UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| R | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2015 | |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from ___________to ___________ |
Commission File No. 000-54090
CAREVIEW COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
| Nevada | 95-4659068 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| 405 State Highway 121, Suite B-240, Lewisville, TX 75067 | (972) 943-6050 | |
| (Address of principal executive offices) | (Registrant’s Telephone Number) |
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
The number of shares outstanding of each of the issuer’s classes of Common Stock as of May 13, 2015 was 139,380,742.
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The accompanying footnotes are an integral part of these condensed consolidated financial statements.
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The accompanying footnotes are an integral part of these condensed consolidated financial statements.
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The accompanying footnotes are an integral part of these condensed consolidated financial statements.
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The accompanying footnotes are an integral part of these condensed consolidated financial statements.
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CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BASIS OF PRESENTATION AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Interim Financial Statements
The accompanying unaudited interim condensed consolidated financial statements of CareView Communications, Inc. (“CareView”, the “Company”, “we”, “us” or “our”) have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, such financial statements include all adjustments (consisting solely of normal recurring adjustments) necessary for the fair statement of the financial information included herein in accordance with GAAP and the rules and regulations of the Securities and Exchange Commission (the “SEC”). The balance sheet at December 31, 2014 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. Results of operations for interim periods are not necessarily indicative of results for the full year. The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2014 as filed with the SEC on March 31, 2015.
Fair Value of Financial Instruments
Our financial instruments consist primarily of receivables, accounts payable, accrued expenses and short- and long-term debt. The carrying amount of receivables, accounts payable and accrued expenses approximates our fair value because of the short-term maturity of such instruments. We have elected not to carry our debt instruments at fair value. The carrying amount of our debt approximates fair value. Interest rates that are currently available to us for issuance of short- and long-term debt with similar terms and remaining maturities are used to estimate the fair value of the our short- and long-term debt and would be considered Level 3 inputs under the fair value hierarchy.
We have categorized our assets and liabilities that are valued at fair value on a recurring basis into a three-level fair value hierarchy in accordance with GAAP. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets and liabilities (Level 1) and lowest priority to unobservable inputs (Level 3).
Assets and liabilities recorded in the condensed consolidated balance sheets at fair value are categorized based on a hierarchy of inputs, as follows:
Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 - Quoted prices for similar assets or liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.
Level 3 - Unobservable inputs for the asset or liability.
The Company’s financial assets and liabilities recorded at fair value on a recurring basis include the fair value of warrant liability as detailed below. The fair value of this warrant liability is included in long-term liabilities on the accompanying condensed consolidated financial statements.
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CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BASIS OF PRESENTATION AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (Continued)
Fair Value of Financial Instruments (continued)
The following table provides the financial assets and liabilities reported at fair value and measured on a recurring basis:
| Description | Assets/(Liabilities) Measured at Fair Value |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant
Other Unobservable Inputs (Level 3) | ||||||||||||||
| Fair value of warrant liability | $ | (539,965 | ) | $ | — | $ | — | $ | (539,965 | ) | ||||||||
The following table provides a summary of changes in fair value associated with the Level 3 liabilities for the three months ended March 31, 2015
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||
| Balance at January 1, 2015 | $ | (301,864 | ) | |
| Issuances of derivative liabilities | — | |||
| Change in fair value of warrant liability | (238,101 | ) | ||
| Transfers in and/out of Level 3 | — | |||
| Ending balance at March 31, 2015 | $ | (539,965 | ) | |
The above table of Level 3 liabilities begins with the prior period balance and adjusts the balance for changes that occurred during the current period. The ending balance of the Level 3 securities presented above represent our best estimates and may not be substantiated by comparisons to independent markets and, in many cases, could not be realized in immediate settlement of the instruments.
Earnings Per Share
We calculate earnings per share (“EPS”) in accordance with GAAP, which requires the computation and disclosure of two EPS amounts, basic and diluted. Basic EPS is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed based on the weighted average number of common shares outstanding plus all potentially dilutive common shares outstanding during the period under the treasury stock method. Such potential dilutive common shares consist of stock options, warrants and convertible debt. Potential common shares totaling 104,333,559 and 92,844,471 at March 31, 2015 and 2014, respectively, have been excluded from the diluted earnings per share calculation as they are anti-dilutive due to our reported net loss.
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CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BASIS OF PRESENTATION AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (Continued)
Recently Issued and Newly Adopted Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board (“FASB”), issued Accounting Standards Update (“ASU”) No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 requires that debt issuance costs be reported in the balance sheet as a direct deduction from the face amount of the related liability, consistent with the presentation of debt discounts and further requires the amortization of debt issuance cost to be reported as interest expense. Similarly, debt issuance costs and any discount or premium are considered in the aggregate when determining the effective interest rate of the debt. ASU 2015-03 is effective for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. Early adoption is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. Management has opted for early adoption of ASU 2015-03 and there was no material effect on the consolidated financial statements upon adoption.
There have been no material changes to our significant accounting policies as summarized in NOTE 2 of our Annual Report on Form 10-K for the year ended December 31, 2014. We do not expect that the adoption of any recent accounting pronouncements will have a material impact on our accompanying condensed consolidated financial statements.
Reclassifications
Certain 2014 amounts have been reclassified to conform to current year presentation.
NOTE 2 – LIQUIDITY AND MANAGEMENT’S PLAN
Our cash position at March 31, 2015 was approximately $7,400,000.
Pursuant to the terms of a Note and Warrant Purchase Agreement dated April 21, 2011 (as subsequently amended) with HealthCor Partners Fund, LP and HealthCor Hybrid Offshore Master Fund, LP (“HealthCor”) we are required to maintain a minimum cash balance $2,000,000 (See NOTE 11 for further details), and we are in compliance with the minimum cash balance as of the date of this filing.
Our continued successful operation is dependent upon us achieving positive cash flow through operations while maintaining adequate liquidity. We expect that the cash on hand, as well as our existing and projected cash flow from billable contracts, will enable us to continue to operate for the next twelve month period. We believe that our sales and marketing plan to attract new business and our ongoing deployment and installation of units under existing hospital agreements, will meet our near-term cash needs and will help us achieve future operating profitability.
At present, we have sufficient inventory to install and service a select number of large customers, but eventually we will need to address additional capital requirements. We are currently in discussions with several entities in an effort to secure a credit facility which will support our projected growth. We expect to close on a credit facility within the next 120 days; however, there are no assurances that we can close on a credit facility on terms acceptable to us or that such closing will occur.
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CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – STOCKHOLDERS’ EQUITY
Warrants to Purchase Common Stock of the Company
We use the Black-Scholes-Merton option pricing model (“Black-Scholes Model”) to determine the fair value of warrants to purchase our Common Stock (the “Warrant(s)”) (except certain Warrants issued to HealthCor and Warrants issued pursuant to the terms our March 2013 private placement (the “Private Placement Warrants”). The Black-Scholes Model is an acceptable model in accordance with GAAP. The Black-Scholes Model requires the use of a number of assumptions including volatility of the stock price, risk-free interest rate, and the estimated term of the Warrant. Estimated volatility is a measure of the amount by which our stock price is expected to fluctuate each year during the expected life of the award. Our estimated volatility is an average of the historical volatility of our stock prices (and that of peer entities whose stock prices were publicly available). Our calculation of estimated volatility is based on historical stock prices over a period equal to the expected life of the awards. Where appropriate we used the historical volatility of peer entities due to the lack of sufficient historical data of our stock price during 2007-2009. The risk-free interest rate assumption is based upon observed interest rates on zero coupon U.S. Treasury bonds whose maturity period is appropriate for the term of the Warrant and is calculated by using the average daily historical stock prices through the day preceding the grant date.
