Overview
ActiveCare, Inc. ("we," "us," "our," the "Company" or "ActiveCare") was formed March 5, 1998 as a wholly owned subsidiary of Track Group, Inc. (OTCQX: TRCK), then a Utah corporation, formerly known as SecureAlert, Inc. ("Track Group"). We were spun off from Track Group in February 2009. Effective July 15, 2009, we changed our name to ActiveCare, Inc. Our state of incorporation is Delaware. Our fiscal year ends on September 30.
We own or have rights to trademarks, service marks or trade names that we use in connection with the operation of our business, including, without limitation, "CareCenter," "4G," "ActiveOne," "ActiveOne+," "ActiveHome," "ActiveCare" and the stylized "ActiveCare" logo. Solely for convenience, some of the trademarks, service marks and trade names referred to in this report are listed without the ©, ® and ™ symbols, but we will assert, to the fullest extent under applicable law, our rights to our copyrights, trademarks, service marks, trade names and domain names. The trademarks, service marks and trade names of other companies appearing in this report are, to our knowledge, the property of their respective owners.
Our focus is on the monitoring of individuals with diabetes. Diabetes is a pandemic that, as of 2014, affected approximately 9% of the U.S. population or 29 million Americans. Studies have shown that the annual cost of treating an individual with diabetes and the comorbidities associated with the disease is approximately $13,700 per year. This combination costs the U.S. health system up to $245 billion annually. The lack of regular glucose monitoring by diabetics is a major driver of diabetic related claims. It is estimated that as much as 80% of diabetics are non-compliant with their treatment plans, despite physician recommendations.
We believe we offer a unique approach to caring for individuals with diabetes by adding a "human touch" and monitoring component to traditional disease management. We have created a "CareCenter" where our "CareSpecialists" reach out to engage members while monitoring their condition on a regular and real-time basis. Our personalized and active monitoring approach allows for issues to be addressed promptly, avoiding major and costly future health complications.
The Problem: Diabetes and its Effect on Healthcare
Diabetes is a condition in which the body does not properly process food for use as energy. Most of the food we eat is turned into glucose, or sugar, for our bodies to use as energy. In order to do so, our pancreas produces a hormone called insulin to help glucose be absorbed by the cells of our bodies. Diabetes results from the body not producing sufficient levels of insulin needed to convert sugar, starches and other food into energy needed for daily life. In some instances, the body does not respond appropriately to insulin, a condition called "insulin resistance," resulting in elevated blood glucose levels. With heightened glucose levels, the blood thickens becoming concentrated, almost "gel-like," causing the heart and other organs to work harder in order to pump and circulate the blood throughout the body.
Diabetes can cause serious health complications including heart disease, blindness, kidney failure and lower extremity amputations. The National Diabetes Statistics Report for 2014, published by the Center for Disease Control and Prevention, estimates that 29.1 million people or 9.3% of the U.S. population is suffering from diabetes, comprised of 21 million diagnosed cases and 8.1 million undiagnosed cases. Diabetes is the seventh leading cause of death in the United States.
There are two types of diabetes:
Type I Diabetes
— Accounting for between 5% – 10% of all diagnosed cases of diabetes as reported by the Centers for Disease Control and Prevention,
type I diabetes
is a chronic disease that usually appears during childhood or the teenage years in which the pancreas does not produce insulin. For unknown reasons, the immune system of people with
type I diabetes
attacks various cells in the body, including the insulin-producing ones of the pancreas. As a result, the body has a total depletion of the insulin hormone. The body's process of converting sugar into energy is disrupted when insulin is not present. This disruption causes the build-up of sugar in the blood, leading to complications such as dehydration, weight loss and ultimately serious damage to the body. There is no cure for
type I diabetes
and it is not preventable.
Type II Diabetes
—
Type II diabetes
accounts for between 90% – 95% of all diagnosed cases of diabetes and differs from
type I diabetes
in that the body cannot use insulin properly, a condition called insulin resistance. At first, a patient's pancreas makes extra insulin to make up for it. Over time the pancreas is not able to keep up and cannot make enough insulin to keep blood glucose at normal levels.
Type II diabetes
can develop at any age, most commonly becoming apparent during adulthood. However,
type II diabetes
in children is rising.
Whereas
type I diabetes
cannot be prevented,
type II diabetes
can be prevented or delayed with proper management. Proper management and control begins with adherence to treatment plans prescribed by medical providers. These plans are a combination of lifestyle changes, medication and regular testing (the American Diabetes Association recommends 3-4 tests per day). By testing at least 3 times per day, an individual with
type II diabetes
can learn how to control their chronic illness through proper food intake, weight control and exercise.
If diabetics do not properly manage their disease, their blood will thicken. This causes the heart and other organs to work harder in order to pump and circulate blood and leads to the following comorbidities:
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Blindness
— diabetes is a leading cause of blindness.
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Stroke
— diabetics are 1.5 times as likely to have a stroke as compared to non-diabetics.
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Heart attack
— diabetics are 1.8 times as likely to have a heart attack as compared to non-diabetics.
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Kidney disease
— diabetes is the leading cause of kidney failure.
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Amputation
— diabetes is the leading cause of non-traumatic lower limb amputations.
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A problem with diabetics' management of their disease is clearly evident: between 50-80% of those with diabetes remain non-compliant with their treatment plans. Traditional programs remain ineffective because they provide no real-time visibility to medical professionals. Vital readings and information into a patient's daily health and behaviors remain on the meter or testing devices and are often never shared or seen by a qualified medical professional.
With actionable and reliable information unavailable, healthcare professionals rely mainly on patients' self-reporting and their A1C (90 day blood glucose average) test results. While these data points provide some historic insight, they are unable to show the daily high and low blood glucose events. We believe that something different is needed to effect and change behavior.
Healthcare professionals lack data on their diabetic patient's daily health, there is no way to effectively monitor an individual's condition. Without active monitoring, there is no way to know if an individual requires attention before their situation becomes critical and requires medical intervention either through the emergency room or a patient hospital stay. In our estimation, current diabetes management programs lack the ability to share and transfer information in "real-time." This results in a reactionary approach that focuses and supports individuals after they have had a high cost claim and are considered high risk.
The ActiveCare Solution
The ActiveCare solution is focused on getting diabetic patients to test and manage their chronic illness on a regular and real-time basis. ActiveCare provides its solution to self-insured companies ("SICs") through third party administrators ("TPAs") and a network of health insurance brokers. In accordance with HIPAA regulations, an SIC cannot administer its own health plan due to privacy regulation and an SIC must have an unaffiliated third party administer the healthcare plan. The members that directly engage with our CareCenter specialists (or CareSpecialists) are diabetic patients employed by these SICs.
An ActiveCare member's introduction to our program begins his/her receipt of a state-of-the-art cellular glucometer and testing supplies. Our CareSpecialist will then walk the new member through how to use the new device and direct the member to register on a private and secure website that records all of the member's readings. From that point forward, the CareSpecialist establishes a personal working relationship with the diabetic member — encouraging testing; helping the member better understand their test results and how to respond to high or low readings — all on a real-time basis. It is this relationship that facilitates better health for our members, while ultimately saving the healthcare provider significant amounts in reduced claims.
As part of these efforts, we have staffed our CareCenter with highly trained "CareSpecialists" that maintain consistent contact with our members helping them through the ups and downs of managing their glucose levels. For example, when test results exceed certain thresholds (e.g., glucose readings being too high or too low) or a certain amount of time has passed without testing, members receive a prompt call from a CareSpecialist who will triage the member and, if necessary, contact emergency personnel. This "live" and timely intervention provides the platform of insight for members to modify their behavior while reinforcing goals to better manage their disease. Based on our internal data, we believe that each CareSpecialist can handle approximately 2,000 active diabetic members and make 300 outbound calls per week, as well as respond to emergency calls when readings are out of stated parameters. With real-time data, the CareSpecialists provide proactive support and encouragement to members before they become high risk. Our approach is designed to improve the health and wellness of members while also lowering the overall costs of medical care paid by their employers.
Our CareCenter is centrally located at our headquarters in Orem, Utah and can monitor diabetics throughout the United States. Our CareCenter location is also an ideal location for locating and training our CareSpecialists as it is within a five mile radius of some of the top universities with access to over 70,000 graduating students to draw from as CareSpecialists. If we desire to expand our service offerings in other countries, we would set up additional CareCenters in such regions as needed, in order to meet the appropriate dialect, customs and regulations required to support the end member.
Training of our CareSpecialists
CareSpecialists receive extensive initial and on-going training comparable to the training received by 911 emergency dispatchers (National Academy of Emergency Dispatchers). Upon being hired, a CareSpecialist goes through a two week course, in which they have classroom training on the ActiveCare solution; what diabetes is; corporate culture, opportunities within the Company; meeting Company personnel; how to on-board members and how to handle compliance calls and alert calls. This classroom training takes place for the first week, with half of each day dedicated to the classroom, and the remaining half day shadowing a team lead. The second week trainees perform calls while a team leader is there to assist and intervene if needed. During the following 90 days, the new hire is on probation and their phone calls are heavily audited, a review of attendance, production and behavior is analyzed and 911 certification is obtained. Further training continues throughout the employment of a CareSpecialist which includes but is not limited to the following:
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How to coach and handle diabetics.
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Proper diet
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Proper testing
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Managing the disease, including various motivating techniques to change the patient's behavior
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Communicating with doctors and nurses.
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Emergency Medical Dispatch training.
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Instructions in life-threatening situations.
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Certified through the National Academy of Emergency Dispatch.
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Software training in helping diabetics understand their charts and goals.
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Strategy and Results
The ActiveCare solution brings forth a strategy that utilizes real-time information to immediately improve a patient's outcome. With real-time data, the CareSpecialists provide proactive support and encouragement to members before they become high risk. To this end, we provide documentation of progress of individuals or populations over time. In the form of regular reports, members, employers, disease management providers and channel partners are provided relevant data detailing the progress of any group, sub-group, or individual in the ActiveCare program.
The outcomes of the ActiveCare approach have been significant. Based on our internal data, testing trends for ActiveCare members show that the more frequently a member tests, the blood sugar can be better managed and kept within a normal range. Without testing, there is no way for a member with diabetes to monitor and control their condition. Regular testing allows members to better monitor and modify behaviors to improve their health. The American Diabetes Association has advocated for years that the best way to control diabetes is by testing at least three times per day.
