NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
CareView Communications, Inc., a Nevada corporation (“CareView”, the “Company”, “we”, “us” or “our”), was originally formed in California on July 8, 1997 under the name Purpose, Inc., changing our name to Ecogate, Inc. in April 1999, and CareView Communications, Inc. in October 2007. We began our current operation in 2003 as a healthcare information technology company with a patented patient monitoring and entertainment system.
Our business consists of a single segment of products and services all of which are sold and provided within the United States.
Description of Business
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 facilities 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 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.
CareView’s secure video monitoring system connects the patient room to a touch-screen monitor at the nursing station or a mobile handheld device, allowing the 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 facilitates a host of modules for patient safety and workflow improvements. 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.
CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition to patient safety and security, we also provide 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.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of CareView and CareView Communications, Inc., a Texas corporation and CareView Operations, LLC, a Nevada limited liability company (our wholly owned subsidiaries). Also included for the year ended December 31, 2016 were CareView-Hillcrest, LLC and CareView-Saline, LLC, both Wisconsin limited liability companies (the “Project LLCs”) and variable interest entities (“VIEs”) (see below). All material inter-company balances and transactions have been eliminated in consolidation.
During 2016 we reported noncontrolling interests in our variable interest entities (“VIEs”) as a component of stockholders’ deficit in the Consolidated Balance Sheets and the loss attributable to noncontrolling interests as an adjustment to net loss to arrive at net loss attributable to us in the Consolidated Statements of Operations. As of and for the year ended December 31, 2017, we did not maintain any variable interests in any entities requiring consolidation in our financial statements.
Concurrent with the execution, and pursuant to the terms, of the Settlement Agreement, as discussed in NOTE 13, all assets and liabilities of the Project LLCs were transferred to our wholly owned subsidiary, CareView Communications, Inc., effective January 1, 2017. On June 12, 2017, we filed Form 510- Limited Liability Company Articles of Dissolution with the State of Wisconsin resulting in the dissolution of the Project LLCs effective that date.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
We consider all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. We maintain cash at financial institutions that at times may exceed federally insured limits.
Restricted Cash
At December 31, 2017, we had $2,500,000 included in restricted cash in other assets on the consolidated balance sheet. On December 28, 2017, the minimum cash requirement in the credit agreement with PDL BioPharma, Inc. was modified to reduce the minimum cash requirement from $3,250,000 to $2,500,000. See
NOTES 12 and 15
for further discussion.
Trade Accounts Receivable
Trade accounts receivable are customer obligations due under normal trade terms. We provide an allowance for doubtful accounts, which is based upon a review of outstanding receivables, historical collection information and existing economic conditions. Trade accounts receivable past due more than 90 days are considered delinquent. Delinquent receivables are written off based on individual credit evaluations, results of collection efforts, and specific circumstances of the customer. Recoveries of accounts previously written off are recorded as reductions of bad debt expense when received.
CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property and Equipment
Property and equipment is stated at cost, net of accumulated depreciation. Maintenance costs, which do not significantly extend the useful lives of the respective assets, and repair costs are charged to operating expense as incurred. We include Network Equipment in fixed assets upon receipt and begin depreciating the Network Equipment when such equipment passes our incoming inspection and is available for use. We attribute no salvage value to the Network Equipment and depreciation is computed using the straight-line method based on the estimated useful life of seven years. Depreciation of office and test equipment, warehouse equipment and furniture is computed using the straight-line method based on the estimated useful lives of the assets, generally three years for office and test equipment, and five years for warehouse equipment and furniture.
Allowance for System Removal
We would remove the CareView System from customer premises due to a number of factors; including, but not limited to, collection/revenue performance issues and contract expiration/non-renewal. We regularly evaluate the installed CareView Systems for such factors and an allowance is set up based on the estimated cost of removal. As of December 31, 2017 and 2016, an allowance of $176,750 and $116,350, respectively, was recorded.
Impairment of Long-Lived Assets
Carrying values of property and equipment and finite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying values may not be recoverable. Such events or circumstances include, but are not limited to:
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●
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Significant declines in an asset’s market price;
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●
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Significant deterioration in an asset’s physical condition;
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●
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Significant changes in the nature or extent of an asset’s use or operation;
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●
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Significant adverse changes in the business climate that could impact an asset’s value, including adverse actions or assessments by regulators;
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●
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Accumulation of costs significantly in excess of original expectations related to the acquisition or construction of an asset;
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●
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Current-period operating or cash flow losses combined with a history of such losses or a forecast that demonstrates continuing losses associated with an asset’s use; and
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●
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Expectations that it is more likely than not that an asset will be sold or otherwise disposed of significantly before the end of our previously estimated useful life.
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CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
If impairment indicators are present, we determine whether an impairment loss should be recognized by testing the applicable asset or asset groups’ carrying value for recoverability. This test requires long-lived assets to be grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities, the determination of which requires judgment. We estimate the undiscounted future cash flows expected to be generated from the use and eventual disposal of the assets and compare that estimate to the respective carrying values in order to determine if such carrying values are recoverable. This assessment requires the exercise of judgment in assessing the future use of and projected value to be derived from the eventual disposal of the assets to be held and used. Assessments also consider changes in asset utilization, including the temporary idling of capacity and the expected timing for placing this capacity back into production. If the carrying value of the assets is not recoverable, then a loss is recorded for the difference between the assets’ fair value and respective carrying value. The fair value of the assets is determined using an “income approach” based upon a forecast of all the expected discounted future net cash flows associated with the subject assets. Some of the more significant estimates and assumptions include: market size and growth, market share, projected selling prices, manufacturing cost and discount rate. Our estimates are based upon our historical experience, our commercial relationships, market conditions and available external information about future trends. We believe our current assumptions and estimates are reasonable and appropriate; however, unanticipated events and changes in market conditions could affect such estimates resulting in the need for an impairment charge in future periods. During the years ended December 31, 2017 and 2016, no impairment was recognized.
Research and Development
Research and development costs are expensed as incurred. Costs regarding the development of software to be sold, leased or otherwise marketed are subject to capitalization beginning when a product’s technological feasibility has been established and ending when a product is available for general release to customers. We did not capitalize any such costs during the years ended December 31, 2017 and 2016.
Intellectual Property
We capitalize certain costs of developing software upon the establishment of technological feasibility and prior to the availability of the product for general release to customers for our CareView System in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Capitalized costs are reported at the lower of unamortized cost or net realizable value and are amortized over the estimated useful life of the CareView System not to exceed five years. Additionally, we test our intangible assets for impairment whenever circumstances indicate that their carrying value may not be recoverable. No impairment was recorded during the years ended December 31, 2017 and 2016.
During the years ended December 31, 2017 and 2016, we capitalized no additional intellectual property costs.
Patents and Trademarks
We amortize our intangible assets with a finite life on a straight-line basis, over 10 years for trademarks and 20 years for patents. We begin amortization of these costs on the date patents or trademarks are awarded.
Derivative Financial Instruments
Derivatives are recorded on the balance sheet at fair value and changes in fair value are recorded in earnings at each reporting date in accordance with GAAP. See
Fair Value of Financial Instruments,
below, and
NOTES 11 and 12
for further details regarding derivative activity during the years ended December 31, 2017 and 2016.
CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 and they are considered Level 1 assets under the fair value hierarchy. 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 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. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. 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 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 warrant liability discussed in
NOTE 4
. The fair value of this warrant liability is included in other current liabilities on the accompanying consolidated financial statements.
