,
	2013			2012
Cash flows from operating activities:
Net loss	$	(9,153,366	)	$	(8,410,162	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		926,671			231,353
Derivative valuation (gain) loss		(45,697	)		1,346,174
Stock-based compensation expense		2,181,098			4,185,673
Stock issued for interest expense		751,220			-
Amortization of debt discounts		789,450			306,130
Loss on disposal of property and equipment		101,421			-
Gain on sale of discontinued operations		(55,096	)		-
Changes in operating assets and liabilities:
Accounts receivable		(7,643,169	)		(162,370	)
Inventories		(811,381	)		(26,120	)
Prepaid expenses and other assets		(13,699	)		(162	)
Accounts payable		5,988,622			217,198
Accrued expenses		560,642			377,796
Deferred revenue		(11,504	)		6,004
Deposit		(81,207	)		-
Net cash used in operating activities		(6,515,995	)		(1,928,486	)
Cash flows from investing activities:
Purchases of property and equipment		(162,712	)		(1,224	)
Purchases of equipment leased to customers		(225,981	)		(6,505	)
Proceeds from sale of discontinued operations		184,318			-
Proceeds from sale of equipment		4,900			-
Acquisition of 4G Biometrics, LLC		-			(200,000	)
Net cash used in investing activities		(199,475	)		(207,729	)
Cash flows from financing activities:
Principal payments on related-party notes payable		(191,831	)		(85,000	)
Net proceeds from related-party notes payable		1,990,799			920,000
Net proceeds from  notes payable		5,386,746			1,200,000
Principal payments on notes payable		(877,753	)		-
Net cash provided by financing activities		6,307,961			2,035,000
Net decrease in cash		(407,509	)		(101,215	)
Cash, beginning of the period		529,839			178,131
Cash, end of the period	$	122,330		$	76,916

See accompanying notes to condensed consolidated financial statements.  

6

ActiveCare, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
Continued
	Nine Months Ended
	June 30,
	2013		2012
Supplemental Cash Flow Information:
Cash paid for interest	$	575,317	$	5,448
Non-Cash Investing and Financing Activities:
Issuance of stock for purchase of patents	$	-	$	622,378
Issuance of stock for accrued dividends		151,176		-
Issuance of stock for settlement of liabilities		865,552		612,000
Conversion of note payable into common stock		100,000		92,400
Conversion of note payable into Series D Preferred Stock		-		110,000
Issuance of derivatives liability		514,643		-
Reclassification of derivatives liability to equity		4,484,801		-
Dividends on preferred stock		213,195		-
Conversion of notes payable to debentures		1,920,797		-

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 statements of ActiveCare, Inc. (the “Company” or “ActiveCare”) has been prepared in accordance with Article 8 of Regulation S-X promulgated by the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”) have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying interim condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the Company’s financial position as of June 30, 2013, and the results of its operations and its cash flows for the three and nine months ended June 30, 2013 and 2012. 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, 2012. The results of operations for the three and nine months ended June 30, 2013 may not be indicative of the results for the full fiscal year ending September 30, 2013.

During the quarter ended June 30, 2013, the Company announced a 10-for-1 reverse common stock split. The condensed consolidated financial statements and notes for all periods presented have been retroactively adjusted to reflect the reverse common stock split.

Going Concern

Although the Company had a positive gross margin for the three and nine months ended June 30, 2013, it incurred negative gross margins, working capital and cash flows from operating activities for the fiscal years ended September 30, 2012 and 2011, and had negative working capital and cash flows from operating activities for the nine months ended June 30, 2013. 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, it must continue to improve gross margins, generate positive cash flows from operating activities and obtain the necessary debt or equity funding to meet its projected capital investment requirements. Management’s plans with respect to this uncertainty include raising additional capital by issuing equity securities and increasing the sales of the Company’s services and products. There can be no assurance that the Company will be able to raise sufficient capital or that revenues will increase rapidly enough to offset operating losses and repay debts as they come due. 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 US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Fair Value of Financial Instruments

The carrying amounts reported in the condensed consolidated balance sheets for accounts receivable, accounts payable, and accrued liabilities approximate fair value because of the immediate or short-term maturity of these financial instruments. The carrying amounts reported for notes payable approximate fair value because the underlying instruments are at interest rates which approximate current market rates.

US GAAP defines fair values as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants as of the measurement date. Additionally, the inputs used to measure fair value are prioritized based on a three-level hierarchy. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

8

· Level 1 — Quoted prices in active markets for identical assets or liabilities.

· Level 2 — Observable inputs other than quoted prices included in Level 1. Assets and liabilities included in this level are valued using dealer and broker quotations, bid prices, quoted prices for similar assets and liabilities in active markets, or other inputs that are observable or can be corroborated by observable market data.

· Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

In valuing certain contracts, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. For disclosure purposes, assets and liabilities are classified in their entirety in the fair value hierarchy level based on the lowest level of input that is significant to the overall fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement within the fair value hierarchy levels.

2. Discontinued Operations

In June 2013, the Company sold its assets and liabilities related to the Reagents segment (Reagents).  This segment was engaged in the business of manufacturing and marketing medical diagnostic stains, solutions and related equipment to hospitals and medical testing labs.  The purchaser was a former employee.  The sale was solely the Company's Reagents business and not any business related to any of the Company's other segments.

As of June 30, 2013, the Company no longer holds any ownership interest in the Reagents segment and has ceased incurring costs related to its operations and development. The sale included all applicable segment assets and liabilities including, accounts receivable, inventory, accounts payable, property, equipment and leased equipment.  The purchaser also assumed the lease for general office and warehouse space.

As a result of the sale of the Reagents business, the Company has reflected this segment as discontinued operations in the condensed consolidated financial statements for the three and nine months ended June 30, 2013 and 2012.

The following table summarized certain operating data for discontinued operations for the three and nine months ended June 30, 2013 and 2012:

	Three months ended						Nine months ended
	June 30,						June 30,
	2013			2012			2013			2012
Revenues	$	97,147		$	135,636		$	351,645		$	357,374
Cost of revenues		(130,797	)		(94,330	)		(300,396	)		(291,137	)
Gross margin (deficit)		(33,650	)		41,306			51,249			66,237
Selling, general and administrative		(33,747	)		(44,935	)		(111,657	)		(171,205	)
Loss from discontinued operations		(67,397	)		(3,629	)		(60,408	)		(104,968	)
Gain on sale of assets		55,096			-			55,096			-
Net loss from discontinued operations		(12,301	)		(3,629	)		(5,312	)		(104,968	)

3. Net Loss per Common Share

Net loss per common share is computed by dividing net loss attributable to common stockholders by the sum of the weighted average number of common shares outstanding and the weighted-average dilutive common share equivalents outstanding.  The computation of net loss per common share does not assume exercise or conversion of securities that would have an anti-dilutive effect.

Common share equivalents consist of shares of common stock issuable upon the exercise of stock options, stock purchase warrants and the conversion of convertible preferred stock or debt instruments.  As of June 30, 2013 and 2012, there were 14,813,664 and 5,713,756 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. The anti-dilutive common stock equivalents outstanding as of June 30, 2013 and 2012 consisted of the following:

9

	June 30,  2013		June 30,  2012
Common stock options and warrants		3,911,887		1,386,587
Series D convertible preferred stock		4,241,005		275,000
Series C convertible preferred stock		480,000		480,000
Convertible debt		6,164,072		3,508,469
Restricted shares of common stock		16,700		63,700
Total common stock equivalents		14,813,664		5,713,756

4. Recent Accounting Pronouncements

The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements will have a material impact on the Company’s financial position, results of operations, or liquidity.

5. Acquisitions

4G Biometrics, LLC

On March 8, 2012, the Company acquired 4G Biometrics, LLC, a Texas limited liability company (“4G”).  Pursuant to the acquisition agreement, the Company acquired 100 percent of the member interests of 4G and 4G is operated as a wholly owned subsidiary of the Company.  As amended, the purchase consideration for the member interests of 4G was comprised as follows:

· $350,000 in cash;

· The assumption of $50,000 of accounts payable and accrued liabilities;

· 160,000 shares of Series D convertible preferred stock;

· Options for the purchase of up to 433,333 shares of common stock of the Company at $1.00 per share to each of the three sellers with vesting as follows:

o Options for 43,333 shares vest when 4G has 9,300 members

o Options for another 43,333 shares vest when an additional 5,000 4G members are added, or a total of 14,300 members;

o Options for another 43,333 shares vest when an additional 5,000 4G members are added, or a total of 19,300 members;

o Options for another 43,333 shares vest when an additional 5,000 4G members are added, or a total of 24,300 members; and

o so forth until fully vested.

As of June 30, 2013, options to purchase 520,000 shares of common stock have vested.

Three of the 4G key operational managers are under two-year written employment agreements with the Company.

Under the purchase method of accounting, the purchase price was allocated to 4G’s assets and assumed liabilities based on their estimated fair values as of the closing date of the acquisition.  The excess of the purchase price over the fair values of the net assets acquired was recorded as goodwill.

The purchase price for 4G reflects total consideration paid of $1,040,000, of which $825,894 was allocated to goodwill and $214,106 was allocated to customer contracts.

10

GWire

During fiscal year 2012, the Company established GWire Corporation (“GWire”) as a subsidiary.  Effective September 1, 2012, GWire acquired the assets and assumed certain liabilities of Green Wire, LLC, Green Wire Outsourcing, Inc., Orbit Medical Response, LLC, and Rapid Medical Response, LLC (collectively, “Green Wire”).  The Company entered into employment agreements with two of Green Wire’s operating managers on November 1, 2012. These two individuals were granted 27% ownership in GWire and ActiveCare retained the remaining 73%.  The purchase consideration for Green Wire consisted of the following:

· $2,236,737 in the form of a note payable with a 36-month term (including imputed interest at 12%); and

· 20,000 shares of ActiveCare’s Series D convertible preferred stock, valued at $40,000.