A peer-reviewed study funded by ActiveCare (the "ActiveCare Study") documented the efficacy of the ActiveCare program and was published in the January 2014 edition of US Endocrinology. The ActiveCare Study began with half of program participants actively engaged in the program as the study group, and those choosing not to participate as the control group. In a year-over-year comparison, the diabetics who did not actively engage in the ActiveCare diabetes management program saw an average increase in medical costs of $282 per person which we believe is directly correlated to costs associated with complications that may have been avoided through proper testing. The diabetics in the study group who regularly tested their blood sugar levels and actively participated in our diabetes program showed a year-over-year reduction of medical costs of $3,384. We believe that these results suggest that through ActiveCare's engagement programs, including but not limited to incentives and points systems (as described below) combined with comprehensive real time monitoring, result in healthier patients and lower overall costs of care.
Competitive Advantages/Operational Strengths
Unique Solution
The challenge facing the healthcare system is not whether to implement proper glucose monitoring and control, but rather how to motivate people with diabetes to monitor their glucose levels to improve their lives. In order to address this challenge, information indicating who is actually testing or not testing and who has readings that are outside of acceptable parameters is needed. Outside of our approach, we are not aware of any companies providing a service utilizing real-time information to help patients manage diabetes, reduce future medical costs and ultimately provide the information needed to address the challenge of ensuring individuals continue to properly test themselves.
Real-Time Visibility
Without the availability of actionable and reliable information, healthcare professionals have typically relied on a diabetic's A1C (90-day blood glucose average) test results. While AIC test results provide some historic insight, these reports do not to show daily high and low blood glucose levels. We believe that our solution, with its emphasis on consistent communications with patients and real time monitoring is preferable to reliance on AIC test results. Our state-of-the-art cellular glucometer and testing supplies allow for test results to automatically be sent wirelessly to ActiveCare immediately following each test. The only thing a member of our service needs to do is test themselves and our CareSpecialists maintain regular contact to provide advice, answer questions and to engage emergency personnel if needed. ActiveCare provides caregivers, physicians, disease management, and wellness coordinators with real-time visibility into a member's health.
Proactive Approach of our CareCenter
We believe that our
24/7 Care Center sets us apart from all other diabetes management programs. Historically, diabetics would be contacted by disease management personnel only after incurring high medical costs and being classified as high risk. This method is reactionary and does nothing to prevent diabetics from becoming high risk in the first place. With real-time data, the CareCenter provides proactive support and encouragement to our members before they become high risk. In addition, this "live" and timely intervention provides the platform of insight for members to modify their behavior while reinforcing goals to better manage their disease.
Engagement Strategy and Reward Program
The entire experience of how CareSpecialists interact with members has been retooled and refocused on increasing engagement. This engagement strategy is designed to foster increased testing through positive reinforcement involving an on-going testing rewards program, regular educational events and increased coordination with the group's clinical team. Our rewards program is designed to incentivize members to test more often through monetary reward. Similar to other rewards programs from credit cards or airlines, members will earn points for each test they take, which accumulates in the members' rewards account over the course of the year. Members can redeem the points through a rewards catalog within their account. This innovative program transforms testing into an exciting and fun activity and has the effect of significantly increasing the incidence of testing.
Management Team and Key Personnel Experience
Our management team and key personnel have significant technical and entrepreneurial experience, with over 20 years of experience in the remote monitoring industry.
We believe our unique approach of combining monitoring technology with a human service touch will create a paradigm shift to increase testing and improve the health of those living with diabetes.
Growth Strategy
Increase Marketing and Sales Force
We market our products and services through a channel partner approach by establishing relationships with insurance companies, disease management companies, third-party administrators ("TPAs") and self-insured companies ("SICs"). TPAs administer the claims, payments, co-pays, and medical coding for SICs and effectively act as the medical benefits administrators for their customers, who typically are not large enough to justify a fully operational in-house department. Disease management companies are hired by insurance companies and SICs to actively engage with members and employees with the goal that more interaction will reduce significant health care claims. Through TPAs and broker networks, we have serviced over 26,000 individuals with diabetes from over 800 SICs.
As our Company continues to evolve, we will seek to expand our channel partner strategy with the goal of increasing revenues. The expansion of existing SICs secured through this model provides us with a high volume of members to accomplish these goals. In addition to this channel partner strategy, we also anticipate initiating in the near future a direct sales model. In this model, we anticipate that sales executives with existing relationships and a regional market presence will call directly on large SICs (with over 2,000 employees). This direct sales model will allow the ActiveCare value proposition to be promoted directly by the sales executive to SICs and will provide direct insight to the Company's executives on the progress of the sale.
Increase Testing and Membership
The key to the ActiveCare strategy is member engagement. When ActiveCare brings on a new client, the number of members of that client with diabetes who are testing is usually around 18%. Currently with ActiveCare's engagement strategy, that figure typically more than doubles to 40%. Part of the ActiveCare strategy is to increase that percentage to 60% through various incentive programs that will also increase daily testing to three times per day.
These programs are coordinated with our customers (SICs) and include the following:
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Financial rewards to member for their initial adoption
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Financial rewards for testing multiple times per day
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Onsite events to help train and educate members
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Mailers, emails and videos that motivate and educate the member
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We expect this engagement to not only increase the health of the diabetic population that uses the testing and monitoring services provided by our CareCenters, but also to increase our revenues and gross profits in a significant manner. This increase is achieved by increasing members testing behavior and the sales of test strips. Members are resupplied test strips on an as-needed basis as they test. As ActiveCare facilitates members to test more frequently, its revenues should increase on the increased sales of test strips alone. More importantly, increased monitoring is expected to result in our diabetic customers statistically having lower claims. This aligns ActiveCare's increased sales goals with that of the healthcare provider who has a significant interest in improving the health of its members thereby reducing the attendant medical costs.
Data Mining
The CareCenter is the real-time recipient of all test results which are delivered using the cellular glucometers that we provide to members. In addition to the real-time monitoring performed by our CareSpecialists, we also have in-house statisticians who analyze the test results data and provide written reports to our clients. This information is gathered, sorted and analyzed by ActiveCare, which in turn produces reports to the given groups (SICs, TPAs or Disease Management personnel). With this information, disease management personnel are offered real time visibility into the daily health of the members they are treating. The ultimate objective is to increase the percentage of diabetics who are regularly testing, which has been proven to be a major factor in reducing the cost of claims based on statistical data derived from the ActiveCare Study.
Technological Innovation/Product Development
Hardware
ActiveCare currently purchases all of it glucometers from a third-party vendor and provides these glucometers to its members at no cost upon their enrollment in our program. However, ActiveCare is in the process of building its own proprietary glucometer with custom designed functions that we believe will increase member engagement and CareCenter interaction. To that end, we have engaged with a third-party manufacturer with specific expertise in manufacturing and applying for FDA approval of glucometers.
Our proprietary glucometer is contemplated to have the following new functionalities:
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Voice communication through the glucometer. At the touch of a button the diabetic can be in instant contact with ActiveCare's CareCenter where he/she can be coached on how to manage his/her diabetic problems
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Touch screen technology which will simplify the diabetic's usage of the glucometer.
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Built-in reminders that alert the diabetic member that it is time to test.
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In addition, since over 57% of all diabetics suffer from complications and other chronic conditions caused by diabetes such as heart disease, congestive heart failure and obesity, our growth strategy specifically contemplates that our glucometer will be equipped with technology allowing other chronic conditions to be monitored by us. This would include the monitoring of blood pressure, blood oxygen levels, weight and heart rate measurements. This will allow us to further improve the health of our members and has the potential to broaden ActiveCare's revenue base from our existing members.
Software
For the past four years, our R&D/IT expenditures were focused on developing a secured web based platform that allow our members, SICs, TPAs and disease management specialists the best experience possible in managing diabetes. In order to further develop these tools given the highly sensitive environment of cybersecurity surrounding HIPAA, we have continued to develop our own proprietary software solutions in which we are able to identify diabetics, produce statistical reports, and most importantly, continually improve the portal in which our members, SICs, TPAs, and others can set up their own alerting parameters to help the member succeed in their goals they have set with their doctor or disease management personnel. It is when a member is able to connect with others, and garner their support that life-changing actions can occur. We believe that our software and personnel facilitate these changes.
Chronic Illness Monitoring of other diseases
We plan to invest in research and development and patent filings, as we broaden the services we offer. We will continue to look for ways to provide solutions for other chronic illness and disease states markets. Our ultimate objective is to become a chronic illness monitoring company measuring not only blood sugar for diabetics, but also blood pressure, weight, and blood oxygen levels. Once we have proven our full turn-key solution within the diabetes disease market, we believe that our clients will want to engage our services to monitor other chronic diseases. We have found that the human touch factor, coupled with innovating technologies, allows us to connect with our members and provide them the support and coaching they need to understand the disease which they have, and how to live a healthy life. Roughly one in every four Americans suffers from a chronic illness like diabetes. Approximately 84 million people in this country suffer from some form of cardiovascular disease. One in every three adults suffers from high blood pressure. Nearly 3.7 million people per year are admitted to the hospital with heart disease. Since we already provide our diabetes monitoring services to over 800 SICs, expanding the Company's monitoring capabilities to other chronic illnesses is a logical extension of building out our business and increasing revenues.
Material Customers
ActiveCare has two significant clients that accounted for 64% of our total revenues for our 2016 fiscal year as follows:
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Office of Group Benefits (OGB), State of Louisiana — OGB accounted for 42% of 2015 revenues and 39% of 2016 revenues.
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Key Benefits — Key Benefits accounted for 15% of 2015 revenues.
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Rx Benefits — Rx Benefits accounted for 12% of 2015 revenues and 25% of 2016 revenues, however, over the past six months, Rx Benefits' percentage of revenues has declined to under 15% and we anticipate revenues from Rx Benefits will fall below 5% of revenues in the future.
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Research and Development
Technology to facilitate data-driven chronic illness monitoring consists of three components: (1) biometric monitoring products and supplies, (2) medical and claims data aggregation, and (3) algorithms for the analysis of the data.
Biometric monitoring products and supplies 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 the ability to integrate and capture data from any 510(k) or HL7 compliant monitoring device. See "Regulatory Matters."
We are currently in the process of building our own proprietary glucometer with custom designed functions that we believe will strengthen member engagement and CareCenter interaction. As mentioned above, our proprietary glucometer is expected to incorporate an easy to use touch screen interface, voice communication technology, testing notifications and reminders, as well the technology to sync with other future devices and analyze data related to other chronic conditions.