The following table provides the financial assets and liabilities reported at fair value and measured on a recurring basis at December 31:
Description
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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)
|
|
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|
|
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Fair value of warrant liability
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|
|
|
|
|
|
|
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|
|
|
|
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2017
|
|
$
|
(11,157
|
)
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(11,157
|
)
|
2016
|
|
$
|
(629
|
)
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(629
|
)
|
CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides a summary of changes in fair value associated with the Level 3 liabilities for the year ended December 31:
|
|
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
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|
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2017
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
(629
|
)
|
|
$
|
(168,805
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)
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Issuances of derivative liabilities
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|
|
—
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|
|
|
—
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Change in fair value of warrant liability
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(10,528
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)
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|
168,176
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|
Transfers in and/out of Level 3
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|
|
—
|
|
|
|
—
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|
Balance, end of period
|
|
$
|
(11,157
|
)
|
|
$
|
(629
|
)
|
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 financial instrument 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.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the related temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized when the rate change is enacted. Valuation allowances are recorded to reduce deferred tax assets to the amount that will more likely than not be realized. In accordance with GAAP, we recognize the effect of uncertain income tax positions only if the positions are more likely than not of being sustained in an audit, based on the technical merits of the position. Recognized uncertain income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which those changes in judgment occur. We recognize both interest and penalties related to uncertain tax positions as part of the income tax provision.
CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition
Revenue is recognized when persuasive evidence of a sales arrangement exists, when the selling price is fixed or determinable, when installation and official acceptance by the facility occurs, and when collection is probable.
We offer CareView’s services through a subscription-based contract with each facility for a standard term of three to five years. We begin to bill monthly subscription fees to the facility upon official acceptance of the CareView System by the facility. The contract requires the facility to pay us the subscription fee monthly. During the term of the contract, we provide continuous monitoring of the CareView System and are required to maintain and service all CareView System equipment. If the customer requires additional products or services, the contract is amended accordingly.
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 common shares 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 to purchase our Common Stock (the “Warrants”) and convertible debt. Potential common shares totaling approximately 133,000,000 and 122,000,000 at December 31, 2017 and 2016, respectively, have been excluded from the diluted earnings per share calculation as they are anti-dilutive due to our reported net loss.
Stock Based Compensation
We recognize compensation expense for all share-based payments granted and amended based on the grant date fair value estimated in accordance with GAAP
.
Compensation expense is generally recognized on a straight-line basis over the employee’s requisite service period based on the award’s estimated lives for fixed awards with ratable vesting provisions.
Debt Discount Costs
Costs incurred with parties who are providing long-term financing, with Warrants issued with the underlying debt, are reflected as a debt discount based on the relative fair value of the debt and Warrants. These discounts are generally amortized over the life of the related debt, using the effective interest rate method or other methods approximating the effective interest method. Additionally, convertible debt issued with a beneficial conversion feature is recorded at a discount based on the difference in the effective conversion price and the fair value of the Company’s stock on the date of issuance, if any. Outstanding debt is presented net of any such discounts on the accompanying consolidated financial statements.
CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred Debt Issuance and Debt Financing Costs
Costs incurred through the issuance of Warrants to parties who are providing long-term financing availability, which includes revolving credit lines, are reflected as deferred debt issuance based on the fair value of the Warrants issued. Costs incurred with third parties related to issuance of debt are recorded as deferred financing costs. These costs are generally amortized over the life of the financing instrument using the effective interest rate method or other methods approximating the effective interest method. Amounts associated with our senior secured convertible notes are netted with the outstanding debt on the accompanying consolidated financial statements while amount associated with credit facilities are presented in other assets on the accompanying consolidated financial statements.
Variable Interest Entities
We use a qualitative analysis to determine if we are the primary beneficiary of a VIE. We consider whether the enterprise’s variable interest or interests give it a controlling financial interest in a VIE. This analysis identifies the primary beneficiary of a VIE as the enterprise that has both of the following characteristics, among others: (a) the power to direct the activities of a VIE that most significantly impacts the entity’s economic performance, and (b) the obligation to absorb losses or the right to receive benefits from the entity, that could potentially be significant to the VIE.
Installation Costs
We defer all costs associated with the installation of the CareView System into a particular hospital until the CareView System is fully operational and accepted by the hospital. Upon acceptance, the associated costs are expensed ratably over the life of the hospital contract. These costs are included in network operations on the accompanying consolidated statements of operations.
Shipping and Handling Costs
We expense all shipping and handling costs as incurred. These costs are included in network operations on the accompanying consolidated financial statements.
Advertising Costs
We consider advertising costs as costs associated with the promotion of our products through the various media outlets and trade shows. We expense all advertising costs as incurred. Our advertising expense for the years ended December 31, 2017 and 2016 totaled approximately $99,000 and $168,000, respectively.
Concentration of Credit Risks and Customer Data
For the years ended December 31, 2017 and 2016, 103 and 93 hospitals accounted for all of our revenue. During 2017 four customer comprised 57% of our revenue, while no other customer comprised more than 10%. During 2016 three customers comprised 58% of our revenue, while no other customer comprised more than 10%.
CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
Our financial statements have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. We evaluate our estimates, including those related to contingencies, on an ongoing basis. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Recently Adopted Accounting Pronouncements
In March 2016, the FASB issued ASU 2016-09,
Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting
(“ASU 2016-09”). This guidance simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The guidance is effective for public business entities for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted in any annual or interim period for which financial statements have not been issued or made available for issuance, but all of the guidance must be adopted in the same period. If an entity early adopts the guidance in an interim period, any adjustments must be reflected as of the beginning of the fiscal year that includes that interim period.
There was no material effect on the 2017 consolidated financial statements upon adoption.
Fair Value of Financial Instruments
In August 2016,
the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2016-15,
Statement of Cash Flows (Topic 230)
(“ASU 2016-15”). ASU 2016-15 is intended to reduce the diversity in practice regarding how certain transactions are classified within the statement of cash flows. ASU 2016-15 is effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted with retrospective application. We are currently evaluating the impact of this guidance on our consolidated financial statements and disclosures.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
(“ASU 2016-13”). The ASU sets forth an “expected credit loss” impairment model to replace the current “incurred loss” method of recognizing credit losses. The standard requires measurement and recognition of expected credit losses for most financial assets held. The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for periods beginning after December 15, 2018. We are currently evaluating the impact of this guidance on our consolidated financial statements and disclosures.
CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In February 2016, the FASB issued ASU 2016-02,
Leases
(“ASU 2016-02”). The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. While we are continuing to assess all potential impacts of the standard, we currently believe, the impact of this standard will be primarily related to the accounting for our operating lease.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
(Topic 606). The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under previous guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In July 2015, the FASB approved the proposal to defer the effective date of ASU 2014-09 standard by one year. Early adoption is permitted after December 15, 2016, and the standard is effective for public entities for annual reporting periods beginning after December 15, 2017 and interim periods therein. In 2016, the FASB issued final amendments to clarify the implementation guidance for principal versus agent considerations (ASU 2016-08), accounting for licenses of intellectual property and identifying performance obligations (ASU 2016-10), narrow-scope improvements and practical expedients (ASU 2016-12) and technical corrections and improvements to topic 606 (ASU 2016-20) in its new revenue standard. Our services are performed over the term of our contracts and customers are billed for those services as they are performed on a monthly basis. Revenue is recognized each month for the services that have been provided to our customers. Additionally, we do not have significant exposure related to uncollectible accounts. We have performed a review of the requirements of the new revenue standard and have performed our analysis of our customer contracts on a portfolio basis (by each hospital group) utilizing the five-step model of the new standard. We have compared the results of our analysis to our current accounting practices. Upon adoption, effective January 1, 2018, we plan to use the full retrospective transition method for recognizing revenue. The adoption of this standard will not have a material effect on the timing and recognition of revenue for the services provided to our customers.