Under the purchase method of accounting, the purchase price for Green Wire was allocated to the assets purchased and liabilities assumed based on their estimated fair values as of the closing date of the acquisition.

The purchase price for Green Wire reflects total consideration paid of $2,276,737, which has been allocated to $12,215 of cash, $13,976 of accounts receivable, $92,022 of property and equipment, $16,964 of deposits and other assets, $229,249 of leased equipment, $2,155,776 of customer contracts, $154,206 of accounts payable, $55,117 of accrued expenses and $34,142 of deferred revenue.

During the nine months ended June 30, 2013, the two operating managers converted their 27% ownership in GWire and 425,000 of related options into 425,000 shares of the Company’s common stock as discussed further in Note 15.  As a result, the Company owns 100% of GWire as of June 30, 2013.

6. Inventories

Inventories are recorded at the lower of cost or market value, cost being determined using the first-in, first-out (“FIFO”) method. Inventories consisted of raw materials, work-in-process, and finished goods as of June 30, 2013 and September 30, 2012 as follows:

	June 30,  2013		September 30, 2012
Chronic Illness Monitoring
Finished goods	$	991,957	$	185,884
CareServices
ActiveHome™		56,692		56,767
Reagents
Raw materials		-		41,195
Work in process		-		5,745
Finished goods		-		6,161
Reserves for obsolescence and valuation		-		(4,984	)
Total inventories	$	1,048,649	$	290,768

When required, provisions 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 values could change in the near term.  During the nine months ended June 30, 2013, the Company disposed of $53,500 of inventory as part of the sale of its Reagents segment.

11

7. Customer Contracts

During the fiscal year ended 2012, the Company recorded customer contracts of $2,369,882 acquired in its purchase of  4G and Green Wire.  The Company is amortizing the customer contracts over their estimated useful lives.  The Company recognized $624,773 and $13,837 of amortization expense for the nine months ended June 30, 2013 and 2012, respectively.  The net balance of customer contracts was $1,642,779 and $2,267,552 as of June 30, 2013 and September 30, 2012, respectively.  The Company’s future customer contract amortization as of June 30, 2013, is as follows:

Years Ending September 30,
2013	$	208,257
2014		833,030
2015		601,492
	$	1,642,779

8. 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.  Upon the sale or disposal of property and equipment, any gains or losses are included in the results of operations.

Property and equipment consisted of the following as of June 30, 2013 and September 30, 2012:

	June 30,  2013			September 30, 2012
Leasehold improvements	$	93,913		$	402,016
Equipment		250,347			374,229
Software		65,836			65,111
Furniture		23,547			50,123
Total gross property and equipment		433,643			891,479
Accumulated depreciation and amortization		(198,675	)		(625,401	)
Property and equipment, net	$	234,968		$	266,078

Assets to be disposed of are reported at the lower of the carrying amounts or fair values, less the estimated costs to sell or dispose.  During the nine months ended June 30, 2013 and 2012, the Company recorded a loss on the disposal of assets of $101,421 and $0, respectively, and disposed of $25,832 of assets related to the sale of the Reagents segment during the nine months ended June 30, 2013. Depreciation expense for the nine months ended June 30, 2013 and 2012 was $71,772 and $46,800, respectively.

9. Equipment Leased to Customers

Equipment leased to customers as of June 30, 2013 and September 30, 2012 was as follows:

	June 30,  2013			September 30, 2012
Leased equipment	$	677,341		$	457,898
Accumulated depreciation		(274,307	)		(144,905	)
Leased equipment, net	$	403,034		$	312,993

The Company leases monitoring equipment to customers for the CareServices segment.  The leased equipment is depreciated using the straight-line method over its estimated useful life of  three years regardless of whether the equipment is leased to a customer or remaining in stock.  Customers have the right to cancel the service agreements at any time.

Assets to be disposed of are reported at the lower of the carrying amounts or fair values, less the estimated costs to sell.  During the nine months ended June 30, 2013 and 2012, the Company recorded as cost of revenues the disposal of equipment leased to customers of $1,500 and $9,166, respectively. Depreciation expense for equipment leased to customers is recorded as cost of revenues for CareServices and depreciation for the nine months ended June 30, 2013 and 2012 totaled $134,442 and $42,974, respectively.

12

10. Patent License Agreement

During fiscal year 2009, the Company licensed the use of certain patents from a third party.  Under the license agreement, the Company was required to pay $300,000 plus a 5% royalty on the net revenues of all licensed products. As of September 30, 2009, the Company had capitalized the initial license fee as a long-term asset and had recorded a corresponding current liability as the fee was not yet paid.

During fiscal year 2012, the Company agreed to purchase the related patents and settle amounts owed under the license agreement by issuing 60,000 shares of common stock and 480,000 shares of Series C preferred stock to the licensor.  The patents were valued at $922,378, based on a valuation performed by an independent valuation expert.  The value of the common stock issued was $240,000, based on the market price of the common stock on the date of issuance. The implied value of the Series C preferred stock was $682,378, which was based on the difference between the value of the patents and the common stock issued in settlement of the existing liability.

The Company is amortizing the patents over their remaining useful lives (through 2018).  The Company recognized $95,153 and $196,870 of amortization expense for the nine months ended June 30, 2013 and 2012, respectively.  The net balance of the patents was $589,637 and $693,790 as of June 30, 2013 and September 30, 2012, respectively.

The Company’s future patent amortization as of June 30, 2013, is as follows:

Years Ending September 30,
2013	$	31,717
2014		126,870
2015		126,870
2016		126,870
2017		126,870
Thereafter		59,440
	$	598,637

11. Notes Payable

As of June 30, 2013 and September 30, 2012, the Company had the following notes payable outstanding:  

	June 30,  2013		September 30, 2012
Note payable to the former owners of Green Wire, secured by customer contracts, imputed interest rate equal to 12%, with monthly installments over a 36-month term.  During the quarter ended March 2013, the Company agreed to issue 15,000 shares of common stock to the lenders to extend two past due payments without late penalty.  The common stock has a value of $24,000 at the date of grant, which will be amortized over the remaining life of the loan.	$	1,935,578	$	2,236,737
Series A debenture loans payable, secured by customer contracts and payable in 36 monthly installments, maturing between September and December 2015. The loans bear interest at 12% and are convertible into common stock after 180 days.  After payment of principal and interest, the holders of the Series A and Series B debentures (see Note 12), as a class, are entitled to receive a pro-rata share of cumulative royalties totaling 4% of the Company’s gross profits payable for the two-year period commencing at the maturity date; provided that no royalties are payable following conversion of any Series A or Series B debenture to the holder thereof.  The Company has the right to buy out each lender's royalty by paying the respective lender $20,000 for every $25,000 loaned.  The note includes a beneficial conversion feature valued at $901,000 at inception, which the Company is amortizing over the life of the loan.  The feature had an unamortized value of $794,667 as of June 30, 2013.		2,790,152		300,000
Unsecured note with interest at 15% (18% after due date), due November 2012, currently in default. In connection with the loan, the Company issued 60,000 shares of Series D preferred stock as a loan origination fee with a total fair value of $150,000.  The note is guaranteed by the Company’s Chief Executive Officer.		1,500,000		1,500,000
Unsecured note with interest at 15%, due March 2013, currently in default. Note included a $25,000 loan origination fee.  In connection with the loan, the Company issued 100,000 shares of common stock as a loan origination fee with a total fair value of $70,000 at date of grant.		175,000		275,000

13

	June 30,  2013			September 30, 2012
Unsecured notes with annual interest rate at 15% (18% after due date), due March and April 2013, respectively, currently in default.  The Company issued 20,000 shares of Series D preferred stock as loan origination fees with total fair value on the date of grant of  $195,000.	$	225,000		$	-
Unsecured note with interest at 12%, due March 2013, currently in default.		250,000			250,000
Total before discount and current portion		6,875,730			4,561,737
Less discount		(816,275	)		(187,587	)
Total notes payable		6,059,455			4,374,150
Less current portion		(3,536,216	)		(2,569,221	)
Total notes payable, net of current portion	$	2,523,239		$	1,804,929

12. Related-Party Notes Payable

As of June 30, 2013 and September 30, 2012, the Company had the following related-party notes payable outstanding:

	June 30,  2013		September 30, 2012
Unsecured note payable to an entity controlled by an officer of the Company.  The note payable incurred no interest and was converted into shares of common stock subsequent to June 30, 2013 (see Note 20).	$	1,235,000	$	-
Series B unsecured debenture loans payable to an entity controlled by an officer of the Company, including 10% loan origination fees totaling $78,587, payable in 36 monthly installments, maturing December 2015.  $421,499 of the debentures were issued to settle a $400,000 Series A secured debenture issued during the three months ended December 31, 2012.  Before the settlement, the prior Series A debenture had a total outstanding balance of $383,181 and $1,845 of accrued interest.  $442,598 of the Series B debenture was issued to settle two related-party notes payable totaling $165,000 and $6,889 of accrued interest, and a $230,800 related-party note payable issued during the three months ended December 31, 2012 to settle previously accrued expenses.  The Series B debenture loan bears interest at 12% and is convertible into common stock after 180 days. After payment of principal and interest, the holders of the Series B and Series A debentures, as a class, are entitled to receive a pro-rata share of cumulative royalties totaling 4% of the Company’s gross profits payable for the two-year period commencing at the maturity date; provided that no royalties are payable following conversion of any Series A or Series B debenture to the holder thereof. The Company has the right to buy out the royalty by paying the lender $22,000 for every $25,000 loaned.  During the nine months ended June 30, 2013, the Company paid $40,336 of the loan principal but is late on certain monthly payments and the debenture is currently in default.		824,121		-
Unsecured notes payable to an entity controlled by an officer of the Company with interest at 15%, due September 30, 2013.  The notes include $60,000 of loan origination fees.		600,000		-