During fiscal year 2016, we spent approximately $248,000, compared to $107,000 in fiscal year 2015, on research and development related to chronic illness monitoring. In addition to costs incurred in connection with our proposed and proprietary glucometer, the research and development program focused on ongoing improvements to methods and systems for the capture and analysis of data, as well as scalable architectures to migrate to production applications and deployments during fiscal year 2015 that were developed during fiscal years 2013 and 2012.
Sales and Marketing
We currently service over 800 SICs through relationships with TPAs, our health insurance broker network, disease management companies and others. We market directly to TPAs and healthcare brokers through participation in healthcare fairs and events as well as through direct contact with our staff and direct mailings of our marketing materials. We plan to continue to mine our existing network of SICs for members as we further prove out our business model and the efficacy of our programs.
Additionally, we are looking to deploy, upon consummation of a contemplated public offering
of our securities in early 2017 (the "Offering"), a direct sales model to market directly to SICs. We anticipate that sales executives with existing relationships and a regional market presence will call directly on large SICs (with over 2,000 employees), which will effectively decrease our reliance on our relationship with TPAs and other third parties. Increasing our salesforce personnel will enable us to have a greater localized presence in the given geographic regions.
Competition
Over the past decade, technology device manufacturers have rushed to provide peripheral devices to capture data related to chronic health conditions rather than provide any assessment or intelligence regarding the data being captured. In most cases the data captured remains static on the peripheral device or data capture system, providing little to no perspective on the current and recent condition of the patient. In cases in which the data is utilized, the application of that data is typically limited to the "point of care" or physician's office. The ActiveCare solution is a complex combination of components that provide an overall care system. ActiveCare's combination of state-of-the-art technology including a cellular glucometer that sends test results to ActiveCare in real-time, along with its 24/7 CareCenter and engagement programs, provides a comprehensive and unique solution in the market. This real-time information allows ActiveCare's 24/7 CareCenter to reach out to members moments after a dangerous reading. We believe that this real-time intervention along with ActiveCare's proactive approach to engagement sets ActiveCare apart in the industry.
Our primary competitors are:
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Livongo — Relatively new to the market, Livongo provides a cellular glucometer that reports to an online record. Generally, the focus of Livongo is with small pilot groups, in which it captures the members' data who were already previously managing their disease.
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GenesisHealth Technologies — Focused solely on the technology, GenesisHealth Technologies ("Gensis") provides a cellular meter that sends results to an online record. Similar to traditional solutions focused solely on supplies, we do not believe that Genesis provides any solutions to increase engagement (i.e., get members testing) and therefore improve the health of members necessary to significantly reduce medical claims.
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Telcare — Similar to GenesisHealth, Telcare is focused solely on the technology, in which they provide a cellular meter that sends results to an online record. Similar to traditional solutions focused solely on supplies, we do not believe that Telecare provides any solutions to increase engagement and therefore improve the health of members necessary to significantly reduce medical claims.
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Intellectual Property
Trademarks
We have registered certain of our trademarks with the United States Patent and Trademark Office, including ActiveCare®, ActiveOne®, ActiveOne
+
®, and ActiveHome®. We also use certain trademarks, trade names, and logos that have not been registered. We claim common law rights to these unregistered trademarks, trade names and logos. We also own domain names, including
www.activecare.com
, and we claim ownership of certain unregistered copyrights of our website content. We also rely on a variety of proprietary rights that we license from third parties as described below.
Patents
We own the following patents and patent applications:
Patent or
Application No.
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Country
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Issue/Filing Date
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Title of Patent
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9,161,198
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United States
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Issued 10/13/15
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Systems and Devices for Emergency Tracking and Health Monitoring
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8,942,676
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United States
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Issued 1/27/15
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Systems and Devices for Emergency Tracking and Health Monitoring
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14,286,695
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United States
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Pending 5/24/2014
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System and Method for Identifying, Tracking and Treating Chronic Illness Using Real-time Biometric Data
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7,251,471
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United States
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Issued 7/31/2007
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Emergency Phone with Single Button Activation
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We have exclusive licenses for the use of the following patents:
8,797,210
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United States
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Issued 8/5/2014
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Remote Tracking Device and System and Method for Two-Way Voice Communication Between Device and a Monitoring Center
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7,545,318
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United States
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Issued 6/9/2009
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Remote Tracking System and Device with Variable Sampling and Sending Capabilities Based on Environmental Factors
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We have non-exclusive licenses for the use of the following patents:
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6,612,985
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United States
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Issued 9/2/2003
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Method and System for Monitoring and Treating a Patient
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6,307,481
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United States
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Issued 10/23/2001
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Systems Within A Communication Device For Evaluating Movement Of A Body And Methods Of Operating The Same
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6,501,386
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United States
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Issued 12/31/2002
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Systems Within A Communication Device For Evaluating Movement Of A Body And Methods Of Operating The Same
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6,661,347
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United States
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Issued 12/09/2003
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Systems Within A Communication Device For Evaluating Movement Of A Body And Methods Of Operating The Same
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6,703,939
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United States
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Issued 3/9/2004
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System and Method For Analyzing Activity of A Body
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6,864,796
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United States
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Issued 3/8/2005
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Systems Within A Communication Device For Evaluating Movement Of A Body And Methods Of Operating The Same
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7,095,331
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United States
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Issued 8/22/2006
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System and Method For Analyzing Activity of A Body
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7,145,461
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United States
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Issued 12/05/2006
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System and Method For Analyzing Activity of A Body
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Trade Secrets
We own certain intellectual property, including trade secrets, which we seek to protect, in part, through confidentiality agreements with employees and other parties. Even where these agreements exist, there can be no assurance that these agreements will not be breached, that we would have adequate remedies for any breach, or that our trade secrets will not otherwise become known to or independently developed by competitors.
Regulatory Matters
The testing, manufacture, distribution, advertising and marketing of medical devices in the United States is subject to extensive regulation by federal, state and local governmental authorities, including the Food & Drug Administration ("FDA"). Certain of our products may be subject to and required to receive regulatory clearances or approvals, as the case may be, before we may market them. Under United States law, a medical device is an article, which, among other things, is intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment or prevention of disease, in man or other animals (see Food, Drug & Cosmetic Act (the "Act") § 201(h)).
Devices are subject to varying levels of regulatory control, the most comprehensive of which requires that a clinical evaluation be conducted before a device receives clearance or approval for commercial distribution. The FDA classifies medical devices into one of three classes. Class I devices are relatively simple and can be manufactured and distributed with general controls. Class II devices are somewhat more complex and require greater scrutiny. Class III devices are new and frequently help sustain life. Examples of the varying levels of regulatory control are described in the following paragraphs.
In the United States, a company generally can obtain permission to distribute a new device in two ways — through a Section 510(k) premarket notification application ("510(k) submission"), or through a Section 515 premarket approval ("PMA") application. The 510(k) submission applies to any device that is substantially equivalent to a "Predicate Device" (a device first marketed prior to May 28, 1976 or a device marketed after that date which was substantially equivalent to a pre-May 28, 1976 device). These devices are either Class I or Class II devices. Under the 510(k) submission process, the FDA will issue an order finding substantial equivalence to a Predicate Device and permitting commercial distribution of that device for its intended use. A 510(k) submission must provide information supporting its claim of substantial equivalence to the Predicate Device. The FDA permits certain low risk medical devices to be marketed without requiring the manufacturer to submit a premarket notification. In other instances, the FDA may not only require that a premarket notification be submitted, but also that such notification be accompanied by clinical data. If clinical data from human experiences are required to support the 510(k) submission, these data must be gathered in compliance with Integral Device Exemption ("IDE") regulations for clinical trials performed in the United States. The FDA review process for premarket notifications submitted pursuant to section 510(k) should take about 90 days on average, but it can take substantially longer if the FDA has concerns. Furthermore, there is no guarantee that the FDA will "clear" the device for marketing, in which case the device cannot be distributed in the United States. There is no guarantee that the FDA will deem the device subject to the 510(k) process, as opposed to the more time-consuming, resource intensive and problematic process described below.
We do not currently manufacture our own chronic disease monitoring devices. We are currently working with a third party to manufacture our own proprietary cellular glucometer and strips. Manufacturers of medical devices are required to register with the FDA before they begin to manufacture devices for commercial distribution. As a result, any entity that manufactures products on our behalf will be subject to periodic inspection by the FDA for compliance with the FDA's Quality System Regulation ("QSR") requirements and other regulations. These regulations require us and our manufacturers to manufacture products and maintain documents in a prescribed manner with respect to design, manufacturing, testing and control activities. Further, we are required to comply with various FDA and other agency requirements for labeling and promotion. The Medical Device Reporting regulations require that we provide information to the FDA whenever there is evidence to reasonably suggest that a device may have caused or contributed to a death or serious injury or, if a malfunction were to occur, could cause or contribute to a death or serious injury. In addition, the FDA prohibits us from promoting a medical device for unapproved indications.
In the United States, Health Insurance Portability and Accountability Act ("HIPAA") regulations require national standards for some types of electronic health information transactions and the data elements used in those transactions, security standards to ensure the integrity and confidentiality of health information and standards to protect the privacy of individually identifiable health information. Covered entities under HIPAA, which include health care organizations such as our clients, our employer clinic business model and our claims processing, transmission and submission services, are required to comply with the privacy standards, the transaction regulations and the security regulations. As a business associate of our clients who are covered entities, we are generally required by contract to comply with the HIPAA regulations as they pertain to handling of covered client data. However, the extension of these HIPAA obligations to business associates by law has created additional liability risks related to the privacy and security of individually identifiable health information.
In the United States, the federal Health Insurance Portability and Accountability Act of 1996, Public Law 104-191 (the "HIPAA Statute"), and its related "Privacy Rules" (45 C.F.R. Part 164 Subparts A and E) and "Security Rules" (45 C.F.R. Part 164 Subpart C) and "Breach Notification Rules" (45 C.F.R. Part 164 Subpart D) as amended by the Health Information Technology for Economic and Clinical Health Act (the "HITECH Statute") and any regulations promulgated thereunder (collectively, "HIPAA"), impose minimum requirements for the confidentiality, integrity and availability of individuals' health information under certain conditions. Briefly, HIPAA requires "Covered Entities" as defined under HIPAA to comply with all applicable HIPAA requirements.