NOTE 3 – GOING CONCERN, LIQUIDITY AND MANAGMENTS PLAN
Our cash position at December 31, 2017 was approximately $2,066,000. At December 31, 2017, we also had $2,500,000 included in restricted cash in other assets on the consolidated balance sheet.
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.
CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounting standards require management to evaluate our ability to continue as a going concern for a period of one year subsequent to the date of the filing of the Form 10-K (“evaluation period”). As such, we have evaluated if cash and cash equivalents on hand and cash generated through operating activities would be sufficient to sustain projected operating activities through March 31, 2019. We anticipate that our current resources, along with cash generated from operations, will not be sufficient to meet our cash requirements throughout the evaluation period, including funding anticipated losses and scheduled debt maturities. In February 2018, we raised $2,050,000 through the sale and issuance of Senior Secured Convertible Notes (see Note 11 for further details). We expect to seek additional funds from a combination of dilutive and/or non-dilutive financings in the future. Because such transactions have not been finalized, receipt of additional funding is not considered probable under current accounting standards. If we do not generate sufficient cash flows from operations and obtain sufficient funds when needed, we expect that we would scale back our operating plan by deferring or limiting some, or all, of our capital spending, reducing our spending on travel, and/or eliminating planned headcount additions, as well as other cost reductions to be determined. Because such contingency plans have not been finalized (the specifics would depend on the situation at the time), such actions also are not considered probable for purposes of current accounting standards. Because, under current accounting standards, neither future cash generated from operating activities, nor management’s contingency plans to mitigate the risk and extend cash resources through the evaluation period, are considered probable, substantial doubt is deemed to exist about the Company’s ability to continue as a going concern. As we continue to incur losses, our transition to profitability is dependent upon achieving a level of revenues adequate to support its cost structure. We may never achieve profitability, and unless and until doing so, we intend to fund future operations through additional dilutive or non-dilutive financings. See
NOTE 15
for further details. There can be no assurances, however, that additional funding will be available on terms acceptable to us, if at all.
NOTE 4 – STOCKHOLDERS’ EQUITY
Preferred Stock
At December 31, 2017 and 2016, we had 20,000,000 shares of Preferred Stock, par value $0.001 authorized and none outstanding, which can be designated by our Board of Directors.
Common Stock
At December 31, 2017 and 2016, we had 300,000,000 shares of Common Stock, $0.001 par value authorized, and 139,380,748 shares of Common Stock issued and outstanding. There was no Common Stock issued during the years ended December 31, 2017 or 2016.
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 (except certain Warrants issued to HealthCor in 2011 as discussed in
NOTE 11
and the warrants issued in connection with a private placement completed in April 2013 “Private Placement Warrants”. The Private Placement Warrants contain provisions that protect the holders from a decline in the issue price of our common stock or “down round” provisions. In accordance with the accounting standards, we determined that these instruments qualify as derivative liabilities and should be recorded at their fair value on the date of issuance and re-measured at fair value each reporting period with the change reported in earnings). The Black-Scholes Model is an acceptable model in accordance with the GAAP. The Black-Scholes Model requires the use of a number of assumptions including volatility of the stock price, the weighted average risk-free interest rate, and the weighted average term of the Warrant. The fair value of the 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. The Warrants issued to HealthCor in 2011 were substantially amended and no longer contain down round provisions.
CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Warrants 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 (and that of peer entities whose stock prices were publicly available) 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.
No Warrants were granted during 2017 or 2016.
A summary of our Warrants activity and related information follows:
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Number of Shares Under Warrant
|
|
|
Range of
Warrant Price
Per Share
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Balance at December 31, 2015
|
|
|
35,197,698
|
|
|
|
$0.33-$1.65
|
|
|
$
|
0.82
|
|
|
|
5.6
|
|
Granted
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(500,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
|
34,697,698
|
|
|
|
$0.33-$1.65
|
|
|
$
|
0.82
|
|
|
|
4.7
|
|
Granted
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(4,643,309
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017
|
|
|
30,054,389
|
|
|
|
$0.33-$1.65
|
|
|
$
|
0.85
|
|
|
|
4.6
|
|
Vested and Exercisable at December 31, 2017
|
|
|
30,054,389
|
|
|
|
$0.33-$1.65
|
|
|
$
|
0.85
|
|
|
|
4.6
|
|
As of December 31, 2017 and 2016, we had no unamortized costs associated with capitalized Warrants, excluding the HealthCor Warrants and Private Placement Warrants.
CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Warrant Activity During 2017
No Warrants were granted during 2017. In May, June and December 2017, 50,000, 290,000 and 4,303,309 Warrants expired.
Warrant Activity During 2016
No Warrants were granted during 2016. In April and May 2016, 400,000 and 100,000 Warrants expired.
Stock Options
Effective December 3, 2007, we established the CareView Communications, Inc. 2007 Stock Incentive Plan (“2007 Plan”) pursuant to which 8,000,000 shares of Common Stock were reserved for issuance upon the exercise of options (“2007 Plan Option(s)”). The 2007 Plan was designed to serve as an incentive for retaining our qualified and competent key employees, officers and directors, and certain consultants and advisors. The 2007 Plan Options vest over three years and have an exercise period of ten years from the date of issuance. At December 31, 2017, 2007 Plan Options to purchase 8,000,000 shares of our Common Stock have been issued with 25,000 remaining outstanding.
Effective September 30, 2009, we established the CareView Communications, Inc. 2009 Stock Incentive Plan (the “2009 Plan”) pursuant to which 10,000,000 shares of Common Stock was reserved for issuance upon the exercise of options (“2009 Plan Option(s)”). The 2009 Plan was designed to serve as an incentive for retaining our qualified and competent key employees, officers and directors. The 2009 Plan Options vest over three years and have an exercise period of ten years from the date of issuance. As of December 31, 2017, 2009 Plan Options to purchase 10,000,000 shares of our Common Stock have been issued with 6,390,760 remaining outstanding.
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. As of December 31, 2017, 2015 Plan Options to purchase 5,000,000 shares of our Common Stock have been issued with 4,492,666 remaining outstanding.
On December 7, 2016, we established the CareView Communications, Inc. 2016 Stock Option Plan (the “2016 Plan”) pursuant to which 20,000,000 shares of Common Stock was reserved for issuance upon the exercise of options (“2016 Plan Option(s)”). The 2016 Plan was designed to serve as an incentive for retaining our qualified and competent key employees, officers and directors. The 2016 Plan Options vest over three years and have an exercise period of ten years from the date of issuance. As of December 31, 2017, 2016 Plan Options to purchase 12,262,033 shares of our Common Stock have been issued 11,752,033 remaining outstanding.
CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The valuation methodology used to determine the fair value of the 2007 Plan Options, 2009 Plan Options, 2015 Plan Options and 2016 Plan Options, collectively, (the “Option(s)”) issued during the year was the Black-Scholes Model. The Black-Scholes Model requires the use of a number of assumptions including volatility of the stock price, the weighted average risk-free interest rate, and the weighted average expected term of the options.
The assumptions used in the Black-Scholes Model during the years ended December 31, 2017 and 2016 are set forth in the table below.
|
|
2017
|
|
|
2016
|
|
Risk-free interest rate
|
|
|
1.17-2.15
|
%
|
|
|
1.13-1.84
|
%
|
Volatility
|
|
|
78.40-89.93
|
%
|
|
|
63.49-73.73
|
%
|
Expected life
|
|
|
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 stock 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 (and that of peer entities whose stock prices were publicly available) 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.