14

	June 30,  2013		September 30, 2012
Series B unsecured debenture loan payable to an entity controlled by an officer of the Company, including $64,227 in loan origination fees, payable in 36 monthly installments, maturing December 2015.  The debenture was issued to settle an outstanding note payable of $620,686 and $21,585 of related accrued interest.  The loan bears interest at 12% and is convertible into common stock after 180 days. After payment of principal and interest, the holders of the Series B and Series A debentures, as a class, are entitled to receive a pro-rata share of cumulative royalties totaling 4% of the Company’s gross profits payable for the two-year period commencing at the maturity date; provided that no royalties are payable following conversion of any Series A or Series B debenture to the holder thereof.  The Company has the right to buy out the royalty by paying the lender $22,000 for every $25,000 loaned.  During the nine months ended June 30, 2013, the Company paid $16,401 of the loan principal. The debenture loan was converted to shares of common stock subsequent to June 30, 2013 (see Note 20).	$	690,098	$	-
Series B unsecured debenture loans owed to an officer of the Company, including $49,777 in loan origination fees, payable in 36 monthly installments, maturing December 2015 and January 2016.  $371,547 of the debentures were issued to settle two Series A debentures and $135,000 of accrued liabilities.  The original Series A debentures had a total outstanding balance of $202,098 and $672 of related accrued interest.  The loan bears interest at 12% and is convertible into common stock after 180 days. After payment of principal and interest, the holders of the Series B and Series A debentures, as a class, are entitled to receive a pro-rata share of cumulative royalties totaling 4% of the Company’s gross profits payable for the two-year period commencing at the maturity date; provided that no royalties are payable following conversion of any Series A or Series B debenture to the holder thereof.  The Company has the right to buy out the royalty by paying the lender $22,000 for every $25,000 loaned.  During the nine months ended June 30, 2013, the Company paid $24,517 of the loan principal. One of the debentures includes a beneficial conversion feature valued at $8,800 at inception, which the Company is amortizing over the life of the loan.  The feature had an unamortized value of $7,360 as of June 30, 2013.  The debenture loan was converted to shares of common stock subsequent to June 30, 2013 (see Note 20).		523,029		-
Unsecured notes payable to an entity controlled by an officer of the Company, including $7,500 of loan origination fees added to the principal, interest at 12%, due August 2012. In the event of default, the note is convertible into common stock at $0.40 per share. During the three months ended March 31, 2013, the lender agreed to extend the maturity date to June 30, 2013 with an interest rate of 18% and 5,600 shares of Series D with fair market value of $56,252 at date of grant paid as a loan origination fee.  The note payable is currently in default.		82,500		543,278

15

	June 30,  2013		September 30, 2012
Series A debenture loans from a former CEO and Chairman of the Company, secured by customer contracts, payable in 36 monthly installments, maturing September and December 2015.  The loans bear interest at 12% and are convertible into common stock after 180 days. After payment of principal and interest, the holders of the Series B and Series A debentures, as a class, are entitled to receive a pro-rata share of cumulative royalties totaling 4% of the Company’s gross profits payable for the two-year period commencing at the maturity date; provided that no royalties are payable following conversion of any Series A or Series B debenture to the holder thereof.  The Company has the right to buy out each royalty by paying the lender $20,000 for every $25,000 loaned.  During the nine months ended June 30, 2013, the Company paid $41,682 of the loan principal.  The debenture loan was converted to shares of common stock subsequent to June 30, 2013 (see Note 20).	$	327,514	$	244,196
Series A debenture loan from an officer of the Company, secured by customer contracts, payable interest only in the first 6 months and interest plus principal in the next 30 monthly installments, maturing January 2016.   The loan bears interest at 12% and is convertible into common stock after 180 days. After payment of principal and interest, the holders of the Series B and Series A debentures, as a class, are entitled to receive a pro-rata share of cumulative royalties totaling 4% of the Company’s gross profits payable for the two-year period commencing at the maturity date; provided that no royalties are payable following conversion of any Series A or Series B debenture to the holder thereof. The Company has the right to buy out the royalty by paying the lender $20,000 for every $25,000 loaned.  The note includes a beneficial conversion feature valued at $250,000 at inception, which the Company is amortizing over the life of the loan.  The feature had an unamortized value of $210,695 as of June 30, 2013.  The debenture loan was converted to shares of common stock subsequent to June 30, 2013 (see Note 20).		250,000		-
Series A debenture loan from an entity controlled by an officer of the Company, secured by customer contracts, payable in 36 monthly installments, maturing December 2015.  The debenture was issued to settle a related-party note payable with an outstanding balance of $300,000 and $14,992 of related accrued interest.  The loan bears interest at 12% and is convertible into common stock after 180 days. After payment of principal and interest, the holders of the Series B and Series A debentures, as a class, are entitled to receive a pro-rata share of cumulative royalties totaling 4% of the Company’s gross profits payable for the two-year period commencing at the maturity date; provided that no royalties are payable following conversion of any Series A or Series B debenture to the holder thereof.  The Company has the right to buy out the royalty by paying the lender $20,000 for every $25,000 loaned.  During the nine months ended June 30, 2013, the Company paid $14,698 of the loan principal but is late on certain monthly payments and the debenture is currently in default.		300,294		-
Unsecured notes payable to an entity controlled by an officer of the Company,  annual interest at 3% (18% after due date), due July 2013.  In the event of default, the note is convertible into common stock at $0.40 per share.		300,000		-
Unsecured notes payable to an entity controlled by an officer of the Company,  annual interest at 12% (18% after due date), due April 2013, currently in default.  In the event of default, the note is convertible into common stock at $0.40 per share.		200,000		-

16

	June 30,  2013		September 30, 2012
Series B unsecured debenture loans from entities controlled by an officer of the Company, including $68,914 in loan origination fees added to the principal of the loans, payable in 36 monthly installments, maturing December 2015 and January 2016.  $554,556 of the debenture was issued to settle a related-party note payable with a total outstanding balance of $460,778 and $43,364 of related accrued interest.  $35,000 of the loan was issued to settle an accrued service fee.  The loans bear interest at 12% and are convertible into common stock after 180 days. After payment of principal and interest, the holders of the Series B and Series A debentures, as a class, are entitled to receive a pro-rata share of cumulative royalties totaling 4% of the Company’s gross profits payable for the two-year period commencing at the maturity date; provided that no royalties are payable following conversion of any Series A or Series B debenture to the holder thereof.  The Company has the right to buy out the royalty by paying the lender $22,000 for every $25,000 loaned.  During the quarter ended March 31, 2013, the Company issued 34,400 shares of Series D with fair market value of $343,748 at date of grant as additional loan origination fees, and the Company also paid $30,102 of the loan principal.  The Company is late on certain monthly payments and the debenture is currently in default.  The notes include beneficial conversion features valued at $167,000 at inception, which the Company is amortizing over the life of the loan.  The feature had an unamortized value of $140,975 as of June 30, 2013.	$	727,954	$	-
Series B debenture loan from an officer of the Company, secured by customer contracts, payable in 36 monthly installments, maturing June 2016.  The Company is late on certain monthly payments and the debenture is currently in default.  The loan bears interest at 12% and is convertible into common stock after 180 days. After payment of principal and interest, the holders of the Series B and Series A debentures, as a class, are entitled to receive a pro-rata share of cumulative royalties totaling 4% of the Company’s gross profits payable for the two-year period commencing at the maturity date; provided that no royalties are payable following conversion of any Series A or Series B debenture to the holder thereof.  The Company has the right to buy out the royalty by paying the lender $20,000 for every $25,000 loaned.  The note includes a beneficial conversion feature valued at $72,600 at inception, which the Company is amortizing over the life of the loan.  The feature had an unamortized value of $70,679 as of June 30, 2013.		145,200		-
Unsecured note payable to an officer of the Company with interest at 12%, due September 30, 2013.  The loan is convertible into the Company's common stock at a rate of $0.75 per share, exercisable at any time.  The note includes a beneficial conversion feature valued at $22,820 at inception, which the Company is amortizing over the life of the loan.  The feature had an unamortized value of $15,104 as of June 30, 2013.		26,721		-
Unsecured notes payable with zero interest to an individual related to an officer of the Company.  The loan was repaid in full subsequent to June 30, 2013		60,000		-
Note payable to an officer of the Company with interest at 15%, due June 2012 and currently in default.  The note includes $3,000 of loan origination fees and is convertible into common stock at $0.50 per share.		33,000		33,000