HIPAA also requires "Business Associates" to comply with the Security Rules as well as any additional specific obligations under HIPAA depending upon the services provided to "Covered Entities". As a "Business Associate" of our clients who are "Covered Entities", we are required to comply with the Security Rules in connection with our clients' "Protected Health Information" or "PHI" as such terms are defined under HIPAA. Our obligations under the Security Rules and other applicable provisions of HIPAA are also imposed pursuant to contract with our "Covered Entity" clients. Such obligations under the Security Rules, other applicable requirements under HIPAA as well as contracts with "Covered Entity" clients (or with clients who are "Business Associates" where we would be deemed to be a "Subcontractor" under HIPAA) create liability risks for failure to abide by maintaining the confidentiality, integrity and availability of "PHI" in accordance with HIPAA and the contracts with "Covered Entity" (and "Business Associate") clients.
Employees
As of January 12, 2016, we had thirty-six (36) full-time and two (2) part-time employees in the U.S. None of these employees are represented by a labor union or subject to a collective bargaining agreement. We have never experienced a work stoppage and our management believes that our relations with employees are good.
Additional Available Information
We maintain executive offices and principal facilities at 1365 West Business Park Drive, Suite 100, Orem, Utah, 84058. Our telephone number is (877) 219-6050. We maintain a website at
www.activecare.com
. The information on our website should not be considered part of this report. We make available, free of charge at our corporate website, copies of our annual reports filed under the Exchange Act with the United States Securities and Exchange Commission ("SEC") on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and all amendments to these reports, as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act. We also provide copies of our Forms 8-K, 10-K, 10-Q, proxy and annual report at no charge to investors upon request.
All reports filed with the SEC are available free of charge through the SEC website at
www.sec.gov
. In addition, the public may read and copy materials we have filed with the SEC at the SEC's public reference room located at 450 Fifth St., N.W., Washington, D.C. 20549.
Item 1A. Risk Factors
RISK FACTORS
RISKS RELATED TO OUR BUSINESS
BECAUSE OF OUR HISTORY OF ACCUMULATED DEFICITS, RECURRING LOSSES, NEGATIVE CASH FLOWS FROM OPERATING ACTIVITIES, NEGATIVE TOTAL EQUITY AND CERTAIN DEBT BEING IN DEFAULT, WE MUST IMPROVE PROFITABILITY AND MAY BE REQUIRED TO OBTAIN ADDITIONAL FINANCING IF WE ARE TO CONTINUE AS A "GOING CONCERN."
We incurred negative cash flows from operating activities and recurring net losses for the fiscal years 2016 and 2015. We had negative working capital at the end of each of those years. As of September 30, 2016 and 2015, our accumulated deficit was $108,178,614 and $91,840,158, respectively. These factors, among others, raise substantial doubt about our ability to continue as a going concern. The financial statements included in this report do not include any adjustments that might result from the outcome of this uncertainty. In order for us to remove substantial doubt about our ability to continue as a going concern, we must achieve profitability, generate positive cash flows from operating activities and obtain necessary debt or equity funding. If we are unable to increase revenues or obtain additional financing, we will be unable to continue the development of our products and services and we may have to cease operations.
Our financial statements have been prepared on the assumption that we will continue as a going concern. Our independent registered public accounting firm has included an explanatory paragraph in its opinion on our financial statements for the fiscal years ended September 30, 2016 and 2015 stating that our recurring losses, negative cash flows from operating activities, negative working capital, negative total equity and certain debt that is in default, and other conditions, raise substantial doubt about our ability to continue as a going concern. It has been necessary to rely upon debt and the sale of our equity securities to sustain operations. We will require additional capital over the next 12 months to fund ongoing operations. We are currently seeking to raise additional funding through the Offering. There can be no guarantee that we will be able to obtain such funds, or obtain them on satisfactory terms, and that such funds would be sufficient. If such additional funding is not obtained, we may be required to scale back or cease operations.
IF WE ARE UNABLE TO OBTAIN ADDITIONAL FINANCING, BUSINESS OPERATIONS WILL BE HARMED AND IF WE DO OBTAIN ADDITIONAL FINANCING THEN EXISTING SHAREHOLDERS MAY SUFFER SUBSTANTIAL DILUTION.
As of September 30, 2016, we had cash of $167,737. We need additional funding in the immediate future to enable us to fund our operating expenses and capital expenditure requirements. Until we achieve profitability, we will need to raise additional capital to fund our operations and to otherwise implement our overall business strategy. We currently do not have any contracts or commitments for additional financing. There can be no assurance that financing will be available in amounts or on terms acceptable to us, if at all. The inability to obtain additional capital will restrict our ability to grow and may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, we will likely be required to curtail and possibly cease operations. In addition, any additional equity financing may involve substantial dilution to then existing shareholders.
DUE TO OUR DEPENDENCE ON A LIMITED NUMBER OF CUSTOMERS, WE ARE SUBJECT TO A CONCENTRATION OF CREDIT RISK.
For the fiscal year ended September 30, 2016, two customers accounted for 64% of our 2016 total revenues. For the fiscal year ended September 30, 2015, revenues from three customers represented 69% of our 2015 total revenues. Revenues from one of these customers, Rx Benefits, has declined to under 15% over the past six months and we anticipate revenues from Rx Benefits will fall below 5% of revenues in the future. As of September 30, 2016 and 2015, accounts receivable from significant customers represented 66% of total accounts receivable.
The loss of any of significant customers, other than Rx Benefits, would likely have a material adverse effect on our business, financial condition and results of operations. In addition, in the case of insolvency of any of our significant customers, receivables from that customer might not be collectible, might not be fully collectible, or might be collectible over longer than normal terms, each of which could have a material adverse effect on our business, financial condition, liquidity and results of operations.
WE CURRENTLY DEPEND UPON A SINGLE SOURCE SUPPLIER FOR OUR PRODUCTS, MAKING US VULNERABLE TO SUPPLY PROBLEMS AND PRICE FLUCTUATIONS, WHICH COULD HARM OUR BUSINESS.
During fiscal years 2016 and 2015, we purchased substantially all of our products and supplies from one third-party vendor. We expect to rely on this single source third-party vendor for the manufacture of our Chronic Illness Monitoring products such as our current glucometer and the test strips required for that device until such time as we develop our own testing products. Although there are other vendors who manufacture similar products and supplies, our systems would need to be modified to accommodate those products and supplies. Consequently, we are dependent on this contract manufacturer for the production of our products and will depend on third-party manufacturing resources to manufacture products we may add to our product line in the future.
Our reliance on this vendor also subjects us to risks that could harm our business, including:
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we may not be able to obtain adequate supply in a timely manner or on commercially reasonable terms;
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we may have difficulty locating and qualifying alternative suppliers;
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our supplier manufactures products for a range of customers, and fluctuations in demand for the products it supplies for others may affect its ability to deliver product to us in a timely manner; and
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our supplier may encounter financial hardships unrelated to our demand for product, which could inhibit its ability to fulfill our orders and meet our requirements.
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Any interruption or delay in the supply of products or materials, or our inability to obtain product from alternate sources at acceptable prices in a timely manner, could impair our ability to meet the demand of our customers and cause them to cancel orders or switch to competitive products, and could therefore have a material adverse effect on our business, financial condition, operating results and cash flows.
OUR PROFITABILITY DEPENDS UPON MANY FACTORS FOR WHICH NO ASSURANCE CAN BE GIVEN.
Profitability depends upon many factors, including the ability to develop and maintain valuable product and monitoring solutions, our ability to identify and obtain the rights to additional products to add to our existing product line, success and expansion of our sales programs, expansion of our customer base, obtaining the right balance of expense levels and the overall success of our business activities. We anticipate that we will generate operating income in the next 12 months although no assurance can be given in this regard. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would depress the value of our company and could impair our ability to raise capital, expand our business, maintain our research and development efforts, diversify our product offerings or even continue our operations. A decline in the value of our stock could also cause you to lose all or part of your investment.
THE COMMERCIAL SUCCESS OF OUR PRODUCTS WILL DEPEND UPON THE DEGREE OF MARKET ACCEPTANCE BY PHYSICIANS, HOSPITALS, THIRD-PARTY PAYERS, AND OTHERS IN THE MEDICAL COMMUNITY.
Ultimately, none of our current products or products in development, even if they receive approval, may ever gain market acceptance by physicians, hospitals, third-party payers or others in the medical community. If these products do not achieve an adequate level of acceptance, we may not generate significant product revenue and we may not become profitable. The degree of market acceptance of our products, will depend on a number of factors, including:
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the efficacy and potential advantages over alternative treatments;
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the ability to offer our products and services for sale at competitive prices;
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the willingness of the target population to accept and adopt our products and services;
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the strength of marketing and distribution support and the timing of market introduction of competitive products and services; and
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publicity concerning our products and services or competing products and services.
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Even if a potential product displays a favorable profile, market acceptance of the product will not be known until after it is launched. Our efforts to educate the medical community and third-party payers on the benefits of our products and services may require significant resources and may never be successful. Such efforts to educate the marketplace may require more resources than are required by conventional technologies marketed by our competitors.
SOME OF OUR PRODUCTS ARE NOT BASED ENTIRELY ON TECHNOLOGY THAT IS PROPRIETARY TO US, WHICH MEANS THAT WE DO NOT HAVE A TECHNOLOGICAL ADVANTAGE OVER OUR COMPETITORS WITH RESPECT TO CERTAIN OF OUR PRODUCTS, AND THAT WE MUST RELY ON THE OWNERS OF THE PROPRIETARY TECHNOLOGY THAT IS THE BASIS FOR THESE PRODUCTS TO PROTECT THAT TECHNOLOGY. WE HAVE NO CONTROL OVER SUCH PROTECTION.
Our products utilize technology based in part on patents that have been licensed to us for use within our markets. Our success in adding to our existing product line will depend on our ability to acquire or otherwise license competitive technologies and products and to operate without infringing the proprietary rights of others, both in the United States and internationally. No assurance can be given that any licenses required from third parties will be made available on terms acceptable to us, or at all. If we do not obtain such licenses, we could encounter delays in product introductions while we attempt to adopt alternate sources. We could also find that the manufacture or sale of products requiring such licenses is not possible. Litigation may be necessary to defend against claims of infringement, to protect trade secrets or know-how owned by us, or to determine the scope and validity of the proprietary rights of others. Such litigation could have an adverse and material impact on us and on our operations.
RECENT CHANGES IN INSURANCE AND HEALTH CARE LAWS HAVE CREATED UNCERTAINTY IN THE HEALTH CARE INDUSTRY.
The Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act, each enacted in March 2010, generally known as the Health Care Reform Law, significantly expanded health insurance coverage to uninsured Americans and changed the way health care is financed by both governmental and private payers. We expect expansion of access to health insurance to increase the demand for our products and services, but other provisions of the Health Care Reform Law could affect us adversely. Additionally, further federal and state proposals for health care reform are likely. We cannot predict what further reform proposals, if any, will be adopted, when they may be adopted, or what impact they may have on us.