The fair value of the above mentioned Warrants issued to HealthCor and the Private Placement Warrants was computed using the Binomial Lattice model, incorporating transaction details such as the price of our Common Stock, contractual terms, maturity and risk free rates, as well as assumptions about future financings, volatility, and holder behavior. Due to the down round provisions associated with the exercise price of these Warrants, we determined that the Binomial Lattice model was the most appropriate model for valuing these instruments.
Warrant Activity during the Three Months Ended March 31, 2015
On February 17, 2015, we entered into a Fifth Amendment to the Note and Warrant Purchase Agreement with HealthCor and certain other investors and agreed to sell and issue (i) additional notes in the initial aggregate principal amount of $6,000,000, with a conversion price per share equal to $0.52 (subject to adjustment for standard anti-dilution provisions) and (ii) additional Warrants for an aggregate of up to 3,692,307 shares of our Common Stock at an exercise price per share equal to $0.52 (subject to adjustment for standard anti-dilution provisions) (the “Fifth Amendment Warrants”). The fair value of the convertible debt and the Fifth Amendment Warrants was determined to be $7,336,615, resulting in a relative fair value of $1,093,105 for the Fifth Amendment Warrants on the date of grant. (See NOTE 11 for further details)
On March 31, 2015, we issued HealthCor a Warrant for up to an aggregate of 1,000,000 shares of our Common Stock in consideration for certain prior waivers of the minimum cash balance requirement in the Purchase Agreement. This Warrant has an exercise price of $0.53 per share and an expiration date of March 31, 2025. (See NOTE 11 for further details).
As of December 31, 2014, we recorded a warrant liability of $301,864 in our consolidated financial statements. At March 31, 2015, the Private Placement Warrants were re-valued with a fair value determination of $539,965, resulting in a difference of $238,101, which was included as change in fair value of warrant liability in other income and expense in the accompanying condensed consolidated financial statements.
During the three months ended March 31, 2015, warrants to purchase an aggregate of 2,882,626 shares of our Common Stock expired.
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CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – STOCKHOLDERS’ EQUITY (Continued)
Warrant Activity during the Three Months Ended March 31, 2014
On January 16, 2014, we entered into a Fourth Amendment to the Note and Warrant Purchase Agreement with HealthCor and agreed to sell and issue (i) additional notes in the initial aggregate principal amount of $5,000,000, with a conversion price per share equal to $0.40 (subject to adjustment for standard anti-dilution provisions) and (ii) additional Warrants for an aggregate of up to 4,000,000 shares of our Common Stock at an exercise price per share equal to $0.40 (subject to adjustment for standard anti-dilution provisions) (the “Fourth Amendment Warrants”). The fair value of the convertible debt and the Fourth Amendment Warrants was determined to be $6,488,000, resulting in a relative fair value of $1,146,732 for the Fourth Amendment Warrants on the date of grant.
As of December 31, 2013, we recorded a warrant liability of $370,865 in our condensed consolidated financial statements. At March 31, 2014, the Private Placement Warrants were re-valued with a fair value determination of $1,004,007 and the difference of $633,142 was included as change in fair value of warrant liability in other income and expense in the accompanying condensed consolidated financial statements.
For the three ended March 31, 2014, we amortized $142,347 of previously capitalized Warrant costs as interest expense in the accompanying condensed consolidated financial statements.
Options to Purchase Common Stock of the Company
On February 25, 2015, we established the CareView Communications, Inc. 2015 Stock Option Plan (the “2015 Plan”) pursuant to which 5,000,000 shares of Common Stock was reserved for issuance upon the exercise of options (“2015 Plan Option(s)”). The 2015 Plan was designed to serve as an incentive for retaining our qualified and competent key employees, officers and directors. The 2015 Plan Options vest over three years and have an exercise period of ten years from the date of issuance.
During the three months ended March 31, 2015, we granted options to purchase 1,815,000 shares of our Common Stock (the ‘‘Option(s)’’) to certain employees and members of our board of directors. We granted 650,000 Options to certain employees and members of our board of directors during the three months ended March 31, 2014. During those same three month periods, 41,002 and 15,001 Options, respectively, were canceled and 6,231,310 and 31,666 Options, respectively, expired.
A summary of our stock option activity and related information follows:
| Number of Shares Under Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life |
Aggregate Intrinsic Value | |||||||||||||
| Balance at December 31, 2014 | 14,273,810 | $ | 0.58 | 6.3 | $ | — | ||||||||||
| Granted | 1,815,000 | $ | 0.53 | 9.9 | $ | — | ||||||||||
| Expired | (6,231,310 | ) | ||||||||||||||
| Canceled | (41,002 | ) | ||||||||||||||
| Balance at March 31, 2015 | 9,816,498 | $ | 0.61 | 8.2 | $ | 52,000 | ||||||||||
| Vested and Exercisable at March 31, 2015 | 3,753,820 | $ | 0.74 | 6.7 | $ | 17,333 | ||||||||||
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CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – STOCKHOLDERS’ EQUITY (Continued)
Options to Purchase Common Stock of the Company (continued)
The valuation methodology used to determine the fair value of the Options issued was the Black-Scholes Model.
The assumptions used in the Black-Scholes Model are set forth in the table below.
| Three Months Ended March 31, 2015 | Year Ended December 31, 2014 | |||||||
| Risk-free interest rate | 1.41-1.47 | % | 1.59-1.83 | % | ||||
| Volatility | 71.30-71.86 | % | 72.82-75.42 | % | ||||
| Expected life in years | 6 | 6 | ||||||
| Dividend yield | 0.00 | % | 0.00 | % | ||||
The risk-free interest rate assumption is based upon observed interest rates on zero coupon U.S. Treasury bonds whose maturity period is appropriate for the expected term of the Option and is calculated by using the average daily historical stock prices through the day preceding the grant date. Estimated volatility is a measure of the amount by which our stock price is expected to fluctuate each year during the expected life of the award. Our estimated volatility is an average of the historical volatility of our stock prices. Our calculation of estimated volatility is based on historical stock prices over a period equal to the expected life of the awards.
Share-based compensation expense for Options charged to our operating results for the three months ended March 31, 2015 and 2014 ($190,106 and $196,444, respectively) is based on awards vested. The estimate of forfeitures are to be recorded at the time of grant and revised in subsequent periods if actual forfeitures differ from the estimates. We have not included an adjustment to our stock based compensation expense based on the nominal amount of the historical forfeiture rate. We do, however, revise our stock based compensation expense based on actual forfeitures during each reporting period.
At March 31, 2015, total unrecognized estimated compensation expense related to non-vested Options granted prior to that date was approximately $1,700,000, which is expected to be recognized over a weighted-average period of 2.1 years. No tax benefit was realized due to a continued pattern of operating losses.