17

	June 30,  2013		September 30, 2012
Series A debenture loan from an entity controlled by an officer of the Company, secured by customer contracts, payable in 36 monthly installments, maturing December 2015.  The debenture was issued to settle a related-party note payable with a total outstanding balance of $51,000 and $3,186 of related accrued interest.  The loan bears interest at 12% and is convertible into common stock after 180 days. After payment of principal and interest, the holders of the Series B and Series A debentures, as a class, are entitled to receive a pro-rata share of cumulative royalties totaling 4% of the Company’s gross profits payable for the two-year period commencing at the maturity date; provided that no royalties are payable following conversion of any Series A or Series B debenture to the holder thereof.  The Company has the right to buy out the royalty by paying the lender $20,000 for every $25,000 loaned.  During the nine months ended June 30, 2013, the Company paid $2,528 of the loan principal.	$	51,657	$	-
Unsecured notes payable to a lender under the control of the Company’s CEO with a line of credit borrowing capacity of $2,000,000, interest at 12%, due July 2013. The notes were convertible into common stock at any time at $5.00 per share.  In connection with the notes payable, the Company issued 80,000 shares of Series D preferred stock (valued at $240,000).  The Company granted warrants to purchase 341,000 shares of common stock as a loan origination fee. These warrants vested immediately and are exercisable at $4.40 per share through November 3, 2016. The fair value of the warrants was $107,130, and was measured using a binomial valuation model with the following assumptions: exercise price $4.40; risk-free interest rate of .39%; expected life of 2.5 years; expected dividend of zero; a volatility factor of 134.57%; and market price on date of grant of $4.40.  During the fiscal year ended September 30, 2012, the Company re-priced the exercise price of the warrants from $4.40 to $1.00 per share.  During the three months ended December 31, 2012, the Company issued a Series A debenture payable to the lender in satisfaction of the outstanding balance of $620,687 plus $21,585 of accrued interest.  Upon the conversion of the note, the Company immediately recognized the unamortized debt discount of $209,143.		-		620,687
Note payable to an entity controlled by an officer of the Company, interest at 12%, due December 2012.  This note was secured by real estate.  During the three months ended December 31, 2012, the Company issued a Series A debenture payable to the entity in satisfaction of the outstanding balance of $300,000 plus $14,992 of accrued interest.		-		300,000
Unsecured note payable to an entity controlled by an officer of the Company, including a $7,500 loan origination fee, interest at 12%, due August 2012.  The note was convertible into common stock at 50% of fair market value or $0.40 per share, whichever is less.  During the three months ended December 31, 2012, the Company issued a Series A debenture payable to the entity in satisfaction of the outstanding balance of $82,500 plus $3,716 of accrued interest.		-		82,500
Unsecured note payable to an entity controlled by an officer of the Company, including a $7,500 loan origination fee, interest at 12%, due September 2012. The note was convertible into common stock at $0.40 per share or 50% of market value, whichever was less.  During the three months ended December 31, 2012, the Company issued a Series A debenture payable to the entity in satisfaction of the outstanding balance of $82,500 plus $3,173 of accrued interest.		-		82,500

\

18

	June 30,  2013			September 30, 2012
Notes payable to an entity controlled by an officer of the Company, including a $26,000 loan origination fee which was convertible into Series D preferred stock at any time at $2.00 per share, interest at 15%, due December 2012.  This note was secured by real estate.  During the three months ended December 31, 2012, the Company issued a Series A debenture payable to the entity in satisfaction of the outstanding balance of $51,000 plus $3,186 of accrued interest.  Upon the conversion of the note, the Company immediately recognized the unamortized debt discount of $14,238.	$	-		$	51,000
Total before discount and current portion		6,377,088			1,957,161
Less discount		(1,023,067	)		(223,381	)
Total notes payable, related-party		5,354,021			1,733,780
Less current portion		(3,676,810	)		(1,563,923	)
Total  notes payable, related-party, net of current portion	$	1,677,211		$	169,857

13. Derivative Liability

The derivative liability was $0 and $4,015,855 as of June 30, 2013 and September 30, 2012, respectively.  The elimination of the derivative liability was due to the 10-for-1 reverse common stock split, which decreased the number of outstanding shares and convertible shares of “freestanding instruments.”  It also allows the Company to reserve sufficient shares to settle “freestanding instruments.”

The Company recognized a $45,697 derivative gain during the nine months ended June 30, 2013.  The Company had previously estimated the fair value of the embedded derivatives using a binomial option-pricing model prior to the common stock reverse split with the following assumptions: conversion price of $0.11 to $0.16 per share according to the agreements; risk free interest rate of 0.14% to 0.16%; expected life of 0.69 to 1.00 years; expected dividend of zero; a volatility factor of 233% to 282%; and a stock price of $0.16 (as of March 25, 2013).  The expected lives of the instruments are equal to the average term of the conversion option.  The expected volatility is based on the historical price volatility of the Company’s common stock.  The risk-free interest rate represents the U.S. Treasury constant maturities rate for the expected life of the related conversion option. The dividend yield represents anticipated cash dividends to be paid over the expected life of the conversion option.

14. Preferred Stock

The Company is authorized to issue 10,000,000 shares of preferred stock, with a par value of $0.00001 per share.  Pursuant to the Company’s Certificate of Incorporation, the Board of Directors has the authority to amend the Company’s Certificate of Incorporation, without further stockholder approval, to designate and determine 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, 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.

Series C Convertible Preferred Stock

On October 4, 2011, the Company issued 480,000 shares of Series C convertible preferred stock (“Series C preferred stock”) in connection with the patent license agreement settlement (see Note 10).  The par value of the Series C is $0.00001 per share.  The Series C preferred stock is non-voting stock.  Each share of Series C preferred stock may be converted into one share of common stock, provided, however, that a holder may not convert shares of Series C preferred stock which, upon conversion, would result in the holder becoming the beneficial owner of more than 4.99% of the issued and outstanding common stock of the Company.

19

During fiscal year 2012, the Company amended the rights and preferences of the Series C preferred stock as follows:

· Required payment of dividends at a rate of 8% per annum in either cash or common stock at the Company’s discretion.  If paid in common stock, the price of the common stock is the average closing price of the last 10 trading days of each quarter; and

· Permitted conversion of the Series C preferred stock into common stock at any time after June 30, 2012.

During the nine months ended June 30, 2013, the Company accrued $40,382 of dividends associated with outstanding shares of Series C preferred stock and settled the balance by issuing 7,169 shares of Series D preferred stock.

Series D Convertible Preferred Stock

On October 4, 2011, the Board of Directors designated 1,000,000 shares of preferred stock as Series D convertible preferred stock (“Series D preferred stock”).  As originally designated, the Series D preferred stock was to be vested immediately upon issuance, and each share of Series D preferred stock was convertible into  one share of common stock.  The original designation also provided that the Series D preferred stock would be non-voting and would not pay a dividend.  In addition, conversion of the Series D preferred stock was limited to not more than 4.99% of the issued and outstanding common stock.

During fiscal year 2012, the Board of Directors approved the following amendments to the designation of the rights and preferences of the Series D preferred stock prior to the issuance of any of the shares:

· Changed the conversion ratio from  one share of common stock for one share of Series D preferred stock to  five shares of common stock for one share of Series D preferred stock;

· Added an annual dividend rate of 8%, payable quarterly beginning April 1, 2012;

· Changed the shares from non-voting to voting, on an as-converted basis;

· Eliminated the 4.99% conversion limitation;

· Permitted conversion of the Series D preferred stock, commencing April 1, 2012;

· Permitted the Company, at its option, to redeem the Series D preferred shares at a redemption price equal to 120% of the original purchase with 15 days notice.

During the nine months ended June 30, 2013, the Company issued the following shares of Series D preferred stock:

· 78,174 shares for $691,363 in loan origination fees;

· 71,800 shares for future advisory services through December 2014, the value on the date of grant was $230,800;

· 20,000 shares for future consulting services through December 2013, the value on the date of grant was $60,000;

· 52,913 shares for $150,000 in previously accrued Board of Directors’ fees and $61,652 of additional compensation for past services;

· 24,300 shares for a bonus to an officer for past services, the value on the date of grant was $97,200;

· 7,169 shares for dividends on Series C preferred stock, the value on the date of grant was $40,382;

· 2,342 shares for dividends on Series D preferred stock, the value on the date of grant was $13,263;

· 95,400 shares for past consulting services by an entity controlled by an officer of the Company, which were previously accrued in the amount of $333,902;

· 30,000 shares for a bonus to an entity controlled by an officer of the Company for consulting services, the value on the date of grant was $105,000;

· 80,000 shares for a bonus to the CEO of the Company for signing an employment agreement with the Company, the value at the date of grant was $320,000, which cannot convert to common stock until the Company has 20,000 members.

20

During the nine months ended June 30, 2013, an employee of the Company converted 30,000 shares of Series D preferred stock into 150,000 shares of common stock.  The Company also accrued $172,511 of dividends on shares of Series D preferred stock and settled $110,794 of the balance by issuing 2,342 shares of Series D preferred stock and 10,218 shares of common stock during the nine months ended June 30, 2013.  As of June 30, 2013, the Company had a remaining balance of $80,338 of accrued dividends.

Liquidation Preference

Upon any liquidation, dissolution or winding up of the Company, before any distribution or payment may be made to the holders of the common stock, the holders of the Series C preferred stock and Series D preferred stock are entitled to be paid out of the assets an amount equal to $1.00 per share plus all accrued but unpaid dividends.  If the assets of the Company are insufficient to make payment in full to all holders of preferred stock, then the assets shall be distributed among the holders of preferred stock ratably in proportion to the full amounts to which they would otherwise be respectively entitled.

15. Common Stock

During the nine months ended June 30, 2013, the Company issued 1,390,019 shares of common stock as follows:

· 425,000 shares for the exercise of options held by two key managers of GWire (see Note 16);

· 207,361 shares valued at $310,002 as compensation for services to six independent consultants;

· 10,218 shares valued at $97,532 as dividends accrued for Series C and Series D preferred stock holders;

· 25,000 shares valued at $37,500 for service provided by an entity controlled by an officer of the Company;

· 150,000 shares for the conversion of 30,000 shares of Series D preferred stock;

· 100,000 shares valued at $150,000 as compensation for a new key employee as an incentive to work for the Company, which vests 25% during the first year of employment and the remaining 75% evenly over the following nine quarters;

· 4,758 shares valued at $7,137 for the extension of related-party payables;

· 217,833 shares as loan origination fees at a value of $329,789;

· 100,000 shares for the conversion of outstanding debt in the amount of $100,000;

· 90,000 shares valued at $136,500 for the extension of third party notes payable;

· 2,600 shares valued at $3,900 as part of the issuance of $26,000 of new debt to a related party;

· 27,650 shares for employee bonuses valued at the date of grant at $39,825;

· 29,600 shares to employees in accordance with the following restricted stock agreement:

The Company agreed to issue 97,500 restricted shares of common stock to certain employees in connection with Company milestones in fiscal year 2010.  During the nine months ended June 30, 2013, the Company issued 29,600 restricted shares of common stock valued at $399,600 on the date of the grant, and reduced the shares of non-vested common stock by 17,400 shares due to the change of employment status of several individuals.  During the fiscal year ended September 30, 2012 no restricted shares of common stock were issued to employees.  During the nine months ended June 30, 2013 and 2012, the Company recognized compensation expense of $0 and $117,187, respectively.  As of June 30, 2013 and September 30, 2012, the unrecognized stock-based compensation was $51,515 and $245,952, respectively, and will be recognized over the remaining vesting term.

