NOTE 2 – GOING CONCERN, LIQUIDITY
AND MANAGEMENT’S PLAN
Our
cash position at September 30, 2018 was approximately $646,000.
At
September 30, 2018, we also had $1,825,000 included in restricted cash in other assets on the condensed consolidated balance sheet.
On July 13, through the issuance of convertible secured promissory notes, we raised an aggregate of $1,000,000 (see
NOTE 10
for further details).
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 10
for further details), and we are in compliance with the minimum cash balance as of the date of this filing.
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 this Form 10-Q (“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 November 14, 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. 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. There
can be no assurances, however, that additional funding will be available on terms acceptable to us, if at all.
CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 3 – STOCKHOLDERS’ EQUITY
Warrants to Purchase Common Stock of the Company
We use the Black-Scholes-Merton
option pricing model (“Black-Scholes Model”) to determine the fair value of warrants to purchase Common Stock of the
Company (“Warrants”). 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 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. 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.
Warrant Activity during the nine months ended September 30,
2018
On February 23, 2018, we
issued an aggregate of 487,500 ten-year Warrants (with a fair value of $10,237) at an exercise price of $0.05 per share to certain
directors and officers and 25,000 ten-year Warrants (with a fair value of $525) at an exercise price of $0.05 per share to an entity.
On March 31, 2018, 2,500,000
Warrants issued in connection with a private placement completed in April 2013 expired and the fair value of $11,157 was written
off and recorded as expense on the accompanying condensed consolidated financial statements.
On July 10, 2018, we entered
into the Ninth Amendment to the HealthCor Purchase Agreement (the “Ninth Amendment”) with HealthCor, pursuant to which
they agreed to amend the HealthCor Purchase Agreement and the 2011 HealthCor Notes canceling 11,782,859 Warrants associated with
the HealthCor Purchase Agreement and the 2011 HealthCor Notes (see
NOTE 10
for further details).
Warrant Activity during the nine months ended September 30,
2017
During the nine months ended September 30, 2017,
no Warrants were issued, 340,000 Warrants expired and none were exercised.
Options to Purchase Common Stock of the Company
On June 29, 2018, the Company’s
Board of Directors amended our 2016 Stock Option Plan (the “2016 Plan”) to limit in certain circumstances the number
of shares of Common Stock that would otherwise be available for issuance under the 2016 Plan, in order to ensure the availability
of a sufficient number of authorized and unissued shares of Common Stock to meet all of the Company’s obligations. The number
of additional shares of Common Stock that may be issued pursuant to the 2016 Plan from and after June 29, 2018 shall be the lesser
of (i) such number of shares of Common Stock previously reserved for issuance under the 2016 Plan and not subject to awards outstanding
(or previously exercised or vested) under the 2016 Plan as of any such date, or (ii) such number of authorized and unissued shares
of Common Stock not otherwise reserved by the Company for issuance as of any such date pursuant to (a) all awards outstanding under
any Company stock or option plan (including, for the avoidance of doubt, under the 2016 Plan), (b) full conversion of all outstanding
notes, (c) full exercise of all outstanding warrants or (d) any other outstanding instrument or contractual commitment of the Company.
CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
During the nine months
ended September 30, 2018, no options to purchase our Common Stock (the ’‘Option(s)’’) were granted. During the nine months ended
September 30, 2017, we granted options to purchase 545,000 shares of our Common Stock (the ’‘Option(s)’’) to certain employees.
During the same nine month-period, 222,830 Options were canceled.
A summary of our stock
option activity and related information follows:
|
|
Number
of Shares Under Options
|
|
Weighted
Average Exercise Price
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Aggregate
Intrinsic Value
|
Balance at December 31, 2017
|
|
|
22,660,459
|
|
|
$
|
0.27
|
|
|
|
8.1
|
|
|
$
|
—
|
|
Expired
|
|
|
(686,836
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(214,997
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2018
|
|
|
21,758,626
|
|
|
$
|
0.26
|
|
|
|
7.4
|
|
|
$
|
—
|
|
Vested and Exercisable at
September 30, 2018
|
|
|
11,697,156
|
|
|
$
|
—
|
|
|
|
6.1
|
|
|
$
|
—
|
|
The valuation methodology
used to determine the fair value of the Options issued was the Black-Scholes Model.