A summary of our Option activity and related information follows:
|
|
Number of Shares Under Option
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Aggregate Intrinsic Value
|
|
Balance at December 31, 2015
|
|
|
9,350,667
|
|
|
$
|
0.58
|
|
|
|
7.6
|
|
|
$
|
15,705
|
|
Granted
|
|
|
6,907,975
|
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(206,664
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(141,003
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
|
15,910,975
|
|
|
$
|
0.37
|
|
|
|
8.0
|
|
|
$
|
—
|
|
Granted
|
|
|
8,017,002
|
|
|
$
|
0.08
|
|
|
|
9.9
|
|
|
$
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(449,521
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(817,997
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017
|
|
|
22,660,459
|
|
|
$
|
0.27
|
|
|
|
8.1
|
|
|
$
|
—
|
|
Vested and Exercisable at December 31, 2017
|
|
|
10,018,489
|
|
|
$
|
0.46
|
|
|
|
6.4
|
|
|
$
|
—
|
|
CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted-average grant date fair value of Options granted during the years ended December 31, 2017 and 2016 was $0.03 and $0.06 per share, respectively.
Share-based compensation expense for Options charged to our operating results for the years ended December 31, 2017 and 2016 (approximately $398,000 and $717,000, respectively) is based on awards vested. The estimate of forfeitures are to be estimated at the time of grant and revised in subsequent periods if actual forfeitures differ from the estimates. We have not included an estimate for forfeitures due to our limited history and we revise based on actual forfeitures each period.
At December 31, 2017, total unrecognized estimated compensation expense related to non-vested Options granted prior to that date was approximately $543,000, which is expected to be recognized over a weighted-average period of 2.2 years. No tax benefit was realized due to a continued pattern of operating losses.
Option Activity During 2017
|
●
|
In March 2017, we granted 2016 Plan Options to purchase 20,000 shares with an exercise price of $0.09 per share to an employee,
|
|
●
|
In May 2017, we granted 2016 Plan Options to purchase 5,000 shares with an exercise price of $0.17 per share to an employee,
|
|
●
|
In June 2017, we granted 2016 Plan Options to purchase 520,000 shares with an exercise price of $0.11 per share to certain employee,
|
|
●
|
In November 2017, we granted 2016 Plan Options to 5 directors (666,667 each, totaling 4,000,002): to purchase shares with an exercise price of $0.06 per share.
|
|
●
|
In December 2017, we granted 2016 Plan Options to purchase 472,000 shares with an exercise price of $0.10 per share to certain employees, and
|
|
●
|
In December 2017, we granted 2016 Plan Options to an officer/director (2,000,000), and an officer (1,000,000) to purchase shares with an exercise price of $0.10 per share.
|
Option Activity During 2016
|
●
|
In March 2016, we granted 2015 Plan Options to purchase 20,000 shares with an exercise price of $0.30 per share to an employee,
|
|
●
|
In August 2016, we granted 2015 Plan Options to 5 directors (235,295 each, totaling 1,176,475) and 35,000 to an employee to purchase shares with an exercise price of $0.17 and $0.18 per share, respectively,
|
|
●
|
In September 2016, we granted 2015 Plan Options to purchase 50,000 shares with an exercise price of $0.08 per share to an employee,
|
|
●
|
In December 2016, we granted 2015 Plan Options to purchase 1,381,469 shares with an exercise price of $0.08 per share to certain employees and 754,969 shares with an exercise price of $0.10 to an employee, and
|
|
●
|
In December 2016, we granted 2016 Plan Options to an officer/director (2,000,000), an officer (2,000,000) and 245,031 to an employee to purchase shares with an exercise price of $0.10 per share.
|
CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – INCOME TAXES
At December 31, 2017, we had approximately $77 million of federal net operating tax loss carry-forward which begins to expire in 2029 and approximately $17 million of state net operating losses which begins to expire in 2029.
The differences between the actual income tax benefit and the amount computed by applying the statutory federal tax rate (35%) to the loss before taxes are as follows:
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Expected income tax benefit at statutory rate
|
|
$
|
(6,968,974
|
)
|
|
$
|
(6,514,444
|
)
|
Debt discount amortization
|
|
|
701,472
|
|
|
|
701,240
|
|
Permanently disallowed interest
|
|
|
671,234
|
|
|
|
801,750
|
|
Other permanent differences
|
|
|
24,458
|
|
|
|
30,818
|
|
State income tax benefit, net of tax effect at state statutory rate
|
|
|
—
|
|
|
|
—
|
|
Deferred pool true-ups/corrections related to:
|
|
|
|
|
|
|
|
|
Net operating losses
|
|
|
—
|
|
|
|
45,138
|
|
Other
|
|
|
(83,190
|
)
|
|
|
(43,369
|
)
|
Change in federal tax rate
|
|
|
14,245,571
|
|
|
|
—
|
|
Change in valuation account
|
|
|
(8,590,571
|
)
|
|
|
4,978,867
|
|
Income tax expense (benefit)
|
|
$
|
—
|
|
|
$
|
—
|
|
The components of the deferred tax assets and liabilities are as follows:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
Tax benefit of net operating loss carry-forward
|
|
$
|
16,247,978
|
|
|
$
|
23,966,537
|
|
Accrued interest
|
|
|
5,195,193
|
|
|
|
6,525,289
|
|
Stock based compensation
|
|
|
1,166,081
|
|
|
|
1,804,050
|
|
Amortization of intangible assets
|
|
|
191,457
|
|
|
|
389,695
|
|
Depreciation of property and equipment
|
|
|
305,987
|
|
|
|
223,211
|
|
Accrued expenses and other liabilities
|
|
|
94,619
|
|
|
|
105,674
|
|
Research and development credit carry-forward
|
|
|
29,084
|
|
|
|
29,084
|
|
Donations
|
|
|
7,102
|
|
|
|
11,241
|
|
Beneficial conversion feature debt discount
|
|
|
(1,840,060
|
)
|
|
|
(3,066,771
|
)
|
Total deferred tax assets
|
|
|
21,397,441
|
|
|
|
29,988,010
|
|
Valuation allowance for deferred tax assets
|
|
|
(21,397,441
|
)
|
|
|
(29,988,010
|
)
|
Deferred tax assets, net of valuation allowance
|
|
$
|
—
|
|
|
$
|
—
|
|
As a result of certain income tax accounting realization requirements with respect to accounting for share-based compensation, the table of deferred tax assets shown above does not include certain deferred tax assets at December 31, 2017 that arose directly from tax deductions related to equity compensation that is greater than the compensation recognized for financial reporting. If such deferred tax assets are subsequently realized, they will be recorded to contributed capital in the amount of approximately $1,166,000.
CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 2017 the deferred tax valuation allowance decreased by $8,590,571. In 2016 the deferred tax valuation allowance increased by $4,978,867. The realization of the tax benefits is subject to the sufficiency of taxable income in future years. The combined deferred tax assets represent the amounts expected to be realized before expiration.
We periodically assess the likelihood that we will be able to recover our deferred tax assets. We consider all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible profits.
As of December 31, 2017 and 2016, we established valuation allowances equal to the full amount of the net deferred tax assets due to the uncertainty of the utilization of the operating losses in future periods.
For the years ended December 31, 2017 and 2016, no amounts have been recognized for uncertain tax positions and no amounts have been assessed or recognized related to interest or penalties related to uncertain tax positions. We have determined that it is not reasonably likely for the amounts of unrecognized tax benefits to significantly increase or decrease within the next twelve months. We are currently subject to the general three-year statute of limitation for federal tax. Under this general rule, the earliest period subject to potential audit is 2014. For years in which the company may utilize its net operating losses, the IRS the ability to examine the tax year that generated those losses and propose adjustments up to the amount of losses utilized.