16. Stock Options and Warrants

The fair value of each stock option or warrant grant is estimated on the date of grant using a binomial option-pricing model.  The expected life of stock options or warrants represents the period of time that the stock options or warrants are expected to be outstanding, based on the simplified method.  Expected volatilities are based on historical volatility of the 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 related to the expected term of the stock options or warrants is based on the U.S. Treasury yield curve in effect at the time of grant.  The dividend yield is zero.

21

During fiscal years 2013 and 2012, the Company measured the fair value of the stock options and warrants using a binomial valuation model with the following assumptions:

	Nine Months Ended
	June 30,
	2013	2012
Exercise price	$1.00 - $1.65	$1.00 - $5.00
Expected term (years)	1.5 - 5	2.5
Volatility	219% - 298%	104% - 135%
Risk-free rate	0.23% - 0.88%	0.39% - 0.68%
Dividend rate	0%	0%

During the nine months ended June 30, 2013, the Company recorded stock-based compensation expense relating to the following stock options and warrants:

· Options to purchase 433,333 shares were granted to each of three employees of 4G, 1,300,000 total shares, as part of their employment agreements dated June 21, 2012, with an exercise price of $1.00 per share.  These options vest as described in Note 5.  The options expire in June 2017.  The value of the options at the date of grant was $1,147,163.  The Company has been amortizing the expense based on expected completion dates of the milestones.  During the nine months ended June 30, 2013, the Company recognized $721,210 of the total compensation expense. As of June 30, 2013, options for 520,000 shares have vested.

· Options to purchase 1,000,000 shares were granted to the Company’s CEO for services as part of his employment agreement dated July 2012, with an exercise price of $1.00 per share.  One tenth (100,000 shares) of the options vest for each milestone of 5,000 additional members added to the Company since the beginning of his employment in July 2012 until fully vested.  The options expire in July 2017.  The Company has been amortizing the expense based on expected completion dates of the milestones.  During the nine months ended June 30, 2013, the Company recognized $616,802 of the total compensation expense.  As of June 30, 2013, options for 600,000 shares have vested due to the Company reaching certain milestones according to the contract.

· Options to purchase 212,500 shares were granted to each of the two key managers of GWire, 425,000 in aggregate, with an exercise price of $1.00 per share.  Under the option agreements, the only method of exercise requires the employee to submit up to 212,500 shares of GWire stock, awarded as part of the employment agreements dated November 1, 2012, to the Company in exchange for equivalent shares of the Company’s common stock, up to $425,000 in total.  The options were fully vested upon issuance and expire in October 2022.  During the three months ended June 30, 2013, the two key managers converted all of these options together with 4,250,000 shares of GWire stock into 425,000 shares of the Company’s common stock.  As a result, the Company owns 100% of GWire as of June 30, 2013.

· Options to purchase 25,300 shares were granted to GWire employees, with an exercise price of $1.00 per share.  The options vested immediately and the Company recognized the $32,572 value as a compensation expense during the nine months ended June 30, 2013.

· Options to purchase 100,000 shares were granted as part of an employment agreement signed with a new employee dated May 2013, with an exercise price of $1.65 per share.  One quarter (25,000 shares) of the options vest after one year and the remaining balance vests equally over the following nine quarters (8,333 per quarter).  The options expire in May 2018.  During the nine months ended June 30, 2013, the Company recognized $4,128 of compensation expense associated with the options.

· Options to purchase 100,000 shares were granted as part of a loan extension agreement with an unrelated party, with an exercise price of $1.00 per share.  The options vested immediately and the Company recognized the $103,495 value during the nine months ended June 30, 2013.

· Options to purchase 100,000 shares were granted for consulting services rendered by a third party, with an exercise price of $1.00 per share.  The options vested immediately and the Company recognized the $134,785 value as a consulting expense during the nine months ended June 30, 2013.

22

The following table summarizes information about stock options and warrants outstanding as of June 30, 2013:

Options and Warrants	Number of  Options and Warrants			Weighted-Average  Exercise Price
Outstanding as of October 1, 2012		2,386,587		$	1.47
Granted		2,050,300			1.04
Exercised		(525,000	)		1.00
Forfeited		-			-
Outstanding as of June 30, 2013		3,911,887			1.31
Exercisable as of June 30, 2013		2,631,887			1.43

As of June 30, 2013, the outstanding options and warrants have an aggregate intrinsic value of $762,371, and the weighted average remaining term of the warrants is 3.42 years.

For the nine months ended June 30, 2013 and 2012, the Company recognized non-cash expense of $1,782,992 and $2,076,709, respectively, related to the vesting and re-pricing of all stock options and warrants granted in current and prior years.

17. Segment Information

The Company operates with two business segments based primarily on the nature of the Company’s products. The CareServices segment is engaged in the business of developing, distributing and marketing mobile health monitoring and concierge services to distributors and consumers.  The Chronic Illness Monitoring segment is engaged in the business of developing, distributing and marketing mobile monitoring of patient vital signs and physical activity to self-insured companies.  The Company previously operated a Reagents business which was sold in June 2013.  The Company no longer holds any ownership interest in the Reagents business.

Additionally, at the corporate level, the Company raises capital and provides for the administrative operations of the Company as a whole.

The following table reflects certain financial information relating to each reportable segment for the three and nine months ended June 30, 2013 and 2012:

	Corporate			Chronic Illness Monitoring			CareServices			Reagents			Total
Three months ended June 30, 2013
Sales to external customers	$	-		$	3,912,300		$	415,377		$	97,147		$	4,424,824
Segment income (loss)		(2,779,565	)		480,562			(811,016	)		(12,301	)		(3,122,320	)
Interest income		26			-			-			-			26
Interest expense		1,065,440			-			-			-			1,065,440
Segment assets		15,161			10,125,070			3,079,681			-			13,219,912
Fixed assets and leased equipment purchases		-			-			121,282			888			122,170
Depreciation and amortization		223,438			28,609			282,773			2,893			537,713
Three months ended June 30, 2012
Sales to external customers	$	-		$	230,625		$	66,035		$	135,636		$	432,296
Segment loss		(2,124,134	)		(215,940	)		(99,003	)		(3,629	)		(2,442,706	)
Interest income		21			-			-			-			21
Interest expense		223,400			-			-			-			223,400
Segment assets		42,204			778,919			1,058,335			203,664			2,083,122
Fixed assets and leased equipment purchases		-			-			-			-			-
Depreciation and amortization		179			13,837			38,555			11,271			63,842

23

	Corporate			Chronic  Illness Monitoring			CareServices			Reagents			Total
Nine months ended June 30, 2013
Sales to external customers	$	-		$	10,121,916		$	1,292,178		$	351,645		$	11,765,739
Segment income (loss)		(7,083,015	)		704,720			(2,769,759	)		(5,312	)		(9,153,366	)
Interest income		50			-			-			-			50
Interest expense		2,856,447			-			-			-			2,856,447
Segment assets		15,161			10,125,070			3,079,681			-			13,219,912
Fixed assets and leased equipment purchases		-			-			382,809			888			383,697
Depreciation and amortization		536			830,966			172,466			658,499			1,662,467
Nine months ended June 30, 2012
Sales to external customers	$	-		$	233,743		$	190,662		$	357,374		$	781,779
Segment loss		(7,705,947	)		(294,166	)		(305,081	)		(104,968	)		(8,410,162	)
Interest income		102			-			-			-			102
Interest expense		459,297			-			-			-			459,297
Segment assets		42,204			778,919			1,058,335			203,664			2,083,122
Fixed assets and leased equipment purchases		-			-			1,224			-			1,224
Depreciation and amortization		536			-			114,281			29,123			143,940

18. Lease Commitments

The Company leases office space under non-cancelable operating leases.  Future minimum rental payments under non-cancelable operating leases as of June 30, 2013 were as follows:

Years Ending September 30,
2013	$	53,119
2014		277,603
2015		308,330
2016		317,580
2017		327,107
Thereafter		280,077
Total	$	1,563,816

The rent expense for the Company’s facilities held under non-cancelable operating leases was $236,792 and $109,212 for the nine months ended June 30, 2013 and 2012, respectively.

19. Fair Value Measurements

US GAAP establishes a fair value hierarchy that prioritizes the inputs used to measure fair values. The Company measured the fair values using the hierarchy levels as follows:

Level 1	The Company does not have any fair value balances classified as Level 1.
Level 2	The Company’s embedded derivatives are measured on a recurring basis using Level 2 inputs.
Level 3	The Company’s goodwill is measured using Level 3 inputs (see note 5).

The Company’s embedded derivatives liability is re-measured to fair value at each reporting date until the contingency is resolved.  See Note 13 above for more information about this liability and the inputs used for calculating fair value.