NOTE 4 – OTHER CURRENT ASSETS
Other current assets consist of the following:
| March 31, 2015 |
December 31, 2014 | |||||||
| Prepaid expenses | $ | 549,672 | $ | 254,998 | ||||
| Other current assets | 22,541 | 21,912 | ||||||
| TOTAL OTHER CURRENT ASSETS | $ | 572,213 | $ | 276,910 | ||||
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CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
| March 31, 2015 |
December 31, 2014 | |||||||
| Network equipment | $ | 10,745,066 | $ | 10,753,542 | ||||
| Office equipment | 169,659 | 160,890 | ||||||
| Vehicles | 132,797 | 132,797 | ||||||
| Test equipment | 88,180 | 87,059 | ||||||
| Furniture | 75,673 | 75,673 | ||||||
| Warehouse equipment | 8,441 | 6,867 | ||||||
| Leasehold improvements | 5,121 | 5,121 | ||||||
| 11,224,937 | 11,221,949 | |||||||
| Less: accumulated depreciation | (6,230,422 | ) | (5,877,157 | ) | ||||
| TOTAL PROPERTY AND EQUIPMENT | $ | 4,994,515 | $ | 5,344,792 | ||||
Depreciation expense for the three months ended March 31, 2015 and 2014 was $409,634 and $392,869, respectively.
At March 31, 2015, some portion of our network equipment is in excess of current requirements based on the recent level of installations. We have developed a program to deploy assets over the near term and believe no impairment exists at March 31, 2015. No estimate can be made of a range of amounts of loss that are reasonably possible should we not be successful.
NOTE 6 – OTHER ASSETS
Intangible assets consist of the following:
| March 31, 2015 | ||||||||||||
| Cost | Accumulated Amortization | Net | ||||||||||
| Patents and trademarks | $ | 281,416 | $ | 30,319 | $ | 251,097 | ||||||
| Other intangible assets | 51,464 | 37,274 | 14,190 | |||||||||
| TOTAL INTANGIBLE ASSETS | $ | 332,880 | $ | 67,593 | $ | 265,287 | ||||||
| December 31, 2014 | ||||||||||||
| Cost | Accumulated Amortization | Net | ||||||||||
| Patents and trademarks | $ | 271,142 | $ | 26,157 | $ | 244,985 | ||||||
| Other intangible assets | 51,464 | 35,166 | 16,298 | |||||||||
| TOTAL INTANGIBLE ASSETS | $ | 322,606 | $ | 61,323 | $ | 261,283 | ||||||
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CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – OTHER ASSETS (Continued)
Other assets consist of the following:
| March 31, 2015 | ||||||||||||
| Cost | Accumulated Amortization | Net | ||||||||||
| Deferred installation costs | $ | 1,504,470 | $ | 932,279 | $ | 572,191 | ||||||
| Prepaid financing costs | 321,492 | — | 321,492 | |||||||||
| Prepaid license fee | 249,999 | 58,742 | 191,257 | |||||||||
| Security deposit | 46,124 | — | 46,124 | |||||||||
| TOTAL OTHER ASSETS | $ | 2,122,085 | $ | 991,021 | $ | 1,131,064 | ||||||
| December 31, 2014 | ||||||||||||
| Cost | Accumulated Amortization | Net | ||||||||||
| Deferred installation costs | $ | 1,457,098 | $ | 865,647 | $ | 591,451 | ||||||
| Prepaid license fee | 249,999 | 54,644 | 195,355 | |||||||||
| Security deposit | 46,124 | — | 46,124 | |||||||||
| TOTAL OTHER ASSETS | $ | 1,753,221 | $ | 920,291 | $ | 832,930 | ||||||
NOTE 7 – OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
| March 31, 2015 | December 31, 2014 | |||||||
| Accrued taxes | $ | 172,342 | $ | 145,183 | ||||
| Allowance for system removal | 170,021 | 277,000 | ||||||
| Accrued insurance | 114,947 | — | ||||||
| Accrued travel and entertainment | 67,000 | 35,000 | ||||||
| Accrued paid time off | 51,686 | 87,319 | ||||||
| Accrued professional services | 28,500 | 204,675 | ||||||
| Other accrued liabilities | 92,982 | 42,107 | ||||||
| TOTAL OTHER CURRENT LIABILITIES | $ | 697,478 | $ | 791,284 | ||||
NOTE 8 – INCOME TAXES
Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. We do not expect to pay any significant federal or state income tax for 2015 as a result of the losses recorded during the three months ended March 31, 2015 and the additional losses expected for the remainder of 2015 and net operating loss carry forwards from prior years. Accounting standards require the consideration of a valuation allowance for deferred tax assets if it is “more likely than not” that some component or all of the benefits of deferred tax assets will not be realized. As of March 31, 2015, we maintained a full valuation allowance for all deferred tax assets. Based on these requirements, no provision or benefit for income taxes has been recorded. There were no recorded unrecognized tax benefits at the end of the reporting period.
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CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 – JOINT VENTURE AGREEMENT
On November 16, 2009, we entered into a Master Investment Agreement (the “Rockwell Agreement”) with Rockwell Holdings I, LLC, a Wisconsin limited liability (“Rockwell”). Under the terms of the Rockwell Agreement, we used funds from Rockwell to fully implement the CareView System™ in Hillcrest Medical Center in Tulsa, Oklahoma (“Hillcrest”) and Saline Memorial Hospital in Benton, Arkansas (“Saline”) (the “Project Hospital(s)”). CareView-Hillcrest, LLC and CareView-Saline, LLC were created as the operating entities for the Project Hospitals under the Rockwell Agreement (the “Project LLC(s)”).
Rockwell and the Company own 50% of each Project LLC. We contributed our intellectual property rights and hospital contract with each Project Hospital and Rockwell contributed cash to be used for the purchase of equipment for the Project LLCs. Rockwell provided $1,151,205 as the initial funding, $575,603 was provided under promissory notes (the “Project Notes”) and $575,602 was provided under an investment interest (“Rockwell’s Preferential Return”). We classified Rockwell’s Preferential Return as a liability since it represents an unconditional obligation by us and is recorded in mandatorily redeemable equity in joint venture on the accompanying consolidated financial statements. The Project Notes and Rockwell’s Preferential Returns both earn interest at the rate of ten percent (10%) and are secured by a security interest in all of the equipment in the Project Hospitals, intellectual property rights, and the Project Hospital Contract
In accordance with GAAP, we determined the Project LLCs are VIEs based on the fact that the total equity investment at risk was not sufficient to finance the entities activities without additional financial support. We consolidate the Project LLCs as we have the power to direct the activities and an obligation to absorb losses of the VIEs. We have no contractual liability to Rockwell with respect to the repayment obligations of the Project LLCs.
As additional consideration to Rockwell for providing the funding, we granted Rockwell Warrants to purchase 1,151,206 shares of our Common Stock on the date of the Rockwell Agreement, and using the Black-Scholes Model valued the Warrants at $1,124,728 (the “Project Warrant”). The Project Warrant is classified as equity and is included in additional paid-in-capital on the accompanying consolidated financial statements. We allocated the proceeds to the Project Warrant, the Project Notes and Preferential Returns based on the relative fair value. The originally recorded debt discount of $636,752 was amortized over the expected life of the debt and was fully amortized as of March 31, 2013.
Hillcrest notified us of its desire to terminate its hospital agreement effective January 27, 2012. This termination resulted in the loss of monthly revenue totaling approximately $20,000, which revenue was used to make payments on our indebtedness to Rockwell. To date, we have incurred system removal costs of approximately $3,000 for removing our equipment from the hospital premises. We currently have approximately 100 units remaining on site at Hillcrest. Included in other current liabilities in the accompanying consolidated financial statements is an allowance for system removal totaling $10,250 to reserve for the removal of the remaining units.