The assumptions used in the Black-Scholes Model
are set forth in the table below.
|
|
Nine Months
Ended
September 30, 2018
|
|
Year Ended
December 31, 2017
|
Risk-free interest rate
|
|
|
—
|
%
|
|
|
1.17-2.15%
|
|
Volatility
|
|
|
—
|
%
|
|
|
78.40-89.93%
|
|
Expected life in years
|
|
|
—
|
|
|
|
6
|
|
Dividend yield
|
|
|
—
|
%
|
|
|
0.00
|
%
|
The risk-free interest
rate assumption is based upon observed interest rates on zero coupon U.S. Treasury bonds whose maturity period is appropriate for
the expected term of the Option and is calculated by using the average daily historical stock prices through the day preceding
the grant date. Estimated volatility is a measure of the amount by which our stock price is expected to fluctuate each year during
the expected life of the award. Our estimated volatility is an average of the historical volatility of our stock prices. Our calculation
of estimated volatility is based on historical stock prices over a period equal to the expected life of the awards.
Share-based compensation
expense for Options charged to our operating results for the nine months ended September 30, 2018 and 2017 ($206,114 and $313,758,
respectively) is based on awards vested. The estimate of forfeitures are to be recorded at the time of grant and revised in subsequent
periods if actual forfeitures differ from the estimates. We have not included an adjustment to our stock-based compensation expense
based on the nominal amount of the historical forfeiture rate. We do, however, revise our stock-based compensation expense based
on actual forfeitures during each reporting period.
CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
At September 30, 2018,
total unrecognized estimated compensation expense related to non-vested Options granted prior to that date was approximately $327,000,
which is expected to be recognized over a weighted-average period of 1.6 years. No tax benefit was realized due to a continued
pattern of operating losses.
NOTE 4 – OTHER CURRENT ASSETS
Other current assets consist
of the following:
|
|
September 30,
2018
|
|
December 31,
2017
|
Prepaid equipment
|
|
$
|
1,274,522
|
|
|
$
|
465,847
|
|
Prepaid expenses
|
|
|
137,831
|
|
|
|
98,656
|
|
Other current assets
|
|
|
20,019
|
|
|
|
21,119
|
|
TOTAL OTHER CURRENT ASSETS
|
|
$
|
1,432,372
|
|
|
$
|
585,622
|
|
NOTE 5 – PROPERTY AND EQUIPMENT
Property and equipment
consist of the following:
|
|
September 30,
2018
|
|
December 31,
2017
|
Network equipment
|
|
$
|
13,976,482
|
|
|
$
|
13,610,280
|
|
Office equipment
|
|
|
293,709
|
|
|
|
291,003
|
|
Vehicles
|
|
|
217,004
|
|
|
|
217,004
|
|
Test equipment
|
|
|
175,603
|
|
|
|
177,386
|
|
Furniture
|
|
|
90,827
|
|
|
|
90,827
|
|
Warehouse equipment
|
|
|
9,524
|
|
|
|
9,524
|
|
Leasehold improvements
|
|
|
5,121
|
|
|
|
5,121
|
|
|
|
|
14,768,270
|
|
|
|
14,401,145
|
|
Less: accumulated depreciation
|
|
|
(12,008,159
|
)
|
|
|
(11,079,604
|
)
|
TOTAL PROPERTY AND EQUIPMENT
|
|
$
|
2,760,111
|
|
|
$
|
3,321,541
|
|
Depreciation expense for
the nine months ended September 30, 2018 and 2017 was $985,927 and $1,365,983, respectively.
NOTE 6 – OTHER ASSETS
Intangible assets consist
of the following:
|
|
September 30, 2018
|
|
|
Cost
|
|
Accumulated Amortization
|
|
Net
|
Patents and trademarks
|
|
$
|
903,650
|
|
|
$
|
180,575
|
|
|
$
|
723,075
|
|
Other intangible assets
|
|
|
63,509
|
|
|
|
55,625
|
|
|
|
7,884
|
|
TOTAL INTANGIBLE ASSETS
|
|
$
|
967,159
|
|
|
$
|
236,200
|
|
|
$
|
730,959
|
|
CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
|
|
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
|
|
Other assets consist of
the following:
|
|
September 30, 2018
|
|
|
Cost
|
|
Accumulated Amortization
|
|
Net
|
Deferred debt issuance costs
|
|
$
|
1,302,223
|
|
|
$
|
593,389
|
|
|
$
|
708,834
|
|
Prepaid financing costs
|
|
|
805,918
|
|
|
|
380,410
|
|
|
|
425,508
|
|
Deferred installation costs
|
|
|
1,805,219
|
|
|
|
1,648,358
|
|
|
|
156,861
|
|
Prepaid license fee
|
|
|
249,999
|
|
|
|
116,119
|
|
|
|
133,880
|
|
Security deposit
|
|
|
46,124
|
|
|
|
—
|
|
|
|
46,124
|
|
TOTAL OTHER ASSETS
|
|
$
|
4,209,483
|
|
|
$
|
2,738,276
|
|
|
$
|
1,471,207
|
|
|
|
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
|
|
NOTE 7 – OTHER CURRENT LIABILITIES
Other current liabilities
consist of the following:
|
|
September 30,
2018
|
|
December 31,
2017
|
Allowance for system removal
|
|
$
|
235,700
|
|
|
$
|
176,750
|
|
Deferred officer compensation
|
|
|
120,184
|
|
|
|
—
|
|
Accrued paid time off
|
|
|
105,481
|
|
|
|
112,577
|
|
Deferred revenue
|
|
|
102,402
|
|
|
|
17,430
|
|
Accrued rent expense
|
|
|
80,435
|
|
|
|
120,433
|
|
Accrued taxes
|
|
|
55,166
|
|
|
|
127,225
|
|
Other accrued liabilities
|
|
|
32,811
|
|
|
|
195,641
|
|
Accrued insurance
|
|
|
19,133
|
|
|
|
—
|
|
TOTAL OTHER CURRENT LIABILITIES
|
|
$
|
751,312
|
|
|
$
|
750,056
|
|
CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 8 – INCOME TAXES