24

20. Subsequent Events

Subsequent to June 30, 2013, the Company entered into the following agreements and transactions:

(1)	In July 2013, the Company entered into three loan conversion agreements with the Company’s Chief Executive Officer and an entity controlled by the Company’s Chief Executive Officer.  The Company issued 1,704,715 shares of common stock for the conversion, at $0.75 per share, of three Series B debenture loans representing principal and interest in the amount of $1,278,536.
(2)	In July 2013, the Company issued 3,180,000 shares of common stock, at $0.75 per share, for cash investments from the Company’s Chief Executive Officer totaling $2,385,000 during the period April 2013 through July 2013.
(3)	In July 2013, the Company entered into an additional short-term loan of $175,000 from the Company’s Chief Executive Officer with interest at 12%, due on demand.  The note included $17,500 of loan origination fees.
(4)	In July 2013, a Series D shareholder requested to convert 20,000 shares of Series D preferred stock into 100,000 shares of common stock.
(5)	In July 2013, the Company entered into a securities purchase agreement with accredited investors in a private placement to purchase previously unissued shares of common stock at $0.75 per share.  The Company issued 333,333 shares of common stock for $250,000.
(6)	In July 2013, the Company entered into two loan conversion agreements with a related party.  The Company issued 457,216 shares of common stock for the conversion of two Series A debenture agreements representing principal and interest in the amount of $342,912.
(7)	In August 2013, the Company entered into loan conversion agreements with an officer of the Company.  The Company issued 333,334 shares of common stock for the conversion of a Series A debenture agreement representing principal and interest in the amount of $250,000.
(8)	In August 2013, the Company entered into loan conversion agreements with two investors.  The Company issued 85,719 shares of common stock for the conversion of a Series A debenture agreement representing principal and interest in the amount of $64,289.
(9)	In August 2013, the Company entered into a securities purchase agreement with accredited investors in a private placement to purchase previously unissued shares of common stock at $0.75 per share.  The Company issued 380,000 shares of common stock for $285,000.
(10)	In August 2013, the Company also entered into two secured loan agreements with two investors in the amount of $550,000, guaranteed by a former Chief Executive Officer of the Company.  The loans bear annual interest of 12% with interest payments due quarterly.  The loans mature in August 2014.  The Company also issued warrants with the option to purchase 36,667 shares of the Company’s common stock at $0.75 per share related to the loan agreements.

25

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, 2012 and 2011, and the accompanying notes thereto, contained in our Annual Report on Form 10-K and our unaudited condensed consolidated financial statements for the three and nine months ended June 30, 2013, and the accompanying notes thereto, contained in the Form 10-Q. 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. (SCRA.BB).  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.  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 on them during the day to ensure their safety, well-being and location. 

Our emphasis in fiscal year 2012 was focused on addressing the chronic conditions and disease states markets.  During fiscal year 2012, we received valuable feedback through sales and focus groups reaching thousands of patients.  We launched an additional product line focused on technology for assisting the chronically ill.  We also successfully acquired 4G Biometrics, LLC (“4G”) and Green Wire, LLC, Green Wire Outsourcing, Inc., Orbit Medical Response, LLC, and Rapid Medical Response, LLC (collectively, “Green Wire”).  These acquisitions greatly increased our customer base and capacity as well as our abilities to include telehealth and other monitoring services in our product offerings.  The focus in fiscal year 2013 is to further develop and execute on our existing business plan serving the chronic conditions and disease states markets.

Recent Developments

We have financed operations primarily through securities purchase agreements, long-term debt and short-term debt.  If our revenues continue to be insufficient to meet our needs, we will attempt to secure additional financing through financial institutions or through the sale of our equity or debt securities.  However, because of our early stages of business and our current financial condition, our attempts may be unsuccessful in obtaining the necessary financing to continue to implement our plan of operations.  There can be no assurance that we will be able to obtain financing on satisfactory terms or at all.  In addition, if we only have nominal funds with which to conduct our business activities, it will negatively impact the results of our operations and our financial condition.

During the year ended September 30, 2012, we established GWire Corporation (“GWire”) as a subsidiary.  Effective September 1, 2012, GWire acquired the net assets and interests of Green Wire.  We entered into employment agreements with two of Green Wire’s operating managers on November 1, 2012. These two individuals were granted 27% ownership in GWire; ActiveCare retained the remaining 73%.

The purchase price for Green Wire reflects was $2,276,737, which has been allocated to $12,215 of cash, $13,976 of accounts receivable, $92,022 of property and equipment, $16,964 of deposits and other assets, $229,249 of leased equipment, $2,155,776 of customer contracts, $154,206 of accounts payable, $55,117 of accrued expenses, and $34,142 of deferred revenue.

During the nine months ended June 30, 2013, the GWire operating managers surrendered the 27% ownership in GWire to the Company by exercising the GWire options to acquire shares of the Company’s common stock.  ActiveCare now owns 100% of GWire.

During the nine months ended June 30, 2013, we sold the net assets and operations of our Reagents business segment.  The sale price for the Reagents segment reflects net consideration received of $184,318 in cash in exchange for the sale of net assets of $129,222, which were comprised of $33,069 of accounts payable, $82,959 of net receivables, $53,500 of net inventory, and $25,832 of net property and equipment.  The Company may receive additional annual payments at five percent net of  income from Reagents, through the fifth anniversary, if Reagents Revenue is at least $465,000 for the previous twelve-month period ending on the closing date anniversary.  The sale of the Reagent business allows the Company to focus on the Chronic Illness Monitoring and CareService segments.

26

Research and Development Program

ActiveOne+

ActiveOne+ is the second-generation PAL (“Personal Assistance Link”) 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 technology to better detect when a fall occurs as well as enhanced locating technology that combines both GPS and cellular triangulation and 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 have obtained FCC certification for ActiveOne+.

During the nine months ended June 30, 2013, we spent $215,981, compared to $81,557 for the same period in 2012, on research and development (“R&D”) related to the ActiveOne+, 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.  The ActiveOne+ is a water resistant wrist device that includes fall detection, speakerphone, vibration alerts, audible alerts, and LED’s for status monitoring.  It communicates through Bluetooth with the Companion Device. Our goal is to develop this wristwatch-size monitoring device primarily for senior citizens.  The watch is 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.  

Chronic Illness Monitoring

Chronic illness monitoring involves the use of biometric monitoring devices in combination with proprietary data and algorithms to assess and predict the wellbeing of an individual under care.  Individual care profiles are created through the aggregation of personal health and medical claims information from multiple data sources.  Real-time biometric readings for blood glucose levels, blood pressure, heart rate, weight, tidal volume and other vital readings are captured over time and added to the existing personal information.  This unique data set may now be used for proactive care protocols, care provider alerts to elevated readings, and behavioral intervention prior to crisis events.

Technology to facilitate data driven chronic illness monitoring consists of three components: (1) biometric monitoring devices, (2) medical and claims data aggregation, and (3) algorithms for the analysis of the data.  Biometric monitoring devices are provided by numerous medical hardware providers, and deliver a wide range of features and functionality.  ActiveCare is agnostic to any specific device requirement, and has as a core competency the ability to integrate to and capture data from any 510(k) or HL7 compliant monitoring device (see “Regulatory Matters”).  Strategic relationships have been created with technology and market leaders, and evaluation of new and emerging technology partners is ongoing.  Medical and claims data is aggregated from multiple source providers using a proprietary application programmatic interface and data storage architecture.  This data is analyzed to identify individual care needs of those entering the program.  Monitoring alerts, predictive informatics and individual care plans are created and managed using the ActiveCare technology platform.  Care for chronic conditions may now be performed in real-time, and outcomes may be measured on both a medical and claims cost basis.

During the nine months ended June 30, 2013, we spent $373,742, compared to $31,250 for the same period in 2012, on R&D for chronic illness monitoring related to the development of prototype methods and systems for the capture and analysis of data, as well as the development of scalable architectures to migrate to production applications and deployments.  We will continue to identify claims and medical data sets as well as analytical and informatics technologies that advance our ability to provide unique services.  Core competency will continue to evolve in the methods and technologies for data analytics and predictive informatics. 

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 our consolidated results of operations or financial position.

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 US 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.

27

Material accounting policies that we believe are critical to an understanding of our financial results and conditions are 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 their expected collectability.

Accounts Receivable

Accounts receivable are carried at the 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 using the first-in, first-out (“FIFO”) method. Chronic Illness Monitoring inventory consists of diabetic supplies.  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 assets or the term of the leases.  Expenditures for maintenance and repairs are expensed while renewals and improvements over $500 are capitalized.  When property and equipment are sold or otherwise disposed of, any gains or losses are included in the results of operations.

Equipment Leased to Customers

Our leased equipment is stated at cost less accumulated depreciation and amortization.  We amortize the cost of leased equipment using the straight-line method over 36 months, which is the estimated useful life of the equipment.  Amortization of leased equipment is recorded as cost of revenues.

Revenue Recognition

Our revenue has historically been from three sources: (i) sales from Chronic Illness Monitoring services and supplies; (ii) sales from CareServices; and (iii) sales of medical diagnostic stains from our Reagents segment, which was sold during the 3 months ended June 30, 2013 and reported as discontinued operations.

Chronic Illness Monitoring

We began sales through 4G upon our acquisition of the company in the quarter ended March 31, 2012.  We recognize Chronic Illness Monitoring revenue when persuasive evidence of an arrangement with the customer exists, title passes to the customer, prices are fixed or determinable and collection is reasonably assured.

Shipping and handling fees are included as part of net revenues.  The related freight costs and supplies directly associated with shipping products to customers are included as a component of cost of revenues.  Sales of Chronic Illness Monitoring products and services do not contain multiple deliverables.

We enter into agreements with self-insured companies to lower medical expenses by distributing diabetic testing supplies to their employees (members) and monitoring their test results.  The self-insured companies are obligated to pay for the supplies that we distribute to the members on a quarterly basis.  The term of these contracts is one year and, unless terminated by either party, will automatically renew for another year.  All of our Chronic Illness Monitoring sales are made with net 30-day payment terms.