As of March 31, 2015, the Project LLCs’ indebtedness to Rockwell, including principal and interest totaled approximately $1,100,000. On March 18, 2014, the Project Notes and Rockwell’s Preferential Returns, previously due on June 30, 2014 (the “June 2014 extensions”), were extended to June 30, 2015. On February 19, 2015, the Project Notes and Rockwell’s Preferential Returns due dates were extended to June 30, 2016. In conjunction with an August 2013 extension of the due dates of the Project Notes and Rockwell’s Preferential Returns to December 31, 2013, the expiration date of the Project Warrant was also extended from November 16, 2014 to November 16, 2015. All other provisions of the Project Warrant remained unchanged. The Project Warrant were amended and revalued in August 2013 resulting in a $25,327 increase in fair value, which has been recorded as non-cash costs included in general and administration expense in the accompanying
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CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 – JOINT VENTURE AGREEMENT (Continued)
consolidated financial statements. CareView, as 50% owner of the LLCs, is currently negotiating with Rockwell to settle the debt of the LLCs through the issuance of shares of CareView’s Common Stock. Although CareView anticipates that this settlement will be forthcoming in the near future, CareView and the LLCs can give no assurances that a settlement will be negotiated, or if negotiated and settled, that it will be through the issuance of CareView’s Common Stock.
NOTE 10 – VARIABLE INTEREST ENTITIES
The Company consolidates VIEs of which it is the primary beneficiary. The liabilities recognized as a result of consolidating these VIEs do not necessarily represent additional claims on our general assets; rather, they represent claims against the specific assets of the consolidated VIEs. Conversely, assets recognized as a result of consolidating these VIEs do not represent additional assets that could be used to satisfy claims against our general assets.
The total consolidated VIE assets and liabilities reflected on our consolidated balance sheets at March 31, 2015 and December 31, 2014 are as follows:
| March 31, 2015 | December 31, 2014 | |||||||
| Assets | ||||||||
| Cash | $ | 2,672 | $ | 2,770 | ||||
| Receivables | 2,366 | 2,365 | ||||||
| Total current assets | 5,038 | 5,135 | ||||||
| Property, net | 34,294 | 46,762 | ||||||
| Total assets | $ | 39,332 | $ | 51,897 | ||||
| Liabilities | ||||||||
| Accounts payable | $ | 125,559 | $ | 122,558 | ||||
| Accrued interest | 208,225 | 191,596 | ||||||
| Other current liabilities | 25,137 | 24,889 | ||||||
| Notes payable-LT | 441,594 | 441,594 | ||||||
| Mandatorily redeemable interest-LT | 441,594 | 441,594 | ||||||
| Total liabilities | $ | 1,242,109 | $ | 1,222,231 | ||||
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CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – VARIABLE INTEREST ENTITIES (CONTINUED)
The financial performance of the consolidated VIEs reflected on our condensed consolidated statements of operations for the three months ended March 31, 2015 and 2014 is as follows:
| March 31, | ||||||||
| 2015 | 2014 | |||||||
| Revenue | $ | 7,097 | $ | 7,162 | ||||
| Network operations expense | 4,164 | 4,173 | ||||||
| General and administrative expense (cost recovery) | 1,130 | 47 | ||||||
| Depreciation | 12,467 | 12,596 | ||||||
| Total operating costs | 17,761 | 16,816 | ||||||
| Operating loss | (10,664 | ) | (9,654 | ) | ||||
| Other expense | (21,780 | ) | (22,026 | ) | ||||
| Loss before taxes | (32,444 | ) | (31,680 | ) | ||||
| Provision for taxes | — | — | ||||||
| Net loss | (32,444 | ) | (31,680 | ) | ||||
| Net loss attributable to noncontrolling interest | (16,222 | ) | (15,840 | ) | ||||
| Net loss attributable to CareView Communications, Inc. | $ | (16,222 | ) | $ | (15,840 | ) | ||
NOTE 11 – AGREEMENT WITH HEALTHCOR
On April 21, 2011, we entered into a Note and Warrant Purchase Agreement (as subsequently amended) (the “HealthCor Purchase Agreement”) with HealthCor. Pursuant to the HealthCor Purchase Agreement, we sold Senior Secured Convertible Notes to HealthCor in the principal amount of $9,316,000 and $10,684,000, respectively (collectively the “2011 HealthCor Notes”). The 2011 HealthCor Notes have a maturity date of April 20, 2021. We also issued Warrants to HealthCor for the purchase of an aggregate of up to 5,488,456 and 6,294,403 shares, respectively, of our Common Stock at an exercise price of $1.40 per share (collectively the “2011 HealthCor Warrants”).
So long as no event of default has occurred, the outstanding principal balances of the 2011 HealthCor Notes accrue interest from April 21, 2011 through April 20, 2016 (the “First Five Year Note Period”) at the rate of 12.5% per annum, compounding quarterly and shall be added to the outstanding principal balances of the 2011 HealthCor Notes on the last day of each calendar quarter. Interest accruing from April 21, 2016 through April 20, 2021 (the “Second Five Year Note Period”) at a rate of 10% per annum, compounding quarterly, may be paid quarterly in arrears in cash or, at our option, such interest may be added to the outstanding principal balances of the 2011 HealthCor Notes on the last day of each calendar.
From the date any event of default occurs, the interest rate, then applicable, shall be increased by five percent (5%) per annum. HealthCor has the right, upon an event of default, to declare due and payable any unpaid principal amount of the 2011 HealthCor Notes then outstanding, plus previously accrued but unpaid interest and charges, together with the interest then scheduled to accrue (calculated at the default rate described in the immediately preceding sentence) through the end of the First Five Year Note Period or the Second Five Year Note Period, as applicable.
At any time after April 21, 2011, HealthCor is entitled to convert any portion of the outstanding and unpaid accrued interest on and principal balances of the 2011 HealthCor Notes into fully paid and non-assessable shares of our Common Stock at a conversion rate of $1.25 per share, subject to adjustment in accordance with anti-dilution provisions set forth in the 2011 HealthCor Notes. As of March 31, 2015, the underlying shares of our Common Stock related to the 2011 HealthCor Notes totaled approximately 26,000,000.
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CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 – AGREEMENT WITH HEALTHCOR (Continued)
On January 31, 2012, we entered into the Second Amendment to the HealthCor Purchase Agreement with HealthCor (the “Second Amendment”) amending the HealthCor Purchase Agreement, and sold Senior Secured Convertible Notes to HealthCor in the principal amounts of $2,329,000 and $2,671,000, respectively (collectively the “2012 HealthCor Notes”). As provided by the Second Amendment, the 2012 HealthCor Notes are in substantially the same form as the 2011 HealthCor Notes, with changes to the “Issuance Date,” “Maturity Date,” “First Five Year Note Period” and other terms to take into account the timing of the issuance of the 2012 HealthCor Notes. The 2012 HealthCor Notes have a maturity date of January 30, 2022. In addition, the provisions regarding interest payments, interest acceleration, optional conversion, negative covenants, and events of default, preemptive rights and registration rights are the same as those of the 2011 HealthCor Notes. At any time after January 30, 2012, HealthCor is entitled to convert any portion of the outstanding and unpaid accrued interest on and principal balances of the 2012 HealthCor Notes into fully paid and non-assessable shares of our Common Stock at a conversion rate of $1.25 per share, subject to adjustment in accordance with anti-dilution provisions set forth in the 2012 HealthCor Notes. As of March 31, 2015, the underlying shares of our Common Stock related to the 2012 HealthCor Notes totaled approximately 5,900,000.