Deferred income tax assets
and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities and
are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. We do not
expect to pay any significant federal or state income tax for 2018 as a result of the losses recorded during the nine months ended
September 30, 2018 and the additional losses expected for the remainder of 2018 and net operating loss carry forwards from prior
years. Accounting standards require the consideration of a valuation allowance for deferred tax assets if it is “more likely
than not” that some component or all of the benefits of deferred tax assets will not be realized. As of September 30, 2018,
we maintained a full valuation allowance for all deferred tax assets. Based on these requirements, no provision or benefit for
income taxes has been recorded. There were no recorded unrecognized tax benefits at the end of the reporting period.
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. Net operating losses generated
from January 1, 2018 are limited to offset 80% of current income, with the remainder of the net operating loss continuing to carry
forward indefinitely. Net operating losses incurred before January 1, 2018 are not subject to the 80% limitations and will begin
to expire in 2029. 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 limitations in tax deductions on interest expense. Under the Act, interest deductions
disallowed from current income will carryforward indefinitely. The Act did not impact management’s valuation allowance position.
NOTE 9 – AGREEMENT WITH PDL BIOPHARMA,
INC.
On June 26, 2015, we entered
into a Credit Agreement (as subsequently amended) 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 condensed consolidated balance sheet at March 31, 2018, and should we drop below
$2,500,000, it will trigger a default. On June 26, 2015, we issued Warrants to PDL for the purchase of an aggregate of 4,444,445
shares of our Common Stock at an exercise price of $0.45 per share (the “PDL Warrant”)
On October 7, 2015, we
entered into an 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
October 7, 2015, we also amended and restated the PDL Warrant changing the exercise price from $0.45 to $0.40 per share (the “Amended
PDL 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.
CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
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, as amended, 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 the Lender was
recorded as deferred closing costs and all third-party payments were considered an expense and recorded as such on the accompanying
condensed consolidated financial statements. Details of the PDL Modification Agreement are included in our Form 10-K filed with
the SEC on March 30, 2018.
On May 31, 2018, the Company
and PDL Investment entered into an amendment to the PDL Modification Agreement (the “PDL Modification Agreement Amendment”),
pursuant to which the parties agreed to amend the PDL Modification Agreement to provide that the dates on which the Lender may
elect, in the Lender’s sole discretion, to terminate the Modification Period would be July 31, 2018 and September 30, 2018
(with each such date permitted to be extended by the Lender in its sole discretion); and that the Company could satisfy its obligations
under the PDL Modification Agreement, as amended to obtain financing by obtaining (i) at least $2,050,000 in net cash proceeds
from the issuance of Capital Stock (other than Disqualified Capital Stock) or Debt on or prior to February 23, 2018 and (ii) an
additional (A) $750,000 in net cash proceeds from the issuance of Capital Stock (other than Disqualified Capital Stock) or Debt
on or prior to June 15, 2018 and (B) $750,000 in net cash proceeds from the issuance of Capital Stock (other than Disqualified
Capital Stock) or Debt on or prior to August 31, 2018 (resulting in aggregate net cash proceeds of at least $3,550,000).
On June 14, 2018, the Company
and PDL Investment entered into a second amendment to PDL Modification Agreement (the “Second PDL Modification Agreement
Amendment”), pursuant to which the parties agreed to further amend the PDL Modification Agreement to provide that the Company
could satisfy its obligations under the PDL Modification Agreement, as amended, to obtain financing by obtaining (i) at least $2,050,000
in net cash proceeds from the issuance of Capital Stock (other than Disqualified Capital Stock) or Debt on or prior to February
23, 2018 and (ii) an additional (A) $750,000 in net cash proceeds from the issuance of Capital Stock (other than Disqualified Capital
Stock) or Debt on or prior to July 3, 2018 (rather than June 15, 2018) and (B) $750,000 in net cash proceeds from the issuance
of Capital Stock (other than Disqualified Capital Stock) or Debt on or prior to August 31, 2018 (resulting in aggregate net cash
proceeds of at least $3,550,000).