THE COLLECTION, RETENTION AND DISCLOSURE OF PERSONAL INFORMATION AND PATIENT HEALTH INFORMATION IS REGULATED BY LAW AND SUBJECTS US AND OUR BUSINESS ASSOCIATES TO POTENTIAL LIABILITY FOR UNAUTHORIZED DISCLOSURE AND OTHER USE OF SUCH INFORMATION.
State, federal and foreign laws, such as the federal Health Insurance Portability and Accountability Act of 1996 (HIPAA), regulate the confidentiality of sensitive personal information and the circumstances under which such information may be released. These measures may govern the disclosure and use of personal and patient medical record information and may require users of such information to implement specified security measures, and to notify individuals in the event of privacy and security breaches. Evolving laws and regulations in this area could restrict the ability of our customers to obtain, use or disseminate patient information, or could require us to incur significant additional costs to re-design our products in a timely manner to reflect these legal requirements, either of which could have an adverse impact on our results of operations. Other health information standards, such as regulations under HIPAA, establish standards regarding electronic health data transmissions and transaction code set rules for specified electronic transactions, for example, transactions involving claims submissions to third-party payers. These also continue to evolve and are often unclear and difficult to apply. In addition, under the federal Health Information Technology for Economic and Clinical Health Act (HITECH Act), which was passed in 2009, some of our business that was previously only indirectly subject to federal HIPAA privacy and security rules became directly subject to such rules because we may serve as "business associates" to persons or entities that are subject to these rules. On January 17, 2013, the Office for Civil Rights of the Department of Health and Human Services released a final rule implementing the HITECH Act and making certain other changes to HIPAA privacy and security requirements. Compliance with the rule was required by September 23, 2013, and increased the requirements applicable to some of our business. Failure to maintain the confidentiality of sensitive personal information in accordance with the applicable regulatory requirements, or to abide by electronic health data transmission standards, could expose us to breach of contract claims, fines and penalties, costs for remediation and harm to our reputation.
OUR INDUSTRY IS FRAGMENTED, AND WE MAY EXPERIENCE INTENSE COMPETITION FROM A VARIETY OF SOURCES, MANY OF WHICH MAY BE BETTER FINANCED AND BETTER MANAGED THAN WE ARE.
We face, and will continue to face, competition in the Chronic Illness Monitoring market. Many of our competitors and potential competitors may have greater access to capital and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. Moreover, many of our competitors may have greater name recognition and experience in the Chronic Illness Monitoring industry. Smaller and other early stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. There can be no assurance that competition from other companies will not render our products and services noncompetitive.
THE LOSS OF ONE OR MORE MEMBERS OF OUR SENIOR MANAGEMENT OR KEY EMPLOYEES MAY ADVERSELY AFFECT OUR ABILITY TO IMPLEMENT OUR STRATEGY.
Our success depends to a significant extent upon the continued services of Mr. Jeffrey Peterson. The loss of the services of Mr. Peterson could have a material adverse effect on our growth, revenues, and prospective business. This individual is committed to the Company and willing to devote a large amount of time and energy to the Company. This employee could leave us with little or no prior notice. We do not have "key person" life insurance policies covering any of our employees. Additionally, there are a limited number of qualified technical personnel with significant experience in the design, development, manufacture, and sale of our products, and we may face challenges hiring and retaining these types of employees.
We depend on our experienced management team and the loss of one or more key executives could have a negative impact on our business. We also depend on our ability to retain and motivate key employees and attract qualified new employees. If we lose a member of the management team or a key employee, we may not be able to replace him or her. Integrating new employees into our management team and training new employees with no prior experience in our industry could prove disruptive to our operations, require a disproportionate amount of resources and management attention and ultimately prove unsuccessful. An inability to attract and retain sufficient technical and managerial personnel could limit or delay our development efforts, which could have a material adverse effect on our business, financial condition and results of operations.
OUR NEWLY HIRED CHIEF FINANCIAL OFFICER WILL BE WORKING PART TIME FOR US RESULTING IN A POTENTIAL LACK OF AVAILABILITY DUE TO OTHER COMMITMENTS.
Mr. Eric Robinson, our newly hired Chief Financial Officer, Secretary and Treasurer, will be devoting two days a week in the performance of his duties to the Company. Mr. Robinson also has other obligations, which may result in a lack of availability when needed due to other responsibilities. It is anticipated that Mr. Robinson will be joining the Company on a full time basis in the future.
FROM TIME TO TIME, WE MAY BE SUBJECT TO EXPENSIVE CLAIMS RELATING TO PRODUCT LIABILITY; OUR ABILITY TO INSURE AGAINST THIS RISK IS LIMITED.
The use of any of our existing or potential products in clinical settings may expose us to liability claims. These claims could be made directly by persons who assert that inaccuracies or deficiencies in their test results were caused by defects in our products. Alternatively, we could be exposed to liability indirectly by being named as a third-party defendant in actions brought against companies or persons who have purchased our products. We have obtained limited product liability insurance coverage and we intend to expand our insurance coverage on an as needed basis as sales revenue increases. However, insurance coverage is becoming increasingly expensive, and no assurance can be given that we will be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. There can also be no assurance that we will be able to obtain commercially reasonable product liability insurance for any products added to our product line in the future. A successful product liability claim or series of claims brought against us could have a material adverse effect on our business, financial condition and results of operations.
FUTURE CASH FLOW FLUCTUATIONS MAY AFFECT OUR ABILITY TO FUND OUR WORKING CAPITAL REQUIREMENTS OR ACHIEVE OUR BUSINESS OBJECTIVES IN A TIMELY MANNER.
Our working capital requirements and cash flows historically have been, and are expected to continue to be, subject to quarterly and yearly fluctuations, depending on such factors as timing and size of capital expenditures, levels of sales, timing of deliveries and collection of receivables, inventory levels, customer payment terms and supplier terms and conditions. We must obtain additional capital to execute our business plan. A greater than expected slow-down in capital spending by our customers may require us to adjust our current business model. As a result, our revenues and cash flows may be materially lower than we expect and we may be required to reduce our capital expenditures and investments or take other measures in order to meet our cash requirements. We may seek additional funds from liquidity-generating transactions and other conventional sources of external financing (which may include a variety of debt, convertible debt and/or equity financings). We cannot provide any assurance that our net cash requirements will be as we currently expect. Our inability to manage cash flow fluctuations resulting from the above factors could have a material adverse effect on our ability to fund our working capital requirements from operating cash flows and other sources of liquidity or to achieve our business objectives in a timely manner.
WE RECENTLY COMPLETED A DEBT FINANCING WHICH IS SECURED BY THE GRANT OF A SECURITY INTEREST IN ALL OF OUR ASSETS AND UPON A DEFAULT THE LENDER MAY FORECLOSE ON ALL OF OUR ASSETS.
In February 2016, we entered into a loan and security agreement with Partners for Growth IV, L.P. (the "Loan and Security Agreement") and issued certain notes payable in connection therewith (the "PFG Notes" together with the Loan and Security Agreement, the "PFG Obligations"). The PFG Obligations, which currently have an outstanding balance of principal and interest in the aggregate of $2,441,750 as of December 31, 2016, are secured by the grant of a security interest in all of the Company's assets. In the event of the Company's failure to make such payments or to comply with the terms of the working capital line of credit under the Loan and Security Agreement or the PFG Notes, PFG can declare a default and seek to foreclose on the Company's assets. Effective December 31, 2016, the Company and PFG entered into the December Forbearance Agreement, pursuant to which PFG agreed to forbear, through February 15, 2017, from exercising remedies with regard to certain breaches of agreements between the Company and PFG, under the Existing PFG Agreements.
If the Company is unable to repay or refinance its indebtedness to PFG it may be forced to cease operations and the holders of the Company's common stock may lose their entire investment. See also Subsequent Events — "
Partners for Growth IV, L.P. Loan Forbearance and Related Matters.
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OUR BUSINESS MAY BE MATERIALLY AND ADVERSELY AFFECTED BY INCREASED LEVELS OF DEBT.
In order to finance our business or to finance possible acquisitions we may incur significant levels of debt compared to historical levels, and we may need to secure additional sources of funding, which may include debt or convertible debt financing, in the future. A high level of debt, arduous or restrictive terms and conditions relating to accessing certain sources of funding, failure to meet the financial and/or other covenants in our credit and/or support facilities and any significant reduction in, or access to, such facilities, poor business performance or lower than expected cash inflows could have adverse consequences on our ability to fund our business operations. Other effects of a high level of debt include the following:
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we may have difficulty borrowing money in the future or accessing sources of funding;
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we may need to use a large portion of our cash flows from operating activities to pay principal and interest on our indebtedness, which would reduce the amount of cash available to finance our operations and other business activities;
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a high debt level, arduous or restrictive terms and conditions, or lower than expected cash flows would make us more vulnerable to economic downturns and adverse developments in our business; and
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if operating cash flows are not sufficient to meet our operating expenses, capital expenditures and debt service requirements as they become due, we may be required, in order to meet our debt service obligations, to delay or reduce capital expenditures or the introduction of new products and services, sell assets and/or forego business opportunities including acquisitions, research and development projects or product design enhancements.
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WE MUST BE ABLE TO ESTABLISH AND MAINTAIN REQUIRED DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL REPORTING AND TO MEET THE PUBLIC REPORTING AND THE FINANCIAL REQUIREMENTS FOR OUR BUSINESS.
Our management has a legal and fiduciary duty to establish and maintain disclosure controls and control procedures in compliance with the securities laws, including the requirements mandated by the Sarbanes-Oxley Act of 2002. The standards that must be met for management to assess the internal control over financial reporting as effective are complex, and require significant documentation, testing and possible remediation to meet the detailed standards. Because we have limited resources, we may encounter problems or delays in completing activities necessary to make an assessment of our internal control over financial reporting, and disclosure controls and procedures, if required. In addition, if we are required to obtain attestation by our independent registered public accounting firm, we may encounter problems or delays in completing the implementation of any requested improvements and receiving an attestation of our assessment by our independent registered public accounting firm. If we cannot assess our internal control over financial reporting as effective or provide adequate disclosure controls or implement sufficient control procedures, or our independent registered public accounting firm is unable to provide an unqualified attestation report on such assessment if required, investor confidence and share value may be negatively impacted.
RAPID GROWTH COULD RESULT IN A STRAIN ON OUR RESOURCES.