28

With respect to Chronic Illness Monitoring revenues, to qualify for the recognition of revenue under US GAAP at the time of sale, the following must be present:

· The price to the contracted self-insured company is fixed or determinable at the date of sale.

· The self-insured company has paid, or is obligated to pay us within terms.

· The self-insured company’s obligation to the Company would not be changed in the event of theft or physical destruction or damage of the product.

· Once the product is shipped, the end user does not have the right of return.

CareServices

“CareServices” include contracts in which we provide monitoring services to end users and sell devices to distributors.  We typically enter into contracts on a month-to-month basis with customers (members) that use our CareServices.  However, these contracts may be cancelled by either party at any time with 30-days notice.  Under our standard contract, the 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 devices at the end of each month that CareServices have been provided.  In those circumstances in which we receive payment in advance, the Company records these payments as deferred revenue.

We recognize CareServices revenue when persuasive evidence of an arrangement with the customer exists, title passes to the customer, prices are fixed or determinable and collection is reasonably assured.  Shipping and handling fees are included as part of net revenues.  The related freight costs and supplies directly associated with shipping products to customers are included as a component of cost of revenues.  Customers order our products by phone or website.  All CareServices sales are made with net 30-day payment terms.

In connection with US GAAP, to qualify for the recognition of revenue at the time of sale, the following must be present:

· 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 terms, 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 not significant.

The vast majority of sales for CareServices are service revenues.  Because equipment sales are not material, we disclose services and equipment sales together in the accompanying financial statements.

Our revenue recognition policy for sales to distributors of CareServices 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.  Our distributors are not required to maintain specified amounts of product on hand, and distributors are not required to make minimum purchases to maintain distributor status.  Distributors have no stock rotation rights or additional rights of return.  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 CareServices revenue transactions do not have multiple elements.  On occasion, we have revenue transactions that have multiple elements (such as device sales to distributors).  In these situations, we provide the distributor with the ActiveOne™ device and a monthly monitoring service, which are both included in the contracted pricing.  In these multiple element revenue arrangements, we will consider whether: (i) the deliverables have value on a standalone basis to the distributors, and (ii) the distributors have a general right of return.  We determined that these elements do have standalone value to distributors and that the delivery of undelivered items is probable and substantially within our control.  Therefore these revenue elements should be considered as separate units of accounting.  Consideration is to be allocated at the inception of the arrangement to all deliverables on the basis of their relative selling prices.  When applying the relative selling price method, the selling price for each deliverable is determined using vendor-specific objective evidence of selling price, if it exists; otherwise, third-party evidence of the selling price is used to determine the selling price.  If neither vendor-specific objective evidence nor third-party evidence of the selling price exists for a deliverable, then the best estimate of the selling price is used for that deliverable.

29

We do not currently sell, nor do we intend to sell the ActiveOne™ device separately from the monthly monitoring service, therefore we are not able to determine vendor-specific objective evidence of selling price.  We are also unable to determine third-party evidence of selling price, because there is not a similar product in the market.  The ActiveOne™ device is the only device in the market with fall detection technology.  We are therefore required to determine the best estimate of its selling price in order to determine the relative selling price of the separate deliverables in the revenue arrangements.  In order to determine the best estimate of selling price of the ActiveOne™ device, we included the following cost components in our estimate: production costs, development costs, PTCRB certification costs, and estimated gross margin.  In order to determine the best estimate of the monthly monitoring service, we included the following components in our estimate: monthly communication costs, monitoring labor costs, Public Safety Access/Answering Point (“PSAP”) database and monthly maintenance costs, and estimated gross margin.  The relative selling price allocated to the sale of the ActiveOne™ device is recognized when the device is delivered to the distributor.  The relative selling price of the monitoring service is recognized monthly when the services have been provided.

Results of Operations

Three Months Ended June 30, 2013 and 2012

Net Revenues

For the three months ended June 30, 2013, we generated net revenues of $4,327,677, compared to $296,660 for the three months ended June 30, 2012.  Chronic Illness Monitoring revenues accounted for $3,912,300 and $230,625 for the three months ended June 30, 2013 and 2012, respectively.  CareServices revenues, including revenue for the ActiveOne™ service, accounted for $415,377 and $66,035 of the total revenues for the three months ended June 30, 2013 and 2012, respectively.  The primary reason for the total revenue increase is the new sales generated by Chronic Illness Monitoring and CareServices.

Cost of revenues

Cost of revenues totaled $3,413,762 for the three months ended June 30, 2013, compared to $334,302 for the three months ended June 30, 2012.  During the three months ended June 30, 2013, Chronic Illness Monitoring accounted for $2,853,557 and CareServices accounted for $560,205 of the total cost of revenues.  In comparison, for the three months ended June 30, 2012, Chronic Illness Monitoring accounted for $169,264 and CareServices accounted for $165,038.  The increase is primarily due to the increase of sales generated by Chronic Illness Monitoring and CareServices.

Research and Development Expenses

For the three months ended June 30, 2013, we incurred research and development expenses of $121,011, compared to $63,906 in research and development expenses for the three months ended June 30, 2012.  The increase is primarily due to the development of the Chronic Illness Monitoring operation system.

Selling, General and Administrative Expenses

For the three months ended June 30, 2013, selling, general and administrative expenses totaled $2,733,452, compared to $793,232 for the three months ended June 30, 2012.  The increase is primarily due to non-cash stock-based compensation and the expenses incurred to support the growth of Chronic Illness Monitoring and CareServices.

Other Income and Expense

There was no gain on derivatives for the three months ended June 30, 2013, compared to a loss on derivatives of $1,320,918 for the three months ended June 30, 2012.  Due to the 10-for-1 reverse common stock split, no derivative liability exists as of June 30, 2013.  Net interest expense was $1,065,414 and $223,379 for the three months ended June 30, 2013 and 2012, respectively.  The increase is primarily due to the increase of notes payable during the current fiscal year.  For the three months ended June 30, 2013 we incurred a loss on disposal of property and equipment of $101,421 primarily due to moving our corporate offices.

30

Net Loss from Continuing Operations

We incurred a net loss from continuing operations for the three months ended June 30, 2013 totaling $3,110,019, compared to a net loss of $2,439,077 for the three months ended June 30, 2012.  This increase in net loss was primarily due to the increase of selling and administrative expenses from Chronic Illness Monitoring and CareService and increases in interest expense.  The net loss per share from continuing operations was $0.59 and $0.55 for the three months ended June 30, 2013 and 2012, respectively.

Discontinued Operations

During the three months ended June 30, 2013, we sold the net assets and operations of the Reagents business segment of the Company to a third party for $184,317 in cash.  During the three months ended June 30, 2013, we recognized a loss from discontinued operations of $12,301 compared to a loss of $3,629 during the three months ended June 30, 2012.

Dividends on Preferred Stock

We accrued $79,219 of dividends on Series C and Series D preferred stock for the three months ended June 30, 2013, compared to $14,057 for the three months ended June 30, 2012.  The increase in dividends was due to the increased number of shares of Series D preferred issued and outstanding during the current period.

Nine Months Ended June 30, 2013 and 2012

Net Revenues

For the nine months ended June 30, 2013, we had net revenues of $11,414,094, compared to $424,405 for the nine months ended June 30, 2012.  CareServices revenues, including revenue for the ActiveOne™ service, totaled $1,292,178 and $190,662 of the total revenues for the nine months ended June 30, 2013 and 2012, respectively.  Chronic Illness Monitoring revenues totaled $10,121,916 and $233,743 for the nine months ended June, 2013 and 2012, respectively.  The primary reason for the total revenue increase is the new sales generated by Chronic Illness Monitoring and CareServices.

Cost of revenues

For the nine months ended June 30, 2013, cost of revenues totaled $9,466,809, compared to $666,287 for the nine months ended June 30, 2012.  CareServices cost of revenues totaled $2,027,829 and $495,743 for the nine months ended June 30, 2013 and 2012, respectively.  Chronic Illness Monitoring cost of revenues totaled $7,438,980 and $170,544 for the nine months ended June, 2013 and 2012, respectively.  The increase is primarily due to the increase of sales generated by Chronic Illness Monitoring and CareServices.

Research and Development Expenses

For the nine months ended June 30, 2013, we incurred research and development expenses of $589,723, compared to $112,807 in research and development expenses for the nine months ended June 30, 2012.  The increase is primarily due to the development of the Chronic Illness Monitoring operation system.

Selling, General and Administrative Expenses

For the nine months ended June 30, 2013, selling, general and administrative expenses totaled $7,606,290, compared to $6,145,136 for the nine months ended June 30, 2012.  The increase is primarily due to the expenses incurred to support the growth of Chronic Illness Monitoring and CareServices

Other Income and Expense

For the nine months ended June 30, 2013, gain on derivatives was $45,697, compared to a loss on derivatives of $1,346,174 for the nine months ended June 30, 2012.  Due to the 10-for-1 reverse common stock split, no derivative liability exists as of June 30, 2013. Interest expense was $2,856,397 and $459,195 for the nine months ended June 30, 2013 and 2012, respectively.  The increase is primarily due to the increase of notes payable during the current fiscal year.  For the nine months ended June 30, 2013, we incurred a loss of disposal on property and equipment of $101,421 primarily due to moving our corporate offices.

Discontinued Operations

During the nine months ended June 30, 2013, we sold the net assets and operations of the Reagents business segment.  During the nine months ended June 30, 2013, we recognized a loss from discontinued operations of $5,312 compared to a loss of $104,968 during the nine months ended June 30, 2012.