On June 28, 2018, the Company,
and PDL Investment entered into a third amendment to Modification Agreement (the “Third PDL Modification Agreement Amendment”),
pursuant to which the parties agreed to further amend the PDL Modification Agreement to provide that the Company could satisfy
its obligations under the PDL Modification Agreement, as amended, to obtain financing by obtaining (i) at least $2,050,000 in net
cash proceeds from the issuance of Capital Stock (other than Disqualified Capital Stock) or Debt on or prior to February 23, 2018
and (ii) an additional (A) $750,000 in net cash proceeds from the issuance of Capital Stock (other than Disqualified Capital Stock)
or Debt on or prior to July 13, 2018 (rather than July 3, 2018) and (B) $750,000 in net cash proceeds from the issuance of Capital
Stock (other than Disqualified Capital Stock) or Debt on or prior to August 31, 2018 (resulting in aggregate net cash proceeds
of at least $3,550,000).
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 PDL Modification Agreement, as amended, 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 30, 2018 have been delayed and are included in the payment due on December 31, 2018. Quarterly payments under the
PDL Credit Agreement, as amended, subsequent to the PDL Modification Agreement, as amended, will be due as detailed in the PDL
Credit Agreement, as amended. We may elect to prepay the Loans at any time without any premium or penalty, subject to certain conditions.
CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
The obligations under the
PDL Credit Agreement, as amended, 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 2015 and 2018 Investors (as defined in
NOTE 10
) 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 2015 and 2018 Investors.
The PDL Credit Agreement,
as amended, 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, as amended, 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, as amended, calls for a reduction of our operating expenses compared to such expense 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. The PDL Credit Agreement, as
amended, 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, (ii) a Guarantee and Collateral Agreement
pursuant to which certain of our subsidiaries guaranteed the performance of our obligations under the PDL Credit Agreement, as
amended, 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, as amended.
Accounting Treatment
In connection with the
PDL Credit Agreement, as amended, 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 condensed consolidated financial statements. The deferred
debt issuance costs associated with the PDL Credit Agreement, as amended are recorded as assets in accordance with the accounting
standards as the PDL Credit Agreement, as amended 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, as amended. In December 2017, in connection with the PDL Modification Agreement, as amended, the Amended PDL Warrant
was again amended (the “Second Amendment to the PDL Warrant’) resulting in an increase in fair value of $44,445, which
was recorded as additional deferred financing costs in the accompanying condensed consolidated financial statements. For the nine-month
periods ended September 30, 2018 and 2017, $94,782 and $89,844, respectively, was amortized to interest expense. As of September
30, 2018, the PDL Warrant, as amended, has not been exercised. We also incurred certain closing costs related to the PDL Credit
Agreement totaling $805,917 in the accompanying condensed consolidated financial statements. These costs have been recorded as
deferred closing costs and are being amortized to interest expense over the term of the PDL Credit Agreement as amended. For both
nine month-periods ended September 30, 2018 and 2017, $55,698 was amortized to interest expense.
CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 10 – 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
Partners Fund, LP and HealthCor Hybrid Offshore Master Fund, LP (“HealthCor”). Pursuant to the terms of 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 March
31, 2018 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.
Subject to the terms of
the Ninth Amendment as discussed below, HealthCor’ s ability 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 has
been eliminated.
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.
CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Subject to the terms of
the Ninth Amendment as discussed below, HealthCor’s ability 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 has
been eliminated.
On August 20, 2013, we
entered into the 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 the 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 September 30, 2018, the underlying
shares of our Common Stock related to the 2014 HealthCor Notes totaled approximately 22,000,000.
On December 4, 2014, we
entered into the Fifth Amendment to the HealthCor Purchase Agreement (the “Fifth Amendment”) with HealthCor and certain
additional investors (such additional investors, the “2015 Additional Investors” and, collectively with HealthCor Partners
Fund, LP, the “2015 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 2015 Investors are composed of
all but one of our current directors and one of our officers. On February 17, 2015, the Company and the 2015 Investors closed on
the transactions contemplated by the Fifth Amendment. In connection with this closing, the Company and the 2015 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 September 30, 2018, the underlying shares of our Common Stock related to the Fifth
Amendment Notes totaled approximately 3,000,000 to HealthCor Partners Fund, LP and 15,000,000 to the 2015 Additional Investors.
CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
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 the 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 PDL Credit
Agreement, as amended, (as detailed in
NOTE 9
); (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 PDL; (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 amended, and to increase certain event of default acceleration and payment thresholds. As pertains
to (iii) and (iv) above , pursuant to the terms of the PDL Credit Agreement, as amended, and having not met the Tranche Two Milestones
by July 26, 2017, the Tranche Two funding was terminated in full.
On February 23, 2018, we
entered into the Eighth Amendment to the HealthCor Purchase Agreement (the “Eighth Amendment”) with HealthCor and certain
investors ( the “February 2018 Investors”) and agreed to sell and issue (i) additional notes in the initial aggregate
principal amount of $2,050,000,with a conversion price per share of $0.05 (subject to adjustment as described therein) (the “Eighth
Amendment Notes”) and (ii) additional Warrants for an aggregate of up to 512,500 shares of our Common Stock at an exercise
price per share of $0.05 (subject to adjustment as described therein) (the “Eighth Amendment Warrants”). As provided
by the Eighth Amendment, the Eighth 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 Eighth Amendment Notes have a maturity date of February 22,
2028. 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 February
2018 Investors are composed of all but one of our current directors, one of our officers and an entity. As of September 30, 2018,
the underlying shares of our Common Stock related to the Eighth Amendment Notes totaled approximately 44,000,000 to the February
2018 Investors.
CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
On July 10, 2018, we entered
into the Ninth Amendment to the HealthCor Purchase Agreement (the “Ninth Amendment”) with HealthCor, the 2015 Investors
and the February 2018 Investors, pursuant to which the parties agreed to amend the HealthCor Purchase Agreement, the 2011 HealthCor
Notes, the 2012 HealthCor Notes, the 2014 HealthCor Notes, the Fifth Amendment Notes and the Eighth Amendment Notes, as applicable,
to (i) remove the rights of the holders of the 2011 HealthCor Notes and the 2012 HealthCor Notes to convert such notes to Common
Stock after September 30, 2018; (ii) suspend the accrual of interest on the 2011 HealthCor Notes and the 2012 HealthCor Notes for
periods after September 30, 2018; (iii) provide for the potential earlier repayment of the 2011 HealthCor Notes and the 2012 HealthCor
Notes by the Company, 120 calendar days following a written demand for payment by the holder of such notes; provided, however,
that such written demand may not be given prior to the twelve-month anniversary of the date on which the obligations of the Company
under the PDL Credit Agreement are repaid in full; (iv) cancel the 2011 HealthCor Warrants; (v) provide for the seniority of the
2011 HealthCor Notes and the 2012 HealthCor Notes in right of payment over notes subsequently issued pursuant to the Purchase Agreement,
including the 2014 HealthCor Notes, the Fifth Amendment Notes and the Eighth Amendment Notes; (vi) amend the terms of the 2014
HealthCor Notes, the Fifth Amendment Notes and the Eighth Amendment Notes to reflect the seniority in payment of the 2011 HealthCor
Notes and 2012 HealthCor Notes; and (vii) reduce the number of shares of Common Stock that the Company must at all times have authorized
and reserved for the purpose of issuance upon conversion of the notes issued pursuant to the HealthCor Purchase Agreement (collectively,
the “Notes”) and exercise of the warrants issued pursuant to the HealthCor Purchase Agreement (collectively, the “Warrants”),
from at least 120% of the aggregate number of shares of Common Stock then issuable upon full conversion of the Notes and exercise
of the Warrants to at least 100% of such aggregate number of shares.
In addition, on July 10,
2018, along with PDL, HealthCor, the 2015 Investors and the February 2018 Investors, we entered into a Second Amendment to the
Subordination and Intercreditor Agreement, to amend the Subordination and Intercreditor Agreement dated as of June 26, 2015, as
amended to provide that, in the event of a sale of the Company’s hospital assets, after the net proceeds are first applied
to repay obligations under the PDL Credit Agreement, as amended, until paid in full, up to the next $5,000,000 of such net proceeds
may be retained by the Company for working capital purposes before all remaining net proceeds are then applied to repay the obligations
under the Notes in accordance with the priorities set forth in the HealthCor Purchase Agreement and the Notes.
On July 13, 2018, we entered
into the Tenth Amendment to the HealthCor Purchase Agreement with HealthCor and certain investors (all of which are directors of
the Company) (the “July 2018 Investors”), pursuant to which we sold and issued convertible secured promissory notes
for an aggregate of $1,000,000 to the July 2018 Investors with a conversion price per share equal to $0.05 and a maturity date
of July 12, 2028. As of September 30, 2018, the underlying shares of our Common Stock related to the Tenth Amendment Notes totaled
approximately 21,000,000 to the July 2018 Investors.