Because of our size, growth will likely place a significant strain on our financial, technical, operational and management resources. The failure to continue to upgrade our technical, administrative, operating and financial control systems or the occurrence of unexpected expansion difficulties, including the recruitment and retention of experienced managers, could have a material adverse effect on our business, financial condition and results of operations and our ability to timely execute this aspect of our business plan.
RISKS RELATED TO OUR INTELLECTUAL PROPERTY
SOME OF OUR PRODUCTS MAY BE SUBJECT TO THE RISKS AND UNCERTAINTIES ASSOCIATED WITH THE PROTECTION OF INTELLECTUAL PROPERTY AND RELATED PROPRIETARY RIGHTS. WE BELIEVE THAT OUR SUCCESS DEPENDS IN PART ON OUR ABILITY TO OBTAIN AND ENFORCE PATENTS, MAINTAIN TRADE SECRETS AND OPERATE WITHOUT INFRINGING ON THE PROPRIETARY RIGHTS OF OTHERS IN THE UNITED STATES AND IN OTHER COUNTRIES.
We own or have license rights under several patents; we have also applied for several additional patents and those applications are awaiting action by the United States Patent Office. There is no assurance those patents will issue or that when they do issue they will include all of the claims currently included in the applications. Even if they do issue, those new patents and our existing patents must be protected against possible infringement. The enforcement of patent rights can be uncertain and involve complex legal and factual questions. The scope and enforceability of patent claims are not systematically predictable with absolute accuracy. The strength of our own patent rights depends, in part, upon the breadth and scope of protection provided by the patent and the validity of our patents, if any.
WE ALSO RELY ON TRADE SECRETS LAWS TO PROTECT PORTIONS OF OUR TECHNOLOGY FOR WHICH PATENT PROTECTION HAS NOT YET BEEN PURSUED OR IS NOT BELIEVED TO BE APPROPRIATE OR OBTAINABLE.
These laws may protect us against the unlawful or unpermitted disclosure of any information of a confidential and proprietary nature, including but not limited to our know-how, trade secrets, methods of operation, names and information relating to vendors or suppliers and customer names and addresses. We intend to protect this unpatentable and unpatented proprietary technology and processes, in addition to other confidential and proprietary information in part, by entering into confidentiality agreements with employees, collaborative partners, consultants and certain contractors. There can be no assurance that these agreements will not be breached, that we will have adequate remedies for any breach, or that our trade secrets and other confidential and proprietary information will not otherwise become known or be independently discovered or reverse-engineered by competitors.
WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, WHICH COULD AFFECT OUR ABILITY TO COMPETE.
There can be no assurance that trade secrets and other intellectual property will not be challenged, invalidated, misappropriated or circumvented by third parties. In some instances, we have augmented our technology base by licensing the proprietary intellectual property of others. In the future, we may not be able to obtain necessary licenses on commercially reasonable terms. We enter into confidentiality and invention assignment agreements with our employees and enter into non-disclosure agreements with our suppliers and appropriate customers so as to limit access to and prevent disclosure of our proprietary information. These measures may not suffice to deter misappropriation or third-party development of similar technologies. Moreover, the laws concerning intellectual property vary among nations and the protection provided to our intellectual property by the laws and courts of foreign nations may not be as advantageous to us as the protection available under U.S. law.
COSTLY LITIGATION MAY BE NECESSARY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AND WE MAY BE SUBJECT TO CLAIMS ALLEGING THE VIOLATION OF THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.
We may face significant expense and liability as a result of litigation or other proceedings relating to patents and intellectual property rights of others. In the event that another party has also filed a patent application or been issued a patent relating to an invention or technology claimed by us in pending applications, we may be required to participate in an interference proceeding declared by the United States Patent and Trademark Office to determine priority of invention, which could result in substantial uncertainties and costs for us, even if the eventual outcome was favorable to us. We, or our licensors, also could be required to participate in interference proceedings involving issued patents and pending applications of another entity. An adverse outcome in an interference proceeding could require us to cease using the technology, substantially modify it or to license rights from prevailing third parties.
The cost to us of any patent litigation or other proceeding relating to our licensed patents or patent applications, even if resolved in our favor, could be substantial, especially given our early stage of development. Our ability to enforce our patent protection could be limited by our financial resources, and may be subject to lengthy delays. A third party may claim that we are using inventions claimed by their patents and may go to court to stop us from engaging in our normal operations and activities, such as research, development and the sale of any future products and services. Such lawsuits are expensive and would consume significant time and other resources. There is a risk that a court will decide that we are infringing the third party's patents and will order us to stop the activities claimed by the patents. In addition, there is a risk that a court will order us to pay the other party damages for having infringed their patents.
Moreover, there is no guarantee that any prevailing patent owner would offer us a license so that we could continue to engage in activities claimed by the patent, or that such a license, if made available to us, could be acquired on commercially acceptable terms. In addition, third parties may, in the future, assert other intellectual property infringement claims against us with respect to our services, technologies or other matters.
WE HAVE LIMITED FOREIGN INTELLECTUAL PROPERTY RIGHTS AND MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS THROUGHOUT THE WORLD.
We have limited intellectual property rights outside the United States. Filing, prosecuting and defending patents on devices in all countries throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside the United States can be less extensive than those in the United States. In addition, the laws of some foreign countries do not protect intellectual property to the same extent as laws in the United States. Consequently, we may not be able to prevent third parties from mimicking our inventions in all countries outside the United States, or from selling or importing products made using our inventions into the United States or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patents to develop their own products and further, may export otherwise infringing products to territories where we have patents, but enforcement is not as strong as that in the United States.
Many companies have encountered significant problems in protecting and defending intellectual property in foreign jurisdictions. The legal systems of certain countries, particularly China and certain other developing countries, do not favor the enforcement of patents, trade secrets and other intellectual property, particularly those relating to medical devices and biopharmaceutical products, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. To date, we have not sought to enforce any issued patents in these foreign jurisdictions. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. The requirements for patentability may differ in certain countries, particularly developing countries. Certain countries in Europe and developing countries, including China and India, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In those countries, we and our licensors may have limited remedies if patents are infringed or if we or our licensors are compelled to grant a license to a third party, which could materially diminish the value of those patents. This could limit our potential revenue opportunities. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.
THIRD PARTIES MAY CLAIM IN THE FUTURE THAT WE ARE INFRINGING DIRECTLY OR INDIRECTLY UPON THEIR INTELLECTUAL PROPERTY RIGHTS, AND THIRD PARTIES MAY INFRINGE UPON OUR INTELLECTUAL PROPERTY RIGHTS.
Many of the markets we serve are characterized by vigorous protection and pursuit of intellectual property rights, which may result in protracted and expensive litigation. Third parties may claim in the future that we are infringing directly or indirectly upon their intellectual property rights, and we may be found to be infringing or to have infringed directly or indirectly upon those intellectual property rights. Claims of intellectual property infringement might also require us to enter into costly royalty or license agreements. Moreover, we may not be able to obtain royalty or license agreements on terms acceptable to us, or at all. We also may be subject to significant damages or injunctions against development and sale of certain of our products, services and solutions. Our success depends in large part on our proprietary technology. We rely on a combination of patents, copyrights, trademarks, trade secrets, know-how, confidentiality provisions and licensing arrangements to establish and protect our intellectual property rights. If we fail to successfully protect and enforce these rights, our competitive position could suffer. Our pending patent and trademark registration applications may not be allowed, or competitors may challenge the validity or scope of our patents or trademark registrations. In addition, our patents may not provide us a significant competitive advantage. We may be required to spend significant resources to monitor and police our intellectual property rights. We may not be able to detect infringement and our competitive position may be harmed before we do so. In addition, competitors may design around our technology or develop competing technologies.
RISKS RELATING TO OWNERSHIP OF OUR COMMON STOCK
WE CURRENTLY DO NOT INTEND TO PAY DIVIDENDS ON OUR COMMON STOCK. AS A RESULT, YOUR ONLY OPPORTUNITY TO ACHIEVE A RETURN ON YOUR INVESTMENT IS IF THE PRICE OF OUR COMMON STOCK APPRECIATES.
We currently do not expect to declare or pay dividends on our common stock. In addition, in the future we may enter into agreements that prohibit or restrict our ability to declare or pay dividends on our common stock. As a result, your only opportunity to achieve a return on your investment will be if the market price of our common stock appreciates and you sell your shares at a profit.
YOU MAY EXPERIENCE DILUTION OF YOUR OWNERSHIP INTEREST DUE TO THE FUTURE ISSUANCE OF ADDITIONAL SHARES OF OUR COMMON STOCK.
We are in a capital intensive business and we do not have sufficient funds to finance the growth of our business or to support our projected capital expenditures. As a result, we will require additional funds from future equity or debt financings, including sales of preferred shares or convertible debt, to complete the development of new projects and pay the general and administrative costs of our business. We may in the future issue our previously authorized and unissued securities, resulting in the dilution of the ownership interests of holders of our common stock. We are currently authorized to issue 200,000,000 shares of common stock and 10,000,000 shares of preferred stock. Additionally, the Board of Directors may subsequently approve increases in authorized common stock. The potential issuance of such additional shares of common or preferred stock or convertible debt may create downward pressure on the trading price of our common stock. We may also issue additional shares of common stock or other securities that are convertible into or exercisable for common stock in future public offerings or private placements for capital raising purposes or for other business purposes. The future issuance of a substantial number of common shares into the public market, or the perception that such issuance could occur, could adversely affect the prevailing market price of our common shares. A decline in the price of our common shares could make it more difficult to raise funds through future offerings of our common shares or securities convertible into common shares.
OUR AMENDED AND RESTATED CERTIFICATE OF INCORPORATION ALLOWS FOR OUR BOARD OF DIRECTORS TO CREATE NEW SERIES OF PREFERRED STOCK WITHOUT FURTHER APPROVAL BY OUR STOCKHOLDERS, WHICH COULD HAVE AN ANTI-TAKEOVER EFFECT AND COULD ADVERSELY AFFECT HOLDERS OF OUR COMMON STOCK.
Our authorized capital includes preferred stock issuable in one or more series. Our board of directors has the authority to issue preferred stock and determine the price, designation, rights, preferences, privileges, restrictions and conditions, including voting and dividend rights, of those shares without any further vote or action by stockholders. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of holders of any preferred stock that may be issued in the future. The issuance of additional preferred stock, while providing desirable flexibility in connection with possible financings and acquisitions and other corporate purposes, could make it more difficult for a third party to acquire a majority of the voting power of our outstanding voting securities, which could deprive our holders of common stock of a premium that they might otherwise realize in connection with a proposed acquisition of our company.