On August 20, 2013, we entered into a Third Amendment to the HealthCor Purchase Agreement with HealthCor (the “Third Amendment”) to redefine our minimum cash balance requirements. Previously we were required to maintain a minimum cash balance of $5,000,000 and should we drop below that balance, it triggered a default. The Third Amendment allowed for a reduced minimum cash period, as defined in the HealthCor Purchase Agreement, which allowed us to drop below $5,000,000, but not below $4,000,000. All other terms and conditions of the HealthCor Purchase Agreement, including all amendments thereto, remain the same. Upon entering the reduced minimum cash period (which occurred on October 7, 2013), we had 120 days to return our minimum cash balance to the original $5,000,000. On January 16, 2014, we increased our cash balance to in excess of the original $5,000,000 minimum allowable balance.
On January 16, 2014, we entered into a Fourth Amendment to the HealthCor Purchase Agreement with HealthCor (the “Fourth Amendment”) and sold Senior Secured Convertible Notes to HealthCor in the principal amounts of $2,329,000 and $2,671,000 (collectively the ‘‘2014 HealthCor Notes’’). As provided by the Fourth Amendment, the 2014 HealthCor Notes are in substantially the same form as the 2011 HealthCor Notes, with changes to the “Issuance Date,” “Maturity Date,” “First Five Year Note Period” and other terms to take into account the timing of the issuance of the 2014 HealthCor Notes. The 2014 HealthCor Notes have a maturity date of January 15, 2024. In addition, the provisions regarding interest payments, interest acceleration, optional conversion, negative covenants, and events of default, preemptive rights and registration rights are the same as those of the 2011 HealthCor Notes. At any time after January 16, 2014, HealthCor is entitled to convert any portion of the outstanding and unpaid accrued interest on and principal balances of the 2014 HealthCor Notes into fully paid and non-assessable shares of our Common Stock at a conversion rate of $0.40 per share, subject to adjustment in accordance with anti-dilution provisions set forth in the 2014 HealthCor Notes. Additionally we issued Warrants to HealthCor for the purchase of an aggregate of up to 4,000,000 shares of our Common Stock at an exercise price of $0.40 per share (collectively the “2014 HealthCor Warrants”). As of March 31, 2015, the underlying shares of our Common Stock related to the 2014 HealthCor Notes totaled approximately 14,500,000.
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CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 – AGREEMENT WITH HEALTHCOR (Continued)
On December 4, 2014, we entered into a Fifth Amendment to the HealthCor Purchase Agreement (the “Fifth Amendment”) with HealthCor and certain additional investors (such additional investors, the “New Investors” and, collectively with HealthCor Partners Fund, LP, the “Investors”) and agreed to sell and issue (i) additional notes in the initial aggregate principal amount of $6,000,000,with a conversion price per share of $0.52 (subject to adjustment as described therein) (the “Fifth Amendment Notes”) and (ii) additional Warrants for an aggregate of up to 3,692,308 shares of our Common Stock at an exercise price per share of $0.52 (subject to adjustment as described therein) (the “Fifth Amendment Warrants”). As provided by the Fifth Amendment, the Fifth Amendment Notes are in substantially the same form as the 2011 HealthCor Notes, with changes to the “Issuance Date,” “Maturity Date,” “First Five Year Note Period” and other terms to take into account the timing of the issuance of the Fifth Amendment Notes. The 2014 HealthCor Notes have a maturity date of February 16, 2025. In addition, the provisions regarding interest payments, interest acceleration, optional conversion, negative covenants, and events of default, preemptive rights and registration rights are the same as those of the 2011 HealthCor Notes. The New Investors are composed of all but one of our current directors and one of our officers. On February 17, 2015, the Company and the Investors closed on the transactions contemplated by the Fifth Amendment. In connection with this closing, the Company and the Investors entered into an Amended and Restated Pledge and Security Agreement (the “Amended Security Agreement”), amending and restating that certain Pledge and Security Agreement dated as of April 20, 2011, and an Amended and Restated Intellectual Property Security Agreement (the “Amended IP Security Agreement”), amending and restating that certain Intellectual Property Security Agreement dated as of April 20, 2011. As of March 31, 2015, the underlying shares of our Common Stock related to the Fifth Amendment Notes totaled approximately 2,000,000 to HealthCor and 9,700,000 to the New Investors.
On March 31, 2015, we entered into the Sixth Amendment to HealthCor Purchase Agreement (the “Sixth Amendment”) pursuant to which, among other things, (i) the requirement to maintain a minimum cash balance of $5,000,000 was reduced to a minimum cash balance of $2,000,000 and (ii) the amendment provision was revised to permit the HealthCor Purchase Agreement to be amended by the Company and the holders of the majority of the Common Stock underlying the outstanding notes and warrants to purchase shares of our Common Stock sold pursuant to the HealthCor Purchase Agreement. On March 31, 2015, we also issued a warrant to HealthCor to purchase up to an aggregate of 1,000,000 shares of our Common Stock in consideration for certain prior waivers of the minimum cash balance requirement in the HealthCor Purchase Agreement (the “Sixth Amendment Warrant”). The Sixth Amendment Warrant has an exercise price per share of $0.53 (subject to adjustment as described therein) and an expiration date of March 31, 2025.
Accounting Treatment
When issuing debt or equity securities convertible into common stock at a discount to the fair value of the common stock at the date the debt or equity financing is committed, a company is required to record a beneficial conversion feature (“BCF”) charge. We had three separate issuances of equity securities convertible into common stock that qualify under this accounting treatment, (i) the 2011 HealthCor Notes, (ii) the 2012 HealthCor Notes and (iii) the 2014 HealthCor Notes. Because the conversion option and the 2011 HealthCor Warrants on the 2011 HealthCor Notes were originally classified as a liability when issued and, subsequently reclassified to equity on December 31, 2011 when the 2011 HealthCor Notes were amended, only the accrued interest capitalized as payment in kind (‘‘PIK’’) since reclassification qualifies under this accounting treatment. The face amount of the 2012 and 2014 HealthCor Notes and all accrued PIK interest also qualify for this accounting treatment. During the three months ended March 31, 2015 and 2014, we recorded a BCF of $456,987 and $400,695, respectively. The BCF was recorded as a charge to debt discount and a credit to additional paid in capital, with the debt discount, using the effective interest method, amortized to interest expense over the term of the notes. As Warrants were issued with the 2014 HealthCor Notes and the Fifth
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CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 – AGREEMENT WITH HEALTHCOR (Continued)
Amendment Notes, the proceeds were allocated to the instruments based on relative fair value. The value allocated to the 2014 HealthCor Warrants and the Fifth Amendment Notes were $1,146,732 and $1,093,105, respectively, which were recorded as a debt discount with the credit to additional paid in capital. The discount associated with the 2014 HealthCor Warrants and the Fifth Amendment Notes is amortized to interest expense using the effective interest method.
We recorded an aggregate of $552,066 and $528,418 in interest expense for the three months ended March 31, 2015 and 2014, respectively, related to this discount. The carrying value of the debt with HealthCor at March 31, 2015 approximates fair value as the interest rates used are those currently available to us and would be considered level 3 inputs under the fair value hierarchy.