The Tax Cuts and Jobs Act (the “Act”) was signed into law on December 22, 2017. Among its numerous changes to the Internal Revenue Code, the Act reduces U.S. corporate rates from 35% to 21%. Additionally, the Act limits the use of net operating loss carry backs, however any future net operating losses will instead be carried forward indefinitely. Only 80% of current income will be able to be offset with a net operating loss carryforward, with the remainder of the net operating loss continuing to carry forward. Based on an initial assessment of the Act, the Company believes that the most significant impact on the Company’s consolidated financial statements will be reduction of deferred tax assets related to net operating losses and research and development tax credits. Such reduction is expected to be largely offset by changes to the Company’s valuation allowance
NOTE 6 – OTHER CURRENT ASSETS
Other current assets consist of the following:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Prepaid expenses
|
|
$
|
564,503
|
|
|
$
|
102,601
|
|
Other current assets
|
|
|
21,119
|
|
|
|
12,116
|
|
TOTAL OTHER CURRENT ASSETS
|
|
$
|
585,622
|
|
|
$
|
114,717
|
|
CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 – PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Network equipment
|
|
$
|
13,610,280
|
|
|
$
|
12,632,559
|
|
Office equipment
|
|
|
291,003
|
|
|
|
243,267
|
|
Vehicles
|
|
|
217,004
|
|
|
|
161,584
|
|
Test equipment
|
|
|
177,386
|
|
|
|
166,484
|
|
Furniture
|
|
|
90,827
|
|
|
|
87,646
|
|
Warehouse equipment
|
|
|
9,524
|
|
|
|
9,524
|
|
Leasehold improvements
|
|
|
5,121
|
|
|
|
5,121
|
|
|
|
|
14,401,145
|
|
|
|
13,306,185
|
|
Less: accumulated depreciation
|
|
|
(11,079,604
|
)
|
|
|
(9,153,771
|
)
|
TOTAL PROPERTY AND EQUIPMENT
|
|
$
|
3,321,541
|
|
|
$
|
4,152,414
|
|
Depreciation expense for the years ended December 31, 2017 and 2016 was $1,840,606 and $1,759,016, respectively.
NOTE 8 – OTHER ASSETS
Intangible assets consist of the following:
|
|
December 31, 2017
|
|
|
|
Cost
|
|
|
Accumulated Amortization
|
|
|
Net
|
|
Patents and trademarks
|
|
$
|
806,279
|
|
|
$
|
146,246
|
|
|
$
|
660,033
|
|
Other intangible assets
|
|
|
59,122
|
|
|
|
53,237
|
|
|
|
5,885
|
|
TOTAL INTANGIBLE ASSETS
|
|
$
|
865,401
|
|
|
$
|
199,483
|
|
|
$
|
665,918
|
|
|
|
December 31,2016
|
|
|
|
Cost
|
|
|
Accumulated Amortization
|
|
|
Net
|
|
Patents and trademarks
|
|
$
|
711,961
|
|
|
$
|
104,574
|
|
|
$
|
607,387
|
|
Other intangible assets
|
|
|
53,088
|
|
|
|
48,138
|
|
|
|
4,950
|
|
TOTAL INTANGIBLE ASSETS
|
|
$
|
765,049
|
|
|
$
|
152,712
|
|
|
$
|
612,337
|
|
CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other assets consist of the following:
|
|
December 31, 2017
|
|
|
|
Cost
|
|
|
Accumulated Amortization
|
|
|
Net
|
|
Deferred debt issuance costs
|
|
$
|
1,257,778
|
|
|
$
|
451,216
|
|
|
$
|
806,562
|
|
Deferred financing costs
|
|
|
850,363
|
|
|
|
296,863
|
|
|
|
553,500
|
|
Deferred installation costs
|
|
|
1,748,818
|
|
|
|
1,533,270
|
|
|
|
215,548
|
|
Prepaid license fee
|
|
|
249,999
|
|
|
|
103,824
|
|
|
|
146,175
|
|
Security deposit
|
|
|
46,124
|
|
|
|
—
|
|
|
|
46,124
|
|
TOTAL OTHER ASSETS
|
|
$
|
4,153,082
|
|
|
$
|
2,385,173
|
|
|
$
|
1,767,909
|
|
|
|
December 31,2016
|
|
|
|
Cost
|
|
|
Accumulated Amortization
|
|
|
Net
|
|
Deferred debt issuance costs
|
|
$
|
1,257,778
|
|
|
$
|
271,528
|
|
|
$
|
986,250
|
|
Deferred financing costs
|
|
|
805,917
|
|
|
|
185,466
|
|
|
|
620,451
|
|
Deferred installation costs
|
|
|
1,582,059
|
|
|
|
1,228,558
|
|
|
|
353,501
|
|
Prepaid license fee
|
|
|
249,999
|
|
|
|
87,431
|
|
|
|
162,568
|
|
Security deposit
|
|
|
46,124
|
|
|
|
—
|
|
|
|
46,124
|
|
TOTAL OTHER ASSETS
|
|
$
|
3,941,877
|
|
|
$
|
1,772,983
|
|
|
$
|
2,168,894
|
|
NOTE 9 – OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Allowance for system removal
|
|
$
|
176,750
|
|
|
$
|
116,350
|
|
Accrued professional services
|
|
|
137,018
|
|
|
|
25,000
|
|
Accrued taxes
|
|
|
127,225
|
|
|
|
182,122
|
|
Accrued rent expense
|
|
|
120,433
|
|
|
|
—
|
|
Accrued paid time off
|
|
|
112,577
|
|
|
|
126,486
|
|
Other accrued liabilities
|
|
|
76,053
|
|
|
|
35,892
|
|
TOTAL OTHER CURRENT LIABILITIES
|
|
$
|
750,056
|
|
|
$
|
485,850
|
|
NOTE 10– COMMITMENTS AND CONTINGENCIES
Operating Lease
On September 8, 2009, we entered into a Commercial Lease Agreement (the “Lease”) for 10,578 square feet of office and warehouse space expiring on June 30, 2015. On December 8, 2014, we entered into a Lease Extension Agreement (the “Lease Extension”), wherein we extended the Lease through June 30, 2020. The Lease Extension contains a renewal provision under which we may renew the Lease for an additional five-year period under the same terms and conditions. Rent expense for the years ended December 31, 2017 and 2016 was $386,429 and $199,553, respectively.
CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the monthly base rent per the Lease and the Lease Extension follows:
Years Ending
June 30,
|
|
|
|
|
2018
|
|
|
$
|
15,052
|
|
2019
|
|
|
$
|
15,503
|
|
2020
|
|
|
$
|
15,968
|
|
As of December 31, 2017, future minimum rental payments are as follows:
Years Ending
December 31,
|
|
|
|
|
2018
|
|
|
$
|
183,330
|
|
2019
|
|
|
|
183,330
|
|
Through June 30, 2020
|
|
|
|
95,810
|
|
Total
|
|
|
$
|
462,470
|
|
Debt Maturity
As of December 31, 2017, future debt payments due are as follows:
Years
Ending December 31,
|
|
|
Total
|
|
|
Loan Payable
|
|
|
Senior Secured Convertible Notes
(1)
|
|
|
Notes Payable
|
|
2018
|
|
|
$
|
8,533,334
|
|
|
$
|
8,333,334
|
|
|
$
|
—
|
|
|
$
|
200,000
|
|
2019
|
|
|
|
5,513,786
|
|
|
|
5,000,000
|
|
|
|
—
|
|
|
|
513,786
|
|
2020
|
|
|
|
6,666,666
|
|
|
|
6,666,666
|
|
|
|
—
|
|
|
|
—
|
|
2021
|
|
|
|
43,752,003
|
|
|
|
—
|
|
|
|
43,752,003
|
|
|
|
—
|
|
2022
|
|
|
|
10,130,338
|
|
|
|
—
|
|
|
|
10,130,338
|
|
|
|
—
|
|
Thereafter
|
|
|
|
16,676,471
|
|
|
|
—
|
|
|
|
16,676,471
|
|
|
|
—
|
|
Total
|
|
|
$
|
91,272,598
|
|
|
$
|
20,000,000
|
|
|
$
|
70,558,812
|
|
|
$
|
713,786
|
|
(1)
Senior Secured Convertible Notes are included on the accompanying consolidated financial statements as $70,558,812, which represents this amount less debt discount of $18,161,723.
CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 quarter. For the period from April 21, 2016 through December 31, 2017 interest has been added to the outstanding principal balance.
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 December 31, 2017, the underlying shares of our Common Stock related to the 2011 HealthCor Notes totaled approximately 35,000,000.
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. For the period from January 31, 2017 through December 31, 2017 interest has been added to the outstanding principal balance. As of December 31, 2017, the underlying shares of our Common Stock related to the 2012 HealthCor Notes totaled approximately 8,000,000.
CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 December 31, 2017, the underlying shares of our Common Stock related to the 2014 HealthCor Notes totaled approximately 20,000,000.
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 Fifth Amendment 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.
CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 December 31, 2017, the underlying shares of our Common Stock related to the Fifth Amendment Notes totaled approximately 3,000,000 to HealthCor and 14,000,000 to the New Investors.
On March 31, 2015, we entered into the Sixth Amendment to the 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.
On June 26, 2015, we (i) entered into a Seventh Amendment to the HealthCor Purchase Agreement (the “Seventh Amendment”) pursuant to which the HealthCor Purchase Agreement was amended to permit the Company to enter into and perform its obligations under the Credit Agreement entered into with PDL, as administrative agent and lender (the “Lender”) (the “PDL Credit Agreement”); (ii) executed an Amendment to the Registration Rights Agreement between the Company and HealthCor dated April 21, 2011 (the “RR Agreement”) pursuant to which the RR Agreement was amended to make its priority of registration consistent with the Registration Rights Agreement executed by the Company and Lender (as detailed in
NOTE 12
); (iii) amended the 2011 HealthCor Notes to extend the maturity date, in the event that Tranche Two of the PDL Credit Agreement is funded, for such notes to 90 days after the earlier of the Tranche Two maturity date or repayment date, but not later than December 31, 2022, (iv) amended the 2012 HealthCor Notes, to set the maturity date at January 30, 2022 and, in the event that Tranche Two of the PDL Credit Agreement is funded, to extend such maturity date to 90 days after the earlier of the Tranche Two maturity date or repayment date, but later than December 31, 2022; and (v) amended each of the Senior Secured Convertible Notes issued under the HealthCor Purchase Agreement (the “HealthCor Notes”) to, among other things, subordinate the HealthCor Notes to the loans under the PDL Credit Agreement (as detailed in
NOTE 12
) and to increase certain event of default acceleration and payment thresholds.
On February 23, 2018, the Company, HealthCor Partners Fund, LP and HealthCor Hybrid Offshore Master Fund, LP (“HealthCor”), an entity, and certain officers and directors of the Company (collectively, but not including HealthCor, the “2018 Investors”) entered into the Eighth Amendment to the HealthCor Purchase Agreement wherein we agreed to sell and issue (i) additional notes in the aggregate principal amount of $2,050,000,with a conversion price per share of $0.05 (subject to adjustment as described therein) and (ii) additional Warrants for an aggregate of 512,500 shares of our Common Stock at an exercise price per share of $0.05 (subject to adjustment as described therein) to the 2018 Investors.
CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 due to the down round provision and the removal of the provision requiring liability treatment, 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 years ended December 31, 2017 and 2016, we recorded a BCF of $153,274 and $967,988, 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 Fifth Amendment Notes, the proceeds were allocated to the instruments based on relative fair value as the warrants did not contain any features requiring liability treatment and therefore were classified as equity. The warrants issued with the Sixth Amendment also did not contain features requiring liability accounting and were recorded at fair value on the date of issuance with the offsetting credit recorded in equity. The value allocated to the Fifth Amendment Warrants was $1,093,105, which was recorded as debt discount with the credit to additional paid in capital. The value allocated to the Sixth Amendment Warrant was $378,000, which was recorded as debt costs with the credit to additional paid in capital. The discount associated with the Fifth Amendment Notes ($98,555) and the expense related to the Sixth Amendment ($8,669) are amortized to interest expense using the effective interest method.
We recorded an aggregate of $3,201,598 and $2,683,719 in interest expense for the years ended December 31, 2017 and 2016, respectively, related to these transactions. The carrying value of the debt with HealthCor and the New Investors at December 31, 2017 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 – AGREEMENT WITH PDL BIOPHARMA, INC.
On June 26, 2015, we entered into a Credit Agreement with PDL BioPharma, Inc. (“PDL”), as administrative agent and lender (“the Lender”) (the “PDL Credit Agreement”). Under the PDL Credit Agreement the Lender made available to us up to $40 million in two tranches of $20 million each. Tranche One was funded on October 8, 2015 (the “Tranche One Loan’). Pursuant to the terms of the PDL Credit Agreement and having not met the Tranche Two Milestones by July 26, 2017, the Tranche Two funding was terminated in full. Outstanding borrowings under the Tranche One Loan bears interest at the rate of 13.5% per annum, payable quarterly in arrears. The PDL Credit Agreement, as modified, includes a minimum cash balance requirement of $2,500,000, which has been recorded as restricted cash on the consolidated balance sheet at December 31, 2017, and should we drop below $2,500,000, it will trigger a default.
CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On October 7, 2015, we entered into a First Amendment to the PDL Credit Agreement (the “First Amendment”). The First Amendment modified the conditions precedent to the funding of each tranche, such that, among other things, we no longer need to attain a specified milestone relating to the placement of our products in order for the Lender to fund us the Tranche One Loan. Contemporaneously with the execution of the First Amendment we borrowed the Tranche One Loan and issued to the Lender a term note in the principal amount of $20 million (the “Tranche One Term Note”), payable in accordance with the terms of the PDL Credit Agreement, as amended.
On December 28, 2017, the Company and PDL Investment Holdings, LLC (as assignee of PDL) (“PDL Investment”) entered into a Binding Forbearance Term Sheet (the “Forbearance Term Sheet”) in order to modify certain provisions of the PDL Credit Agreement to prevent any Events of Default from occurring on December 31, 2017. This Forbearance Term Sheet was the governing document until February 2, 2018, at which time, the Company and PDL Investment entered into a Modification Agreement (the “PDL Modification Agreement”), effective December 28, 2017, with respect to the PDL Credit Agreement which reiterated the terms included in the Forbearance Term Sheet and effective February 2, 2018, entered into certain consents and amendments with respect to other existing agreements. In accordance with GAAP, we accounted for this transaction as a debt modification, wherein consideration given to PDL was recorded as deferred closing costs and all third-party payments were considered an expense and record as such on the accompany consolidated financial statements.