THERE CAN BE NO ASSURANCES THAT OUR SHARES AND/OR WARRANTS WILL BE LISTED ON THE NASDAQ CAPITAL MARKET AND, IF THEY ARE, OUR SHARES WILL BE SUBJECT TO POTENTIAL DELISTING IF WE DO NOT MEET OR CONTINUE TO MAINTAIN THE LISTING REQUIREMENTS OF THE NASDAQ CAPITAL MARKET.
We intend to apply to list the shares of our common stock on the NASDAQ Capital Market, or NASDAQ. An approval of our listing application by NASDAQ will be subject to, among other things, our fulfilling all of the listing requirements of NASDAQ. In addition, NASDAQ has rules for continued listing, including, without limitation, minimum market capitalization and other requirements. Failure to maintain our listing, or de-listing from NASDAQ, would make it more difficult for shareholders to sell our common stock and more difficult to obtain accurate price quotations on our common stock. This could have an adverse effect on the price of our common stock. Our ability to issue additional securities for financing or other purposes, or otherwise to arrange for any financing we may need in the future, may also be materially and adversely affected if our common stock is not traded on a national securities exchange.
THERE IS CURRENTLY ONLY A LIMITED PUBLIC MARKET FOR OUR COMMON STOCK AND NO PUBLIC MARKET FOR OUR WARRANTS. FAILURE TO DEVELOP OR MAINTAIN A TRADING MARKET COULD NEGATIVELY AFFECT THEIR VALUE AND MAKE IT DIFFICULT OR IMPOSSIBLE FOR YOU TO SELL YOUR SHARES.
There is currently only a limited public market for our common stock and no market for our warrants. An active public market for our common stock and/or warrants may not develop or be sustained. Failure to develop or maintain an active trading market could make it difficult for you to sell your shares or warrants without depressing the market price for such securities or recover any part of your investment in us. Even if an active market for our common stock and warrants does develop, the market price of such securities may be highly volatile. In addition to the uncertainties relating to future operating performance and the profitability of operations, factors such as variations in interim financial results or various, as yet unpredictable, factors, many of which are beyond our control, may have a negative effect on the market price of our securities.
IF AND WHEN A LARGER TRADING MARKET FOR OUR SECURITIES DEVELOPS, THE MARKET PRICE OF SUCH SECURITIES IS STILL LIKELY TO BE HIGHLY VOLATILE AND SUBJECT TO WIDE FLUCTUATIONS, AND YOU MAY BE UNABLE TO RESELL YOUR SECURITIES AT OR ABOVE THE PRICE AT WHICH YOU ACQUIRED THEM.
The stock market in general and the market for smaller health service companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. The market price for our securities may be influenced by many factors that are beyond our control, including, but not limited to:
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variations in our revenue and operating expenses;
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market conditions in our industry and the economy as a whole;
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actual or expected changes in our growth rates or our competitors' growth rates;
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•
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developments or disputes concerning patent applications, issued patents or other proprietary rights;
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•
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developments in the financial markets and worldwide or regional economies;
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•
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variations in our financial results or those of companies that are perceived to be similar to us;
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announcements by the government relating to regulations that govern our industry;
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•
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the recruitment or departure of key scientific or management personnel;
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•
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sales of our common stock or other securities by us or in the open market;
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•
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changes in the market valuations of other comparable companies;
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•
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general economic, industry and market conditions; and
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•
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the other factors described in this "Risk Factors" section.
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The trading price of our shares might also decline in reaction to events that affect other companies in our industry, even if these events do not directly affect us. Each of these factors, among others, could harm the value of your investment in our securities. In the past, following periods of volatility in the market, securities class-action litigation has often been instituted against companies. Such litigation, if instituted against us, could result in substantial costs and diversion of management's attention and resources, which could materially and adversely affect our business, operating results and financial condition.
EFFORTS TO COMPLY WITH THE APPLICABLE PROVISIONS OF SECTION 404 OF THE SARBANES-OXLEY ACT WILL INVOLVE SIGNIFICANT EXPENDITURES, AND NON-COMPLIANCE WITH SECTION 404 OF THE SARBANES-OXLEY ACT MAY ADVERSELY AFFECT US AND THE MARKET PRICE OF OUR COMMON STOCK.
Under current SEC rules, we have been required to report on our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act, or Section 404, and related rules and regulations of the SEC. We will be required to review on an annual basis our internal control over financial reporting, and on a quarterly and annual basis to evaluate and disclose changes in our internal control over financial reporting. This process may result in a diversion of management's time and attention and may involve significant expenditures. We cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or the impact of the same on our operations, and we may not be able to ensure that the process is effective or that our internal control over financial reporting is or will be effective in a timely manner. In the event that we are unable to maintain or achieve compliance with the applicable provisions of Section 404 of the Sarbanes-Oxley Act and related rules, we and the market price of our common stock may be adversely affected.
IF SECURITIES OR INDUSTRY ANALYSTS DO NOT PUBLISH OR CEASE PUBLISHING RESEARCH OR REPORTS ABOUT US, OUR BUSINESS OR OUR MARKET, OR IF THEY CHANGE THEIR RECOMMENDATIONS REGARDING OUR STOCK ADVERSELY, OUR STOCK PRICE AND TRADING VOLUME COULD DECLINE.
The trading market for our common stock will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market or our competitors. If any of the analysts who may cover us change their recommendation regarding our stock adversely, or provide more favorable relative recommendations about our competitors, our stock price would likely decline. If any analyst who may cover us were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD DISCOURAGE, DELAY OR PREVENT A CHANGE IN CONTROL OF OUR COMPANY AND MAY AFFECT THE TRADING PRICE OF OUR COMMON STOCK AND WARRANTS.
We are a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change in control would be beneficial to our existing stockholders. In addition, our certificate of incorporation and bylaws may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable. Our certificate of incorporation and bylaws:
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authorize the issuance of "blank check" preferred stock that could be issued by our Board of Directors to thwart a takeover attempt;
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provide that vacancies on our Board of Directors, including newly created directorships, may be filled by a majority vote of directors then in office;
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place restrictive requirements (including advance notification of stockholder nominations and proposals) on how special meetings of stockholders may be called by our stockholders;
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do not provide stockholders with the ability to cumulate their votes; and
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provide that our Board of Directors or a majority of our stockholders may amend our bylaws.
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Item 2. Properties
We sublease office facilities of approximately 6,900 square feet located at 1365 West Business Park Drive, Suite 100, Orem, Utah, 84058. This lease expires in July 2018 and the monthly rent is approximately $10,650 subject to annual adjustments.
Management believes the facilities described above are adequate to accommodate presently expected growth and needs of our operations.
Item 3. Legal Proceedings
On May 28, 2015, an investor in the Company, filed a lawsuit against the Company, James Dalton, our former CEO and Chairman, ADP Management, an entity controlled by David Derrick, our former Executive Chairman, and 4G Biometrics, a wholly owned subsidiary of the Company in the District Court of Utah-Central Division (Case No. 2:15-CV-00373-BCW). The lawsuit alleges a breach of contract, breach of the implied covenant of good faith and fair dealing, fraud and conspiracy to commit fraud and seeks damages in excess of $1,000,000, exclusive of interest and costs. The Company has engaged legal counsel regarding the matter. At this time, it is not possible to predict the outcome of the matter. The Company intends to vigorously dispute the litigation and believes it has meritorious defenses to the claims.
On November 4, 2015, the Company received a demand for payment of $275,000 from a former employee of the Company and former principal of 4G Biometrics who was terminated for cause in regards to his employment agreement. On December 4, 2015, the Company filed a complaint in the Third Judicial District Court in Salt Lake County, State of Utah (Case No. 150908531) against Kenith Lewis, a former employee, Randall K. Gardner, a former employee, and Darrell Meador, our President of Sales, all of whom are the former owners of 4G Biometrics, seeking damages in excess of $300,000 related to alleged misrepresentations made to induce ActiveCare to acquire 4G Biometrics. In February 2016, the Company entered into settlement agreements with each of Kenith Lewis, Randall K. Gardner and Darrell Meador whereby all parties released all claims against each other.
With the exception of the foregoing, the Company is not involved in any disputes and does not have any litigation matters pending.
Item 4. Mine Safety Disclosures.
Not Applicable
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is quoted on the OTC Markets Group Inc.'s OTCQB Link quotation platform (the "OTCQB") under the trading symbol "ACAR". We intend to effect a 1-for-500 reverse split of our common stock in the near future.
As of December 1, 2016, there were approximately 2,183 registered holders of record of our common stock and the last reported sale price of our common stock on January 9, 2016 on the OTCQB was $0.05 per share.
Our Common Stock was initially quoted on the OTCQB in 2009 and the following table sets forth the high and low sales price of our common stock on the OTCQB for the periods set forth below. These prices are based on inter-dealer bid and asked prices, without markup, markdown, commissions, and may not represent actual transactions.
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U.S. $
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PERIOD
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High
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Low
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Fiscal Year Ending September 30, 2016:
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Quarter Ended September 30, 2016
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$
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0.065
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$
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0.025
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Quarter Ended June 30, 2016
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0.11
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0.04
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Quarter Ended March 31, 2016
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0.18
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0.026
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Quarter Ended December 31, 2015
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0.135
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0.023
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Fiscal Year Ending September 30, 2015:
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Quarter Ended September 30, 2015
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0.2799
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0.1126
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Quarter Ended June 30, 2015
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0.35
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0.20
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Quarter Ended March 31, 2015
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0.425
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0.05
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Quarter Ended December 31, 2014
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0.44
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0.12
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Fiscal Year Ending September 30, 2014:
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Quarter Ended September 30, 2014
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0.61
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0.22
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Quarter Ended June 30, 2014
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0.75
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0.35
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Quarter Ended March 31, 2014
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1.00
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0.60
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Quarter Ended December 31, 2013
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1.45
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0.80
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Dividends
To date, we have not paid any dividends on our common stock and do not anticipate paying any dividends in the foreseeable future. The declaration and payment of dividends on the common stock is at the discretion of our board of directors and will depend on, among other things, our operating results, financial condition, capital requirements, contractual restrictions or such other factors as our board of directors may deem relevant. We currently expect to use all available funds to finance the future development and expansion of our business and do not anticipate paying dividends on our common stock in the foreseeable future. In addition, the payment of cash dividends is prohibited under our current financing agreements.