NOTE 12 – SUBSEQUENT EVENTS
On April 1, 2015, we entered into a Master Product and Services Agreement (the “Master Agreement”) with Community Health Systems (“CHS”). The terms of the Master Agreement provide for the execution of a facilities level agreement with each hospital that wants to participate. Upon signing of the Master Agreement, we commenced billing 750 units that had been previously installed, but not billable, for a total of 1,800 billable units. The 1,800 units were installed under a previous agreement with Health Management Associates (“HMA”), acquired by CHS in January 2014. We have also commenced the roll-out of the CareView System to additional CHS facilities. We estimate that total billable units will be in excess of 2,500 by the end of 2015 with the potential for an additional approximately 3,500 units in 2016. CHS has an estimated 31,000 licensed beds in its system.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
The following discussion and analysis provides information which our management believes to be relevant to an assessment and understanding of our results of operations and financial condition. This discussion should be read together with our financial statements and the notes to the financial statements, which are included in this Quarterly Report on Form 10-Q (the “Report”). This information should also be read in conjunction with the information contained in our Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2015, including the audited consolidated financial statements and notes included therein as of and for the year ended December 31, 2014. The reported results will not necessarily reflect future results of operations or financial condition.
Throughout this Annual Report on Form 10-K (the “Report”), the terms “we,” “us,” “our,” “CareView,” or “our Company” refers to CareView Communications, Inc., a Nevada corporation, and unless otherwise specified, includes our wholly owned subsidiaries, CareView Communications, Inc., a Texas corporation (“CareView-TX”) and CareView Operations, LLC, a Nevada limited liability company (“CareView Operations”) (collectively known as the “Company’s Subsidiaries”) and its LLCs, CareView-Hillcrest and CareView-Saline, determined to be variable interest entities (“VIEs”) in which the Company exercises control and is deemed the Primary Beneficiary (collectively known as the “Company’s LLCs”).
We maintain a website at www.care-view.com and our Common Stock trades on the OTCQB under the symbol “CRVW.’’
Company Overview
Our mission is to be the leading provider of products and on-demand application services for the healthcare industry, specializing in bedside video monitoring, software tools to improve hospital communications and operations, and patient education and entertainment packages. Our proprietary, high-speed data network system is the next generation of patient care monitoring that allows real-time bedside and point-of-care video monitoring designed to improve patient safety and overall hospital costs. The entertainment packages and patient education enhance the patient’s quality of stay. Reported results from CareView-driven hospitals prove that our products reduce falls, reduce the cost of sitter fees, increase patient satisfaction and reduce bed turnaround time to increase patient flow. For patients, we have a convenient in-room, entertainment package that includes high-speed Internet, access to first-run on-demand movies and visual connectivity to family and friends from anywhere in the world. For the hospital, we offer tools to provide superior patient care, peace of mind and customer service satisfaction.
Our CareView System® suite of video monitoring, guest services and related applications connect patients, families and healthcare providers. Through the use of telecommunications technology and the Internet, our evolving products and on-demand services greatly increase the access to quality medical care and education for patients/consumers and healthcare professionals. We understand the importance of providing high quality patient care in a safe environment and believe in partnering with hospitals to improve the quality of patient care and safety by providing a system that monitors and records continuously. We are committed to providing an affordable video monitoring tool to improve the practice of nursing, create a better work environment and make the patient’s hospital stay more informative and satisfying. Our suite of products and services can simplify and streamline the task of preventing and managing patients’ falls, enhance patient safety, improve quality of care and reduce costs associated with bringing information technology directly to patients, families and healthcare providers. Our products and services can be used in all types of hospitals, nursing homes, adult living centers and selected outpatient care facilities domestically and internationally.
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The CareView System secure video monitoring system connects the patient room to a touch-screen monitor at the nursing station, allowing nursing staff to maintain a level of visual contact with each patient. This configuration enhances the use of the nurse call system, reduces unnecessary steps to and from patient rooms, and the recording capability allows for a video record of all in-room activity during the length of the patient’s hospital stay. The CareView System suite can be easily configured to meet the individual privacy and security requirements of any hospital or nursing facility. The Health Insurance Portability and Accountability Act of 1996 (“HIPAA’) compliant, patient approved video record can be included as part of the patient’s medical record and serves as additional documentation of bedside care, procedures performed, patient and hospital ancillary activities, safety or care incidents, support to necessitate additional clinical services, and, if necessary, as evidence. Additional HIPAA-compliance features allow privacy options to be enabled at any time by the patient, nurse or physician.
In addition to patient safety and security, we also provides a suite of services to increase patient satisfaction scores and enhance the overall image of the hospital including first-run on-demand movies, Internet access via the patient’s television, and video visits with family and friends from most places throughout the world. Through continued investment in patient care technology, our products and services help hospitals and assisted living facilities build a safe, high quality healthcare delivery system that best serves the patient, while striving for the highest level of satisfaction and comfort.
Events Occurring During First Quarter 2015
On February 17, 2015, we closed the transactions entered into on December 4, 2014, wherein we entered into a Fifth Amendment to a Note and Warrant Purchase Agreement dated April 21, 2011 (as subsequently amended) with HealthCor Partners Fund, LP and HealthCor Hybrid Offshore Master Fund, LP (“HealthCor”) and certain additional investors (such additional investors, the “New Investors” and, collectively with HealthCor Partners Fund, LP, the “Investors”) and agreed to sell and issue (i) additional notes in the initial aggregate principal amount of $6,000,000, with a conversion price per share equal to $0.52 (subject to adjustment for standard anti-dilution provisions) and (ii) additional warrants to purchase an aggregate of up to 3,692,307 shares of our Common Stock at an exercise price per share equal to $0.52 (subject to adjustment for standard anti-dilution provisions). (See NOTE 11 in the accompanying condensed consolidated financial statements for further details).
On February 19, 2015, the due date on outstanding debts related to a Master Investment Agreement with Rockwell Holdings I, LLC, a Wisconsin limited liability (“Rockwell”) entered into by Rockwell and the Company on November 16, 2009, were extended to June 30, 2016. (See NOTE 9 in the accompanying condensed consolidated financial statements for further details).
On February 25, 2015, we established the CareView Communications, Inc. 2015 Stock Option Plan (the “2015 Plan”) pursuant to which 5,000,000 shares of Common Stock was reserved for issuance upon the exercise of options (“2015 Plan Option(s)”). The 2015 Plan was designed to serve as an incentive for retaining our qualified and competent key employees, officers and directors. The 2015 Plan Options vest over three years and have an exercise period of ten years from the date of issuance.
On March 31, 2015, we issued HealthCor a warrant to purchase up to an aggregate of 1,000,000 shares of our Common Stock in consideration for certain prior waivers of the minimum cash balance requirement in the Purchase Agreement. This warrant has an exercise price of $0.53 per share and an expiration date of March 31, 2025. (See NOTE 11 in the accompanying condensed consolidated financial statements for further details).
During the three months ended March 31, 2015, we granted options to purchase 1,815,000 shares of our Common Stock (the ‘‘Option(s)’’) to certain employees and members of our board of directors. We granted 650,000 Options to certain employees and members of our board of directors during the three months ended March 31, 2014. During those same three month periods, 6,272,312 and 46,667 Options, respectively, were canceled and no Options expired.