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. We recorded an aggregate of $2,746,081 and $2,345,767 in interest for the nine months ended September 30,
2018 and 2017, respectively, related to these transactions. The face amount of the 2012 HealthCor Notes, 2014 HealthCor Notes,
the Fifth Amendment Notes and the Eighth Amendment Notes and all accrued PIK interest also qualify for BCF treatment as discussed
above. During the nine months ended September 30, 2018 and 2017, we recorded a BCF of $98,363 and $122,453, 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.
CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
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 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. We recorded
an aggregate of $21,456 and $18,054 in interest for the nine months ended September 30, 2018 and 2017, respectively, related to
the Fifth Amendment Notes and Fifth Amendment Warrants. The carrying value of the Fifth Amendment Notes at September 30, 2018 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.
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 Sixth Amendment Warrant was $378,000, which
was recorded as debt costs with the credit to additional paid in capital. We recorded an aggregate of $43,352 and 43,332 in interest
for the nine month-periods ended September 30, 2018 and 2017, respectively.
As Warrants were issued
with the Eighth 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 value allocated to the Eighth
Amendment Warrants was $10,707 and was recorded as interest expense with the credit to additional paid in capital. The carrying
value of the Eighth Amendment Notes at September 30, 2018 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 11 – 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 had 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 were to 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 quarter through
September 30, 2019 with the final payment of $13,786, representing the remaining principal balance plus all accrued and unpaid
interest, due on December 31, 2019. On February 2, 2018, pursuant to the terms of 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, which ends December 31, 2018, at which time the payments will revert back to $100,000
per quarter starting March 31, 2019 through September 30, 2019 with the final payment of $307,538, representing the remaining principal
balance plus all accrued and unpaid interest, due on December 31, 2019.
Our evaluation of the February
2, 2018 modification of the Rockwell Note concluded that the modification resulted in a troubled debt restructuring under the accounting
guidance as we are experiencing financial difficulties and it was deemed a concession was granted by Rockwell. However, as the
future payments to be received subsequent to the modification were greater than the carrying value at the time of the modification,
no gain was required to be recognized on the restructuring. We will amortize the restructured note using the effective interest
method which is not expected to be materially different as the effective rate on the restructured debt was not materially lower
than before the modification. We were not in default of any conditions under the Settlement Agreement as of September 30, 2018.
CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED 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, which was recorded as non-cash costs included in general and administration expense in the consolidated
financial statements for the nine months ended September 30, 2018.
Item 2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations
General
The following discussion
and analysis provides information which our management believes to be relevant to an assessment and understanding of our results
of operations and financial condition. This discussion should be read together with our financial statements and the notes to the
financial statements, which are included in this Quarterly Report on Form 10-Q (the “Report”). This information should
also be read in conjunction with the information contained in our Form 10-K filed with the Securities and Exchange Commission (the
“SEC”) on March 30, 2018, including the audited consolidated financial statements and notes included therein as of and
for the year ended December 31, 2017. The reported results will not necessarily reflect future results of operations or financial
condition.
Throughout this Annual
Report on Form 10-K (the “Report”), the terms “we,” “us,” “our,” “CareView,”
or “Company” refers to CareView Communications, Inc., a Nevada corporation, and unless otherwise specified, includes
our wholly owned subsidiaries, CareView Communications, Inc., a Texas corporation (“CareView-TX”) and CareView Operations,
LLC, a Nevada limited liability company (“CareView Operations”) (collectively known as the “Company’s Subsidiaries”).
We maintain a website at
www.care-view.com and our Common Stock trades on the OTCQB under the symbol “CRVW.’’
Company Overview
Our mission is to be the
leading provider of products and on-demand application services for the healthcare industry, specializing in bedside video monitoring,
software tools to improve hospital communications and operations, and patient education and entertainment packages. Our proprietary,
high-speed data network system is the next generation of patient care monitoring that allows real-time bedside and point-of-care
video monitoring designed to improve patient safety and overall hospital costs. The entertainment packages and patient education
enhance the patient’s quality of stay. Reported results from CareView-driven 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.
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.
Quarterly Update to Products and Services
Agreement with Healthcare Facilities
We offer our products and
services through a subscription-based model with healthcare facilities through a Products and Services Agreement (the “P&S
Agreement(s)”). During the term of the P&S Agreement, we provide continuous monitoring of the CareView System’s products
and services deployed to a healthcare facility and maintain and service all equipment installed by us. Terms of each P&S Agreement
require the healthcare facility to pay us a monthly subscription fee based on the number of selected, installed and activated services.
None of the services provided through the Primary Package or GuestView module are paid or reimbursed by any third-party provider
including insurance companies, Medicare or Medicaid. We also enter into corporate-wide agreements with healthcare companies (the
“Master Agreement(s)”), wherein the healthcare facilities that are a part of these healthcare companies enter into individual
facility level agreements that are substantially similar to our P&S Agreements.