Equity Compensation Plans
We granted our former Chief Executive Officers, former directors, and current officers equity compensation in the form of restricted stock and warrants for the purchase of common stock. The following table summarizes certain information concerning equity plan awards outstanding as of September 30, 2016.
Plan Category
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Number of securities to be issued upon exercise of outstanding options, warrants and rights
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Weighted-average exercise price of outstanding options, warrants and rights
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Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
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(a)
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(b)
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(c)
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Equity compensation plans approved by security holders
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-
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$
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-
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-
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Equity compensation plans not approved by security holders
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1,635,287
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(1)
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$
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0.75
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-
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Total
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1,635,287
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$
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0.75
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-
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(1)
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Includes 360,000 shares of common stock issuable upon exercise of outstanding warrants granted to Mr. Dalton.
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Dilution
The Board of Directors determines when and under what conditions and at what prices to issue stock. In addition, a significant number of shares of common stock are reserved for issuance upon the exercise of stock options and warrants. The issuance of any shares of common stock for any reason will result in dilution of the equity and voting interests of existing stockholders.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company, 59 Maiden Lane, Plaza Level, New York, NY 11
Rule 10B-18 Transactions
During the fiscal year ended September 30, 2016, there were no repurchases of the Company's common stock by the Company.
Recent Sales of Unregistered Securities
The following discussion summarizes sales and issuances of our common stock and other securities not previously reported during the prior fiscal year. Unless otherwise indicated, no underwriters were used in connection with the sales and the sales were exempt pursuant to Section 4(a)(2) of the Securities Act and Regulation D as promulgated thereunder.
During 2016 the Company issued the following shares of common stock:
From February 29, 2016 through June 17, 2016, the Board issued an aggregate of 15,564,175 shares to settle notes payable and related accrued interest.
From February 29, 2016 through May 3, 2016, the Board issued an aggregate of 1,008,047 shares for employee compensation for past services and bonuses.
From November 5, 2015 through February 29, 2016, the Board issued an aggregate of 1,750,000 shares for services provided by independent consultants.
On February 29, 2016, the Board issued an aggregate of 10,000,000 shares as part of the redemption of Series F preferred stock.
From October 28, 2015 through May 3, 2016, the Board issued an aggregate of 2,122,866 shares for notes payable origination and financing fees.
On February 29, 2016, the Board issued an aggregate of 250,000 shares for the extension of notes payable.
From February 29, 2016 through May 3, 2016, the Board issued an aggregate of 226,651 shares to settle accrued dividends for Series D preferred stock.
On May 3, 2016, the Board issued 1,000,000 shares to an entity controlled by an officer of the Company for a related-party note payable origination fee.
On August 23, 2016, the Board issued 4,601,226 shares to settle notes payable and related accrued interest.
On August 23, 2016, the Board issued 100,000 shares for services provided by independent consultants.
On August 23, 2016, the Board issued 300,000 shares for a financing fee related to a note payable amendment.
On August 23, 2016, the Board issued an aggregate of 75,866 shares to settle accrued dividends for Series D preferred stock.
During 2016 the Company issued the following convertible equity securities for the purchase of shares of common stock:
On February 16, 2016, the Company issued warrants to purchase 12,015,350 shares with an exercise price of $0.065 per share in connection with the acquisition of a note payable and line of credit; warrants for the purchase of 7,392,800 shares vested immediately, 1,847,550 vested upon the disbursement of the second tranche of the related note payable, and 2,775,000 vest evenly in the event of three available increases to the related line of credit. The warrants expire in February 2023, may be settled in a cashless exercise, and are puttable upon expiration or liquidation for the greater of $500,000 or up to 6.5% of the equity value of the Company, depending on the number of warrants vested.
On February 16, 2016, the Company exchanged warrants held by the holders of its Series F preferred stock for the purchase of 5,534,097 shares of common stock in connection with the redemption of Series F preferred stock for new warrants for the purchase of the same number of shares on different terms. The new warrants are exercisable for $0.30 per share, adjustable to any lower rates granted through equity sales or other conversion rates provided by issuances of other debt, warrants, options or other instruments, with the exception of certain other raises. The new warrants expire in February 2021, and may be settled in a cashless exercise. Additional warrants for the purchase of 8,000,000 shares of common stock may be issued in the event of default on the related notes payable, exercisable at $0.001 per share, with 25% issuable upon the first event of default, 37.5% upon the second event, and 37.5% upon the third event. The warrants issuable upon default expire in February 2026 (if issued), may be settled in a cashless exercise, and are puttable upon expiration or liquidation with the primary warrants. The new warrants may only be exercised to the extent the respective holder would own a maximum of 4.99% of the Company's common stock after exercise, but the holders may elect to increase the maximum to 9.99%. These warrants will be terminated upon the consummation of the Offering. In consideration for such termination, the Debenture Holders will be issued new warrants to purchase an identical number of shares of Common Stock at an exercise price equal to the Conversion Price as more fully described in the Subsequent Events —"
Conversion of Convertible Debentures, Promissory Notes and Accounts Payable
" section below.
On September 19, 2016, the Company issued warrants to purchase 10,000,000 shares in connection with the acquisition of a note payable, which vested immediately. The warrants are exercisable at the lesser of (i) 80% of the per share price of common stock contemplated in the Offering, (ii) $0.05 per share, (iii) 80% of the unit price offering price in the Offering, or (iv) the exercise price of any warrants issued in the Offering, in each case subject to adjustment. Until the closing on the stock and warrants contemplated in the Offering, the exercise price is adjustable to any lower rates granted through equity sales or other conversion rates provided by issuances of other debt, warrants, options or other instruments by multiplying that rate by an aggregate exercise price, $500,000 at the inception of the warrant, which would increase the number of shares issuable. The warrants are subject to certain default provisions which may result in additional shares issuable by increase in the aggregate exercise price. Upon the closing of the Offering, the number of shares issuable under the warrant will reset to an amount of shares equal to the Aggregate Exercise Amount of the warrants (as defined therein) divided by the exercise price then in effect. The warrants expire in September 2021, and may be settled in a cashless exercise. The warrants may only be exercised to the extent the holder would own a maximum of 9.99% of the Company's common stock after exercise. See also Subsequent Events — "JMJ Financing" section below.
On September 20, 2016, the Company issued a warrant to purchase 1,333,333 shares to a third party in connection with the acquisition of a secured borrowing agreement in November 2015. The estimated fair value of the warrant was included in accrued liabilities as of June 30, 2016, has an exercise price of $0.30 per share and expires in November 2020.
On November 3, 2016, the Company issued a warrant to purchase 5,000,000 shares of common stock at an exercise price per share equal to the lesser of (i) 80% of the per share price of the common stock of the offering, (ii) $0.05 per share, (iii) 80% of the unit price in the offering (if applicable), or (iv) the exercise price of any warrants issued in the offering.
During 2016 the Company issued the following notes payable:
On February 16, 2016, the Company amended a $300,000 unsecured note payable to subordinate to other notes payable also issued during February 2016, and the conversion price was reduced to $0.06 per share, which was below the fair value of the Company's common stock on the date of the amendment. The note may only be converted if the holder owns less than 9.99% of the Company's common stock after conversion. In May 2016, the note was amended to extend the maturity date to the earlier of an equity raise of $10,000,000 or October 2016 which required a payment of 300,000 shares of common stock.
On October 27, 2015, the Company issued $138,000 of unsecured notes payable with interest at 12% per annum, due April 2016, convertible into common stock at a 15% discount from the 10-day volume adjusted weighted average closing price per share upon maturity. In connection with the issuance of the notes, the Company also issued 331,200 shares of common stock as an origination fee.
On February 16, 2016, the Company amended a $1,303,135 unsecured note payable to an entity controlled by an officer to subordinate to other notes payable also issued during February 2016, and reduced the conversion price to $0.06 per share. The conversion of the note is now limited to a maximum of 20,000,000 common shares in combination with other convertible notes payable held by the lender.
On February 16, 2016, the Company amended a $25,463 unsecured note payable to an entity controlled by an officer to subordinate the note to other notes payable also issued during February 2016. The note is convertible into shares of common stock at $0.06 per share. The conversion of the note is now limited to a maximum of 20,000,000 common shares in combination with other convertible notes payable held by the entity.
On February 19, 2016, the Company issued $5,900,000 of unsecured notes payable with interest at 10% per annum, due November 2018. Payments on the notes are partially or fully convertible at the Company's option at $0.30 per share to a maximum of 19,667,000 shares of common stock subject to the terms therein.
On March 21, 2016, the Company issued a $2,523,937 unsecured note payable to a vendor with interest at 0.65% per annum, due January 2018, upon the conversion of $2,523,937 in accounts payable to the vendor.
From February 19, 2016 through April 25, 2016, the Company issued a $2,000,000 secured note payable to a third party with interest at 12.75% per annum, due February 2019. The note is secured by the assets of the Company and may go into default in the event other notes payable go into default subsequent to the effective date of the note. The Company entered into the note payable agreement in conjunction with a line of credit.
On February 19, 2016, the Company issued a secured line of credit with a third party with interest at 12.25% per annum, due February 2018. The note is secured by the assets of the Company and may go into default in the event other notes payable go into default subsequent to the effective date of the note. The Company entered into the line of credit agreement in conjunction with a note payable. The Company may draw up to the lesser of 80% of certain accounts receivable or $1,500,000 and increase the maximum it may borrow under the agreement up to a total balance of $3,000,000 at $500,000 per increase as the Company meets certain milestones.
On March 24, 2016, the Company issued a $250,000 unsecured note payable with interest at 12% per annum, due September 2016, subordinated to other notes payable. In connection with the issuance of the note, the Company issued 1,000,000 shares of common stock.
On February 18, 2016, the Company issued a $263,082 secured note payable to a third party with interest at 18% per annum, due June 2017. The note is secured by shares of the Company's common stock held by, and other assets of an entity controlled by, a former Executive Chairman of the Board of Directors. The note may only be converted if the holder owns less than 4.99% of the Company's common stock after conversion.
On February 18, 2016, the Company issued a $542,005 unsecured note payable to an entity controlled by a former Executive Chairman of the Board of Directors with interest at 18% per annum, due January 2017. In February 2016, notes payable to the same entity, with outstanding balances of $511,005 plus accrued interest of $30,999 combined into this note. The conversion of the note is limited to a maximum of 9,250,000 common shares.
On April 20, 2016, the Company issued a $250,000 unsecured note payable to an entity controlled by an officer with interest at 12% per annum, due September 2016, subordinated to other third party notes payable. In connection with the issuance of the note, the Company issued 1,000,000 shares of common stock.