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Summary of Product and Service Usage
The following table shows the number of healthcare facilities using our products and services including the number of deployed units, installed units and billable units as of April 30, 2015. The table also shows the number of pilot programs in place and hospital proposals pending approval, estimated bed count if the pilot programs and pending proposals result in executed Products and Services Agreement, and the estimated total number of licensed beds available under the pilot programs and hospital proposals. There are no assurances that the pilot programs will be extended or the pending proposals will be approved to ultimately result in the number of estimated beds. Further, there are no assurances that we will have access to the total number of licensed beds in each healthcare facility.
| Number of Billed Hospitals(1) | Number of Installed Hospitals(1) |
Number of Aggregated Deployed Units(1) | Number of Aggregated
Installed Units(1)(2) |
Number of Aggregated Billable Units(1)(2) |
Number of Pilots/Pending Proposals | Number of Estimated Bed Count of Pilot/Pending Proposals | Number of Estimated Total Licensed Beds in the Pilot/Pending Proposals | |||||||||||||||||||||||
| 81 | 100 | 8,982 | 8,324 | 6,552 | 26 | 7,900 | 11,200 | |||||||||||||||||||||||
| (1) | In January 2014, Community Health Systems, Inc. ("CHS") acquired Hospital Management Associates, Inc. ("HMA"). Under the terms of an existing products and services agreement with HMA, at December 31, 2014, we had approximately 3,600 units deployed. Under a separate agreement with HMA, due to their budgetary concerns, only 1,050 of the 3,600 units were billable. The 2,550 unbillable units remained installed pending future disposition. During the period from January 1, 2015 to April 30, 2015, we de-installed 11 former HMA hospital (totaling 719 deployed units and 687 installed units). Of the 11 de-installed hospitals, 7 were billable hospital. |
| (2) | The variance between the Number of Aggregated Installed Units and Number of Aggregated Billable Units is largely due to units covered by unpaid pilot agreements and those units that are not being paid for under the agreement with HMA as described above. On April 1, 2015, we entered into a Master Product and Services Agreement (the “Master Agreement”) with CHS. Over the next 90 days management believes that the spread between installed and billable units will be significantly reduced resulting in meaningfully higher billable units. See Recent Events for further details. |
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Results of Operations
Three months ended March 31, 2015 compared to three months ended March 31, 2014
| Three months ended March 31, |
||||||||||||
| 2015 | 2014 | Change | ||||||||||
| (000’s) | ||||||||||||
| Revenue | $ | 1,001 | $ | 619 | $ | 382 | ||||||
| Operating expenses | 2,507 | 2,179 | 328 | |||||||||
| Operating loss | (1,506 | ) | (1,560 | ) | 54 | |||||||
| Other, net | (2,282 | ) | (2,609 | ) | 327 | |||||||
| Net loss | (3,788 | ) | (4,169 | ) | 381 | |||||||
| Net income (loss) attributable to noncontrolling interest | (16 | ) | (16 | ) | (-) | |||||||
| Net loss attributed to CareView | $ | (3,772 | ) | $ | (4,153 | ) | $ | 381 | ||||
Revenue
Revenue increased approximately $382,000 for the three months ended March 31, 2015 as compared to the same period in 2014. This increase is a direct result of hospitals with billable units improving from 70 on March 31, 2014 to 93 on March 31, 2015. Of the 93 hospitals with billable units on March 31, 2015, two hospital groups accounted for 54% of the total. Billable units (RCPs and Nurse Stations) for all hospitals totaled 5,411 (5,091 and 320, respectively) on March 31, 2015 as compared to 3,446 (3,297 and 149, respectively) on March 31, 2014.
Operating Expenses
Our principal operating costs include the following items as a percentage of total operating expense.
| Three Months Ended March 31, | ||||||||
| 2015 | 2014 | |||||||
| Human resource costs, including non-cash compensation | 48 | % | 43 | % | ||||
| Professional and consulting costs | 2 | % | 8 | % | ||||
| Depreciation and amortization | 17 | % | 18 | % | ||||
| Product deployment costs | 7 | % | 9 | % | ||||
| Travel and entertainment expense | 12 | % | 8 | % | ||||
| Other expenses, net | 14 | % | 14 | % | ||||
Operating expenses increased by 15% as a result of the following items:
| (000’s) | ||||
| Increase in human resource costs, including non-cash compensation | $ | 273 | ||
| Decrease in professional and consulting costs | (121 | ) | ||
| Increase in depreciation and amortization | 17 | |||
| Decrease in product deployment costs | (29 | ) | ||
| Increase in travel and entertainment expense | 117 | |||
| Increase in all other expenses, net | 71 | |||
| $ | 328 | |||
We had 56 employees at March 31, 2015 compared to 42 at March 31, 2014. This increase of approximately $273,000 is a direct result of the increase in personnel.
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Professional and consulting fees decreased primarily as a result of reductions in legal expenses and the termination of certain consulting agreements.
The decrease in product deployment costs reflects the reversal of approximately $94,000 in previously accrued product removal costs recovered with the signing of the Community Health Services, Inc. Master Product and Service Agreement detailed in Recent Events below, partially offset by other product deployment costs related to the increase in hospitals under contract.
The increase in travel and entertainment expense is directly related to the addition of new hospital contracts and the resulting product deployment during the three months ended March 31, 2015.
Other operating expense increased by approximately $71,000 for the three months ended March 31, 2015 in comparison to the same period in 2014, primarily a result of the increases in general and administrative expenses totaling approximately $59,000 along with slight increase in sales and marketing expenses and research and development costs.
Other, net
Other non-operating income and expense decreased by $327,000 for the three months ended March 31, 2015 in comparison to the same period in 2014, primarily a result of the change in fair value of warrant liability related to warrants sold in conjunction with our April 2013 private placement totaling approximately $395,000, partially offset by an increase in interest expense related to the HealthCor funding transactions.
Net Loss Attributable to CareView Communications, Inc.
As a result of the factors above, and after applying the $16,000 net loss attributed to noncontrolling interests, our first quarter 2015 net loss of $3,772,000 decreased $381,000, or 9%, as compared to the $4,153,000 net loss for the first quarter of 2014.
Liquidity and Capital Resources
Our cash position at March 31, 2015 was approximately $7,400,000.
Pursuant to the terms of a Note and Warrant Purchase Agreement dated April 21, 2011 (as subsequently amended) with HealthCor Partners Fund, LP and HealthCor Hybrid Offshore Master Fund, LP (“HealthCor”) we are required to maintain a minimum cash balance $2,000,000 (See NOTE 11 in the accompanying condensed consolidated financial statements for further details), and we are in compliance with the minimum cash balance as of the date of this filing.
Our continued successful operation is dependent upon us achieving positive cash flow through operations while maintaining adequate liquidity. We expect that the cash on hand, as well as our existing and projected cash flow from billable contracts, will enable us to continue to operate for the next twelve month period. We believe that our sales and marketing plan to attract new business and our ongoing deployment and installation of units under existing hospital agreements, will meet our near-term cash needs and will help us achieve future operating profitability.
At present, we have sufficient inventory to install and service a select number of large customers, but eventually we will need to address additional capital requirements. We are currently in discussions with several entities in an effort to secure a credit facility which will support our projected growth. We expect to close on a credit facility within the next 120 days; however, there are no assurances that we can close on a credit facility on terms acceptable to us or that such closing will occur.
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Off-Balance Sheet Arrangements
As of March 31, 2015, we had no material off-balance sheet arrangements.
In the ordinary course of business, we enter into agreements with third parties that include indemnification provisions which, in our judgment, are normal and customary for companies in our industry sector. These agreements are typically with business partners, clinical sites, and suppliers. Pursuant to these agreements, we generally agree to indemnify, hold harmless, and reimburse indemnified parties for losses suffered or incurred by the indemnified parties with respect to our product candidates, use of such product candidates, or other actions taken or omitted by us. The maximum potential amount of future payments we could be required to make under these indemnification provisions is unlimited. We have not incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. As a result, the estimated fair value of liabilities relating to these provisions is minimal. Accordingly, we have no liabilities recorded for these provisions as of March 31, 2015.