In consideration of the Lender’s entry into the PDL Modification Agreement, we agreed:
|
●
|
to concurrently amend and restate the warrant to purchase 4,444,445 shares of the Company’s common stock that we issued to the Lender on June 26, 2015 (the “PDL Warrant”) (amended and restated on October 7, 2015 (the “Amended PDL Warrant”)), reducing the exercise price per share from $0.40 to $0.0273, all other provisions of the Amended PDL Warrant remained unchanged (the “Second Amendment to the PDL Warrant”);
|
|
●
|
to concurrently make a conforming amendment and restatement (the “Amended Registration Rights Agreement”) of the registration rights agreement dated June 26, 2015 pursuant to which the Company had agreed to provide the Lender with certain registration rights with respect to the shares of common stock issuable upon exercise of the Second Amendment to the PDL Warrant;
|
|
●
|
to concurrently provide a written consent and acknowledgement from each holder of the notes issued pursuant to the HealthCor Debt Documents (as defined in the PDL Credit Agreement), in the form of the Consent and Amendment to Note and Warrant Purchase Agreement and Subordination and Intercreditor Agreement (the “Intercreditor Amendment”) by and among the Company, the Lender and such noteholders (i) confirming, on the terms set forth therein, that any lien of such noteholders would be automatically released in the event of a sale of the Company’s hospital assets, (ii) reaffirming such noteholders’ obligations under the Subordination and Intercreditor Agreement dated as of June 26, 2015 and (iii) consenting to certain potential issuances of the Company’s capital stock and cash payments to the Lender pursuant to the PDL Modification Agreement;
|
CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
●
|
that we will obtain (i) at least $2,250,000 (reduced to $2,050,000 on February 23, 2018 pursuant to the terms of the Second Amendment to the PDL Credit Agreement, wherein the PDL Modification Agreement was amended and restated) in net cash proceeds from the issuance of Capital Stock (other than Disqualified Capital Stock) or Debt (each such term as defined in the Credit Agreement) on or prior to February 23, 2018 (we are in compliance with this covenant as of the date of this filing) and (ii) an additional $3,000,000 in net cash proceeds from the issuance of Capital Stock (other than Disqualified Capital Stock) or Debt on or prior to May 31, 2018 (resulting in aggregate net cash proceeds of at least $5,250,000); provided that any Debt will be subordinated to the Loans (as defined in the PDL Credit Agreement) under the PDL Credit Agreement;
|
|
●
|
that in the event of any sale or transfer of assets of the Company other than a sale of all or substantially all of the assets of Company, all of the net proceeds of such sale or transfer will be first applied to repay all amounts owed under the PDL Credit Agreement;
|
|
●
|
that in the event that the Company separates or transfers its senior care business, including but not limited to a sale to, or merger with, a third party of the senior care business or otherwise establishes a senior care business, or in the event that the Company disposes of substantially all business divisions other than the senior care business such that the Company’s remaining assets consist substantially of the Company’s senior care business, the Lender will be issued 7.5% of the equity in such senior care business on a fully diluted basis (the “Equity Grant”), which Equity Grant will be in addition to any interests represented by warrants held by the Lender; provided, however, that in the event of a sale of the senior care business to an unrelated third party, the Lender will be paid 7.5% of the equity value of such business in cash or in the same equity securities received by the Company or its equity holders from the purchaser of the senior care business;
|
|
●
|
that if all amounts owed to the Lender under the PDL Credit Agreement have been paid in full on or prior to December 31, 2018 (even if the Equity Grant has occurred first), then the Equity Grant (or, as the case may be, a payment in cash or equity received from a purchaser) will have a value, or will be equitably adjusted to have a value, that is equal to the lesser of 7.5% of the equity in the senior care business or $5,000,000;
|
|
●
|
that in the event of any sale of all or substantially all of the assets of the Company and its subsidiaries at a time when amounts under the PDL Credit Agreement remain outstanding, then (i) the net proceeds of such sale or transfer will be applied to repay all amounts owed under the PDL Credit Agreement and (ii) the Lender will be paid $5,000,000 in cash from the proceeds of such sale or transfer; provided, however, that no such payment will be made if the Lender has previously received a cash payment or equity from a purchaser in respect of the Equity Grant; and, provided, further, that the Equity Grant will be automatically terminated if such a $5,000,000 cash payment is made;
|
|
●
|
that we will reduce our operating expenses compared to those incurred in October 2017 by at least (i) $113,000 for January 2018, (ii) $148,000 for February 2018 and (iii) $167,000 for each other month for the duration of the Modification Period we are in compliance with this covenant as of the date of this filing; and
|
CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
●
|
to grant the Lender observation rights with respect to meetings of the board of directors of the Company and to have the Chief Executive Officer of the Company and a specified member of the board of directors participate in monthly calls with the Lender to discuss updates with respect to the Company’s business.
|
In accordance with the PDL Credit Agreement, as amended, interest only payments of $675,000 for each of the first nine interest payment dates (December 31, 2015, March 31, June 30, September 30, and December 31, 2016, March 31, June 30, September 30, 2017 and December 31, 2017) were made timely. Pursuant to the terms of the Forbearance Term Sheet, the first principal payment on the Tranche One Loan due on December 31, 2017 in the amount of $1,666,667, and similar principal payments due on March 31, 2018, June 30, 2018 and September 31, 2018 have been delayed to be included in the payment due on December 31, 2018. Quarterly payments under the PDL Credit Agreement subsequent to the PDL Modification Agreement will be due as detailed in the PDL Credit Agreement. We may elect to prepay the Loans at any time without any premium or penalty, subject to certain conditions.
The obligations under the PDL Credit Agreement are secured by a pledge of substantially all of the assets of the Company and certain of its domestic subsidiaries. We executed a Subordination and Intercreditor Agreement (the “Subordination and Intercreditor Agreement”), with the Lender, HealthCor and the New Investors (as defined in
NOTE 11
) pursuant to which we granted first-priority liens on our pledged assets to the Lender and second-priority liens on such pledged assets to HealthCor and the New Investors.
The PDL Credit Agreement contains customary affirmative covenants for transactions of this type and other affirmative covenants agreed to by the Company and the Lender, including, among others, the provision of annual and quarterly reports, maintenance of property, insurance, compliance with laws and contractual obligations and payment of taxes. The PDL Credit Agreement contains customary negative covenants for transactions of this type and other negative covenants agreed to by the Company and the Lender, including, among others, restrictions on the incurrence of indebtedness, the granting of liens, making restricted payments and investments, entering into affiliate transactions and transferring assets. The PDL Credit Agreement also provides for a number of customary events of default, including payment, bankruptcy, covenant, representation and warranty and judgment defaults.
In addition, contemporaneously with the execution of the PDL Credit Agreement the Company and the Lender executed (i) a Registration Rights Agreement (as amended in the PDL Modification Agreement as discussed above) pursuant to which we agreed to provide the Lender with certain registration rights with respect to the shares of Common Stock issuable upon exercise of the PDL Warrant (the “PDL RRA”), (ii) a Guarantee and Collateral Agreement (the “Guarantee and Collateral Agreement”) pursuant to which certain of our subsidiaries guaranteed the performance of our obligations under the PDL Credit Agreement and granted the Lender a security interest in such subsidiaries’ tangible and intangible assets securing our performance of the same, and (iii) a Patent Security Agreement and a Trademark Security Agreement pursuant to which we granted the Lender a security interest in a certain subsidiary’s tangible and intangible assets securing the performance of our obligations under the PDL Credit Agreement.
CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounting Treatment
In connection with the PDL Credit Agreement, we issued the PDL Warrant to the Lender. The fair value of the PDL Warrant at issuance was $1,257,778, which has been recorded as deferred issuance costs in the accompanying consolidated financial statements. The deferred debt issuance costs associated with the PDL Credit Agreement are recorded as assets in accordance with the accounting standards as the PDL Credit Agreement is considered to be a credit facility and the warrants were payment for the facility and not the drawdowns. These costs are amortized to interest expense using the straight-line method over the term of the PDL Credit Agreement. Upon amendment of the PDL Warrant (the “Amended Warrant”), we evaluated whether there was an increase in fair value which would require recognition of additional costs. No such increase in fair value was noted and no adjustment to the PDL Warrant valuation was necessary. The Second Amendment to the PDL Warrant resulted in an increase in fair value of $44,445, which was recorded as financing costs in the accompanying consolidated financial statements. For both years ended December 31, 2017 and 2016, $179,688 was amortized to interest expense. The PDL Warrant has not been exercised. We also incurred certain financing costs related to the PDL Credit Agreement totaling $805,917 in the accompanying consolidated financial statements. These costs have been recorded as deferred financing costs and are being amortized to interest expense over the term of the PDL Credit Agreement. For both years ended December 31, 2017 and 2016, $111,396 was amortized to interest expense.
NOTE 13 – 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) ”).
On January 31, 2017, under the terms of the Rockwell Agreement, wherein we have the option to purchase Rockwell’s interest in the Project LLCs, we exercised that right by entering into a Settlement and LLC Interest Purchase Agreement with Rockwell (the “Settlement Agreement”). Pursuant to the terms of the Settlement Agreement, we paid Rockwell the aggregate amount of $1,213,786 by the issuance of a promissory note to Rockwell for $1,113,786 (the “Rockwell Note”) and a cash payment of $100,000. Pursuant to the terms of the Rockwell Note, we will make quarterly principal payments of $100,000, with each payment being made on the last day of each calendar quarter beginning with the first payment date of March 31, 2017 and continuing on the last business day of each subsequent calendar quarter through September 30, 2019. We were not in default of any conditions under the Settlement Agreement as of December 31, 2017. The final payment due on December 31, 2019 was to be a balloon payment of $13,786 representing the remaining principal balance plus all accrued and unpaid interest. Effective February 2, 2018, pursuant to the terms of the modification agreement with PDL and PDL Modification Agreement, we entered into an amendment to the Rockwell Note wherein the quarterly payments under the Rockwell Note were reduced to $50,000 per quarter during the term of the PDL Modification Agreement, with the final payment due on December 31, 2019 a balloon payment of $513,786 representing the remaining principal balance plus all accrued and unpaid interest.
CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As additional consideration to Rockwell for entering into the Rockwell Agreement, 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”), which amount was fully amortized at December 31, 2015. Pursuant to the terms of the Settlement Agreement, the expiration date of the Project Warrant was extended from November 16, 2017 to November 16, 2022. All other provisions of the Project Warrant remained unchanged. At the time of the extension, the Project Warrant were revalued resulting in a $11,512 increase in fair value, which has been recorded as non-cash costs included in general and administration expense in the accompanying consolidated financial statements. Effective February 2, 2018, pursuant to the terms of the PDL Modification Agreement, we entered into an amendment to the Project Warrant wherein the Project Warrant’s exercise price was changed from $0.52 to $0.05, resulting in a $13,814 increase in fair value, this transaction will be recorded as non-cash costs included in general and administration expense in the condensed consolidated financial statements for the 1st Quarter of 2018.
NOTE 14 – 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.
Concurrent with the execution, and pursuant to the terms, of the Settlement Agreement, as discussed in NOTE 13, all assets and liabilities of the Project LLCs were transferred to our wholly owned subsidiary, CareView Communications, Inc., effective January 1, 2017. On June 12, 2017, we filed Form 510- Limited Liability Company Articles of Dissolution with the State of Wisconsin resulting in the dissolution of the Project LLCs effective that date.
The total consolidated VIE assets and liabilities reflected on our consolidated balance sheets at December 31, 2017 and 2016 are as follows:
|
|
2017
|
|
|
2016
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
—
|
|
|
$
|
1,270
|
|
Receivables
|
|
|
—
|
|
|
|
2,579
|
|
Total current assets
|
|
|
—
|
|
|
|
3,849
|
|
Property, net
|
|
|
—
|
|
|
|
22,555
|
|
Total assets
|
|
$
|
—
|
|
|
$
|
26,404
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
—
|
|
|
$
|
141,782
|
|
Notes payable
|
|
|
—
|
|
|
|
439,173
|
|
Mandatorily redeemable interest
|
|
|
—
|
|
|
|
439,173
|
|
Accrued interest
|
|
|
—
|
|
|
|
328,978
|
|
Other current liabilities
|
|
|
—
|
|
|
|
8,747
|
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
1,357,853
|
|
CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The financial performance of the consolidated VIEs reflected on our consolidated statements of operations for the years ended December 31, 2017 and 2016 is as follows:
|
|
Year Ended
December 31, 2017
|
|
|
Year Ended
December 31, 2016
|
|
|
|
|
|
|
|
|
Revenue, net
|
|
$
|
—
|
|
|
$
|
28,388
|
|
Network operations expense
|
|
|
—
|
|
|
|
16,655
|
|
General and administrative expense (recovery)
|
|
|
—
|
|
|
|
(19,466
|
)
|
Depreciation
|
|
|
—
|
|
|
|
48,794
|
|
Total operating costs
|
|
|
—
|
|
|
|
45,983
|
|
Operating loss
|
|
|
—
|
|
|
|
(17,595
|
)
|
Other expense
|
|
|
—
|
|
|
|
(88,529
|
)
|
Loss before taxes
|
|
|
—
|
|
|
|
(106,124
|
)
|
Provision for taxes
|
|
|
—
|
|
|
|
—
|
|
Net loss
|
|
|
—
|
|
|
|
(106,124
|
)
|
Net loss attributable to noncontrolling interest
|
|
|
—
|
|
|
|
(53,062
|
)
|
Net loss attributable to CareView Communications, Inc.
|
|
$
|
—
|
|
|
$
|
(65,082
|
)
|
NOTE 15 – SUBSEQUENT EVENTS
PDL Modification Agreement and Amendment to PDL Credit Agreement
On February 2, 2018, the Company and PDL Investment Holdings, LLC (as assignee of PDL) (“PDL Investment”) entered into a Modification Agreement (the “PDL Modification Agreement”), with respect to the PDL Credit Agreement which reiterated the terms included in a Binding Forbearance Term Sheet dated December 28, 2017 also entered into by the Company and PDL Investment. The purpose of the PDL Modification Agreement is to amend the PDL Credit Agreement to prevent any Event of Default from occurring. See
NOTES
12 and 13 for further details.
On February 23, 2018, the Company and PDL Investment entered into the Second Amendment to the PDL Credit Agreement, wherein the PDL Modification Agreement was amended and restated to allow for the reduction of certain funding requirements from $2,250,000 to $2,050,000, which funding was completed on February 23, 2018.
Eighth Amendment to HealthCor Purchase Agreement
On February 23, 2018, the Company, HealthCor Partners Fund, LP and HealthCor Hybrid Offshore Master Fund, LP (“HealthCor”), an entity, and certain officers and directors of the Company (collectively, but not including HealthCor, the “2018 Investors”) entered into the Eighth Amendment to the HealthCor Purchase Agreement wherein we agreed to sell and issue (i) additional notes in the aggregate principal amount of $2,050,000,with a conversion price per share of $0.05 (subject to adjustment as described therein) and (ii) additional Warrants for an aggregate of 512,500 shares of our Common Stock at an exercise price per share of $0.05 (subject to adjustment as described therein) to the 2018 Investors.