Master Agreements and P&S
Agreements are currently negotiated for a period of five years with a minimum of two or three years; however, older P&S Agreements
were negotiated for a five-year period with a provision for automatic renewal. P&S Agreements specific to pilot programs (“P&S
Pilot Agreements”) contain pricing terms substantially similar to P&S Agreements, are generally three or six-months in
length and can be extended on a month-to-month basis as required. We own all rights, title, and interest in and to the equipment
we install at each location and agree to maintain and repair it; although, we may charge for repairs or replacements due to damage
or misuse. We are not responsible for maintaining data arising from use of the CareView System or for transmission errors, corruption
or compromise of data carried over local or interchange telecommunication carriers. We grant each healthcare facility a limited,
revocable, non-transferable and non-exclusive license to use the software, network facilities, content and documentation on and
in the CareView System suite to the extent, and only to the extent, necessary to access, explore and otherwise use the CareView
System suite in real time. Such non-exclusive license expires upon termination of the P&S Agreement.
We use specific terminology
in an effort to better define and track the staging and billing of the individual components of the CareView System suite. The
CareView System suite includes three components which are separately billed; the Room Control Platform (the “RCP”),
the Nurse Station, and mobile devices (each component referred to as a “unit”). The term “bed” refers to each
healthcare facility bed as part of the overall potential volume that a healthcare facility represents. For example, if a healthcare
facility has 200 beds, the aggregate of those beds is the overall potential volume of that healthcare facility. The term “bed”
is often used interchangeably with “RCP” or “Room Control Platform” as this component of the CareView System
consistently resides within each room where the “bed” is located. On average, there are six Nurse Stations for each 100
beds. The term “deployed” means that the units have been delivered to the healthcare facility but have not yet been installed
at their respective locations within the facility. The term “installed” means that the units have been mounted and are
operational. The term “billable” refers to the aggregate of all units on which we charge fees. Units become billable
once they are installed and the required personnel have been trained in their use. Units are only deployed upon the execution of
a P&S Agreement or P&S Pilot Agreement.
Update on Significant Customer Agreements
HealthTrust
On December 14, 2016, the
Company entered into a Group Purchasing Agreement with HealthTrust Purchasing Group, L.P. (“HealthTrust”) (the “HealthTrust
GPO Agreement”), the nation’s only committed-model Group Purchasing Organization (“GPO”) headquartered in Nashville,
Tennessee. HealthTrust serves approximately 1,600 acute care facilities and members in more than 26,000 other locations, including
ambulatory surgery centers, physician practices, long-term care and alternate care sites. The agreement was effective on January
1, 2017 and all CareView System components and modules are available for purchase by HealthTrust’s exclusive membership. HealthTrust
members may order CareView’s products and services included in the agreement directly from CareView.
On October 1, 2018, the
Company added CareView Connect to the HealthTrust GPO Agreement.
Hospital Corporation of America
West Florida Division
On April 26, 2016, we entered
into a Master Agreement with the West Florida Division of Health Corporation of America (“HCA”), the nation’s leading
provider of healthcare services. The West Florida Division has approximately 2,600 beds. The three-year divisional Master Agreement
follows the successful P&S Pilot Agreement with HCA’s Blake Medical Center. Currently, we are billing 439 units monthly.
Capital Division
On January 1, 2017, we
entered into a P&S Agreement with HCA Capital Division pursuant to the HealthTrust GPO Agreement. We now have signed P&S
Agreements for three facilities in the Capital Division, Lewis-Gale Medical Center, CJW Medical Center and Henrico Doctor’s
Hospital totaling 169 units. There are 14 facilities in the division totaling approximately 3,200 staffed beds.
East Florida Division
On January 25, 2017, we
entered into a P&S Agreement with HCA East Florida Division pursuant to the HealthTrust GPO Agreement. Under this agreement,
our products and services will be available to all 13 facilities in the division, totaling approximately 3,600 staffed beds. Currently,
we have 42 units in place at one facility.
Community Health Systems, Inc
.
On April 1, 2015, we closed
a Master Agreement with Community Health Systems, Inc. (“CHS”). Under the terms of the Master Agreement, currently,
we are billing 1,016 units monthly in 17 hospitals. In early 2016, Mat-Su Regional Medical Center, a legacy CHS facility completed
policy revision for patient video monitoring for CHS. With the policy revision complete, we have approval to contact all CHS facilities.
We have had meetings with CHS market leaders and their Chief Nursing Officer and have their support, which could result in a potential
roll-out of approximately 15,000 additional beds out of their estimated 27,000 staffed beds.