In the normal course of business, we may be confronted with issues or events that may result in a contingent liability. These generally relate to lawsuits, claims, environmental actions or the actions of various regulatory agencies. We consult with counsel and other appropriate experts to assess the claim. If, in our opinion, we have incurred a probable loss as set forth by accounting principles generally accepted in the U.S., an estimate is made of the loss and the appropriate accounting entries are reflected in our financial statements. After consultation with legal counsel, we do not anticipate that liabilities arising out of currently threatened lawsuits and claims, if any, will have a material adverse effect on our financial position, results of operations or cash flows.
Critical Accounting Estimates
Please refer to our Annual Report on Form 10-K for the year ended December 31, 2014 filed with the Commission on March 31, 2014 and incorporated herein by reference, for detailed explanations of our critical accounting estimates, which have not changed significantly during the three months ended March 31, 2015.
New Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board ("FASB"), issued Accounting Standards Update ("ASU") No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 requires that debt issuance costs be reported in the balance sheet as a direct deduction from the face amount of the related liability, consistent with the presentation of debt discounts and further requires the amortization of debt issuance cost to be reported as interest expense. Similarly, debt issuance costs and any discount or premium are considered in the aggregate when determining the effective interest rate of the debt. ASU 2015-03 is effective for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. Early adoption is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. Management has opted for early adoption of ASU 2015-03 and there was no material effect on the consolidated financial statements upon adoption.
There have been no material changes to our significant accounting policies as summarized in NOTE 2 of our Annual Report on Form 10-K for the year ended December 31, 2014. We do not expect that the adoption of any recent accounting pronouncements will have a material impact on our accompanying condensed consolidated financial statements.
Recent Events
On April 1, 2015, we entered into a Master Product and Services Agreement (the “Master Agreement”) with Community Health Systems (“CHS”). The terms of the Master Agreement provide for the execution of a facilities level agreement with each hospital that wants to participate. Upon signing of the Master Agreement, we commenced billing 750 units that had been previously installed, but not billable, for a total of 1,800 billable units. The 1,800 units were installed under a previous agreement with Health Management Associates (“HMA”), acquired by CHS in January 2014. We have also commenced the roll-out of the CareView System to additional CHS facilities. We estimate that total billable units will be in excess of 2,500 by the end of 2015 with the potential for an additional approximately 3,500 units in 2016. CHS has an estimated 31,000 licensed beds in its system.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
None.
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Item 4. Controls and Procedures
Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports filed or submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported, within the time period specified in the SEC’s rules and forms and is accumulated and communicated to our management, as appropriate, in order to allow timely decisions in connection with required disclosure.
Evaluation of Disclosure Controls and Procedures
Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”), we carried out an evaluation, with the participation of our management, including Steve G. Johnson, our Chief Executive Officer (“CEO”) and principal executive officer, and L. Allen Wheeler, our principal financial officer and chief accounting officer, of the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this Report.
Based upon that evaluation, our CEO and Chief Accounting Officer concluded that our disclosure controls and procedures were effective as of March 31, 2015 to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO and Chief Accounting Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Controls
During the three months ended March 31, 2015, there were no changes in our internal control over financial reporting that occurred that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
Our Company is a “smaller reporting company” as defined by Rule 12b-2 of the Exchange Act, and as such, is not required to provide the information required under this Item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
None.
| 27 |
| Exhibit No. | Date of Document | Name of Document |
| 31.1 | 5/14/15 | Certification of Chief Executive Officer of Periodic Report pursuant to Rule 13a-14a and Rule 14d-14(a).* |
| 31.2 | 5/14/15 | Certification of Chief Financial Officer of Periodic Report pursuant to Rule 13a-14a and Rule 15d-14(a).* |
| 32.1 | 5/14/15 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.* |
| 32.2 | 5/14/15 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.* |
| 101.INS | n/a | XBRL Instance Document* |
| 101.SCH | n/a | XBRL Taxonomy Extension Schema Document* |
| 101.CAL | n/a | XBRL Taxonomy Extension Calculation Linkbase Document* |
| 101.DEF | n/a | XBRL Taxonomy Extension Definition Linkbase Document* |
| 101.LAB | n/a | XBRL Taxonomy Extension Label Linkbase Document* |
| 101.PRE | n/a | XBRL Taxonomy Extension Presentation Linkbase Document* |
___________________
| * | Filed herewith. |
| 28 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| DATE: May 14, 2015 | ||
| CAREVIEW COMMUNICATIONS, INC. | ||
| By: | /s/ Steven G. Johnson | |
| Steven G. Johnson Chief Executive Officer |
||
| Principal Executive Officer | ||
| By: | /s/ L. Allen Wheeler | |
| L. Allen Wheeler | ||
| Principal Financial Officer | ||
| Chief Accounting Officer | ||
29
CareView Communications, Inc. 10-Q
Exhibit 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Steven G. Johnson, certify that:
| (1) | I have reviewed this quarterly report on Form 10-Q of CareView Communications, Inc.; |
| (2) | Based on my knowledge, this report does not contain any untrue statements of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report’ |
| (3) | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| (4) | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluations; and |
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| (5) | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of the internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| May 14, 2015 | /s/ Steven G. Johnson | |
| Steven G. Johnson Chief Executive Officer |
||
| Principal Executive Officer | ||
CareView Communications, Inc. 10-Q
Exhibit 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, L. Allen Wheeler, certify that:
| (1) | I have reviewed this quarterly report on Form 10-Q of CareView Communications, Inc.; |
| (2) | Based on my knowledge, this report does not contain any untrue statements of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report’ |
| (3) | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| (4) | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluations; and |
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| (5) | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of the internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| May 14, 2015 | /s/ L. Allen Wheeler | |
| L. Allen Wheeler | ||
| Principal Financial Officer | ||
| Chief Account Officer | ||
CareView Communications, Inc. 10-Q
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of CareView Communications, Inc. (the “Company”) on Form 10-Q for the period ending March 31, 2015, as filed with the Securities and Exchange Commission (the “Report”), I, Steven G. Johnson, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and | |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. |
/s/ Steven G. Johnson
Steven G. Johnson
Chief Executive Officer
May 14, 2015
A signed original of this certification has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
CareView Communications, Inc. 10-Q
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of CareView Communications, Inc. (the “Company”) on Form 10-Q for the period ending March 31, 2015, as filed with the Securities and Exchange Commission (the “Report”), I, L. Allen Wheeler, Principal Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and | |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. |
/s/ L. Allen Wheeler
L. Allen Wheeler
Principal Financial Officer
May 14, 2015
A signed original of this certification has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
|
OTHER CURRENT LIABILITIES (Details) (USD $)
|
Mar. 31, 2015
|
Dec. 31, 2014
|
|---|---|---|
| OTHER CURRENT LIABILITIES: | ||
| Accrued taxes | $ 172,342 | $ 145,183 |
| Allowance for system removal | 170,021 | 277,000 |
| Accrued insurance | 114,947 | |
| Accrued travel and entertainment | 67,000 | 35,000 |
| Accrued paid time off | 51,686 | 87,319 |
| Accrued professional services | 28,500 | 204,675 |
| Other accrued liabilities | 92,982 | 42,107 |
| TOTAL OTHER CURRENT LIABILITIES | $ 697,478 | $ 791,284 |
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