31

Dividends on Preferred Stock

We accrued $213,192 of dividends on Series C and Series D preferred stock for the nine months ended June 30, 2013, compared to $40,842 for the nine months ended June 30, 2012.  The increase in dividends was due to the increased number of shares of Series D preferred issued and outstanding during the current period.

Liquidity and Capital Resources

Our primary sources of liquidity are proceeds from the issuance of equity and debt securities.  We have not been in a position to finance operations from cash flows from operating activities.  We anticipate that we will continue to seek equity and debt funding to supplement revenues from the sale of our products and services until we begin to have positive cash flows from operating activities.

As of June 30, 2013, we had cash of $122,330, compared to $529,839 as of September 30, 2012.  The decrease in cash was due to increased cash used in operating activities off set by cash provided by financing activities during the nine months ended June 30, 2013, compared to the fiscal year ended September 30, 2012. As of June 30, 2013 we had a working capital deficit of $6,741,951 compared to $10,143,700 as of September 30, 2012.  The decrease in working capital deficit is primarily due to the increase of accounts receivable and the elimination of the derivatives liability.

For the nine months ended June 30, 2013 and 2012, operating activities used cash of $6,515,995 and $1,928,486, respectively.  The increased cash used in operating activities was primarily due to increased accounts receivable and increased cash losses for the nine months ended June 30, 2013, compared to the same period in 2012.  Investing activities for the nine months ended June 30, 2013 and 2012 used cash of $199,475 and $207,729, respectively.  The cash used in investing activities was primarily due to increased purchasing of equipment leased to customers offset by the proceeds from the sale of discontinued operations for the nine months ended June 30, 2013.  Financing activities for the nine months ended June 30, 2013 and 2012 provided cash of $6,307,961 and $2,035,000, respectively.  The increase was due to increased cash proceeds from notes payable issued for the nine months ended June 30, 2013.

For the nine months ended June 30, 2013, we had a net loss of $9,153,366, compared to a net loss of $8,410,162 for the nine months ended June 30, 2012.  The increase in net loss was due primarily to the increase in operational expenses and interest expenses for the nine months ended June 30, 2013.

As of June 30, 2013, we had an accumulated deficit of $46,725,775 compared to $37,359,214 as of September 30, 2012.  Stockholders’ deficit as of June 30, 2013 was $7,119,629 compared to stockholders’ deficit of $7,715,390 as of September 30, 2012.  The decrease in stockholders’ deficit is primarily due to the increase of additional paid-in capital from the decrease of derivative liabilities.

Recent Accounting Pronouncements

We have reviewed all recently issued, but not yet effective, accounting pronouncements and do not believe the future adoptions of any such pronouncements will cause a material impact on our financial position or the results of our operations.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

Information about the Company’s exposure to market risk was disclosed in our Annual Report on Form 10-K for the year ended September 30, 2012, which was filed with the Securities and Exchange Commission on January 15, 2013. There have been no material quantitative or qualitative changes in market risk exposure since the date of that filing.

Item 4.  Controls and Procedures

Evaluation of 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 reports under the Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed, summarized, and reported within the time periods that are specified in the rules and forms of the Securities and Exchange Commission (“SEC”) 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.

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 Exchange Act). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of the end of the period, our disclosure controls and procedures were not effective, for the reasons discussed below.  

During the audit process for the year ended September 30, 2012, we identified material weaknesses in internal control over financial reporting as follows:

32

Control Environment

We did not maintain an effective control environment for internal control over financial reporting.  Specifically, we concluded that we did not have appropriate controls in the following areas:

· Period end financial disclosure and reporting processes.

· Communication of material transactions between management and accounting personnel.

Financial Reporting Process

We did not maintain an effective financial reporting process to prepare financial statements in accordance with US GAAP.  Specifically, we initially failed to appropriately account for and disclose the valuation and recording of certain equity arrangements and financing transactions, as well as the accounting and disclosure of the acquisition of 4G.

Management has not made any correcting changes to our internal control over financial reporting and the above material weaknesses remained as of June 30, 2013.  Similar material weaknesses to those identified in the 4G acquisition were also identified in the Green Wire acquisition.

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.

We are in the process of improving our internal control over financial reporting in an effort to eliminate these material weaknesses through improved supervision and training of our staff, but additional effort and staffing are 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.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2013 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

On December 18, 2012, iLife Technologies, Inc. filed a lawsuit against nine companies, including ActiveCare, for patent infringement in the District Court for the Northern District of Texas.  The lawsuit alleged infringement of seven patents owned by iLife purportedly related to the use of accelerometers in devices used to monitor the status of a user.  In May 2013, ActiveCare entered into a settlement agreement and patent license agreement with iLife Technologies, Inc. and an agreed motion was filed to dismiss all claims of the lawsuit.

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

Recent Sales of Unregistered Securities

During the nine months ended June 30, 2013, we issued the following shares of common stock without registration under the Securities Act of 1933 (the “Securities Act”):

· 425,000 shares for the exercise of options held by two key managers of GWire;

· 207,361 shares valued at $310,002 as service compensation to six independent consultants;

· 10,218 shares valued at $97,532 as dividends accrued for Series C and Series D preferred stock holders;

· 25,000 shares valued at $27,500 for services provided by an entity that is controlled by an officer of the Company;

· 150,000 shares for the conversion of 30,000 shares of Series D preferred stock;

· 100,000 shares valued at $150,000 as compensation of a new key employee as an incentive to work for the Company, which vests 25% during the first year of employment and the remaining 75% evenly over the following nine quarters;

· 4,758 shares valued at $7,137 for the extension of related-party payables;

· 217,833 shares as loan origination fees at a value of $329,789;

· 100,000 shares for the conversion of outstanding debt in the amount of $100,000;

· 90,000 shares valued at $136,500 for the extension of third-party notes payable;

· 2,600 shares valued at $3,900 as part of the issuance of $26,000 of new debt to a related party;

· 27,650 shares for employee bonuses valued at the date of grant at $39,825;

· 29,600 shares to employees in accordance with the following restricted stock agreement:

33

We agreed to issue 97,500 restricted shares of common stock to certain employees in connection with our milestones in fiscal year 2010.  During the nine months ended June 30, 2013, we issued 29,600 restricted shares of common stock valued at $399,600 on the date of the grant, and reduced the shares of non-vested common stock by 17,400 shares due to the change of employment status of several individuals.  During the fiscal year ended September 30, 2012, no restricted shares of common stock were issued to employees.  During the nine months ended June 30, 2013 and 2012, we recognized compensation expense of $0 and $117,187, respectively.  As of June 30, 2013 and September 30, 2012, the unrecognized stock-based compensation was $51,515 and $245,952, respectively, and will be recognized over the remaining vesting term.

We issued shares of preferred stock without registration under the Securities Act during the nine months ended June 30, 2013, as follows:

· 78,174 shares for $691,363 in loan origination fees;

· 71,800 shares for future advisory services through December 2014, the value on the date of grant was $230,800;

· 20,000 shares for future consulting services through December 2013, the value on the date of grant was $60,000;

· 52,913 shares for $150,000 in previously accrued Board of Directors’ fees and $61,652 of additional compensation for past services;

· 24,300 shares for a bonus to an officer for past services, the value on the date of grant was $97,200;

· 7,169 shares for dividends on Series C preferred stock, the value on the date of grant was $40,382;

· 2,342 shares for dividends on Series D preferred stock, the value on the date of grant was $13,263;

· 95,400 shares for past consulting services by an entity controlled by an officer of the Company, which were previously accrued in the amount of $333,902;

· 30,000 shares for a bonus to an entity controlled by an officer of the Company for consulting services, the value on the date of grant was $105,000;

· 80,000 shares for a bonus to the CEO of the Company for signing an employment agreement with the Company, the value at the date of grant was $320,000, which cannot convert to common stock until the Company has 20,000 members.

The securities issued in the above transactions were not registered under the Securities Act in reliance upon exemptions from registration under Section 4(2) of the Securities Act and rules and regulations promulgated thereunder.

Item 3.   Defaults Upon Senior Securities

As of the date of this report, notes payable to five unrelated parties with total principal amounts due of $2,150,000 are in default and unpaid (see Note 11).  These notes payable were due in November 2012, March 2013, and April 2013.  The Company continues to make payments on these notes payable.  In addition, notes payable due to related parties with total principal amounts of $2,364,726 are in default and unpaid.  These notes payable were due in June 2012, April 2013 and June 2013, or the Company is late on certain payments (see Note 12).

Item 5.     Other Information

None.

34

Item 6. Exhibits

Exhibit Number	Description
10(x)	Employment Agreement with David Derrick, Chief Executive Officer (filed previously as exhibit to report on Form 10-Q, filed May 15, 2013)*
10(xi)	Common Stock Purchase Warrant Agreement with David Derrick, Chief Executive Officer (filed previously as exhibit to report on Form 10-Q, filed May 15, 2013)*
10(xii)	Office Lease Agreement between the Company and Countryview  Properties, LLC (filed previously as exhibit to report on Form 10-Q, filed May 15, 2013)*
10(xiii)	Subscription Agreement
10(xiv)	Form of Secured Convertible Promissory Note
10(xv)	Security Agreement
31.1	Certification of Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002
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.

101 INS	XBRL Instance Document*
101 SCH	XBRL Schema Document*
101 CAL	XBRL Calculation Linkbase Document*
101 DEF	XBRL Definition Linkbase Document*
101 LAB	XBRL Labels Linkbase Document*
101 PRE	XBRL Presentation Linkbase Document*

*           The XBRL related information in Exhibit 101 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.

35

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/  David G. Derrick
	David G. Derrick Chief Executive Officer (Principal Executive Officer) and Chairman of the Board of Directors

Date: August 27, 2013

/s/  Michael G. Acton

Michael G. Acton

Chief Financial Officer (Principal Financial and Accounting Officer)

Date: August 27, 2013

36