The Community Medical Centers HealthCare
Network-Central California
On July 7, 2016, we
signed a P&S Pilot Agreement with Clovis Community Medical Center, owned by The Community Medical Centers HealthCare
Network-Central California (“Community Medical HealthCare”), which owns approximately 1,120 beds. We have
completed the initial rollout of 64 units at Clovis Community Medical Center and 84 units at Community Regional Medical
Center. Both facilities became billable in May 2017.
Tenet Healthsystem Medical, Inc.
In February 2014, we entered
into a Master Agreement with Tenet Healthsystem Medical, Inc. (“Tenet”). The terms of the Master Agreement provide
for the execution of a facilities level agreement with each hospital. We are currently billing 631 units monthly.
Kaiser Permanente
We currently are billing
589 units monthly in seven Kaiser Permanente (“Kaiser”) facilities. In April and May 2014, we executed P&S Pilot
Agreements with Kaiser’s Baldwin Park and Panorama City facilities, respectively. This is in addition to our P&S Pilot
Agreement with Kaiser Orange County covering its facilities in Anaheim and Irvine, California which was executed in October 2013.
The P&S Pilot Agreements for these four facilities provide for a monthly renewal until termination or replacement by a Master
Agreement or individual P&S Agreements. We finalized a P&S Agreement with the Irvine facility in October 2016 and we are
now in the process of finalizing a conversion from a P&S Pilot Agreement to a P&S Agreement with the Anaheim facility.
Both of these facilities are in the process of determining their needs as it relates to adding additional units.
On November 2, 2015, we
signed a P&S Agreement with Kaiser’s San Diego Medical Center. We currently have 28 installed units at this facility
and anticipate adding additional beds once use and need has been determined.
In early 2016 we commenced
discussions with Kaiser Northwest Region for deployment of the CareView System in Kaiser’s hospitals in Oregon. On November
10, 2016, we signed a P&S Pilot Agreement with the Northwest Division of Kaiser Permanente. Execution of this agreement signals
our expanded growth within the Kaiser system. The agreement calls for the installation of 81 units at the Westside Medical Center.
After a successful pilot,
in February 2016 we executed a P&S Agreement with Kaiser’s Los Angeles Medical Center for a total of 136 units. We are
also in pilot discussions with other Kaiser facilities in the San Diego area. While we are continuing our sales efforts at the
hospital and regional level, there are still discussions regarding a possible Master Agreement. Notwithstanding those discussions
we will continue to sell into other Kaiser Regions and look to convert our P&S Pilot Agreements into P&S Agreements that
can be replaced by a Master Agreement if and when one is finalized.
Parkland
In September 2015 we signed
a P&S Agreement with Dallas County Hospital District d/b/a Parkland Health & Hospital System and are currently billing
425 units.
Geisinger Health System
In 2015 we signed a P&S
Pilot Agreement with Geisinger Medical Center (“GMC”). Currently there are 144 monthly billable units at GMC. The results
of the pilot were favorable and we have finalized the terms of a Master Agreement with GMC. There are approximately 1,800 beds
within Geisinger System Services (“GSS”). Upon completion of the Master Agreement, we anticipate rolling out product
and services to all owned and affiliated facilities. Currently we are in discussions with two GSS facilities who have expressed
interest in installing the CareView System. We will also continue our sales efforts to the balance of GSS.
Baptist Health South Florida
Baptist Health South Florida
(“BHSF”) is a system comprised of 6 hospitals with 1,700 beds in the Miami area. They entered into a P&S Pilot
Agreement in January 2016 to cover 99 beds. After a successful pilot BHSF has decided to move forward with a Master Agreement,
which was finalized in July 2017. As of March 31, 2018, we are billing for 2013 units. CareView is in discussions with two additional
BHSF facilities.
Adventist Health
In March 2017 we entered
into a P&S Agreement with White Memorial Hospital for 78 units (“White Memorial”) following a successful pilot. White
Memorial is part of the Adventist Health. There are a total of 16 facilities in the Adventist Health network. We are working on
collecting data in anticipation of setting up a meeting to discuss a Master Agreement and system-wide roll-out. To that end, on
July 24, 2017 we signed a P&S Agreement with Glendale Adventist for 68 units and on November 14, 2017 we began billing Adventist
Health Bakersfield for 58 units.
Baylor Scott & White Health
Under the terms of a P&S
Agreement with Baylor Scott & White Medical Center Frisco, we are currently billing 156 units monthly. On June 30, 2017 we
executed a Master Agreement with Baylor Scott & White Health (“BSW”) corporate. We have had meetings with the following
BSW facilities as we move toward a corporate roll-out, which include: BSW Temple, BSW All-Saints, BSW Hillcrest, BSW Round Rock,
BSW Waxahachie, and BSW White Rock. These facilities are gathering data so we can generate proposals.
VA Central Arkansas Veterans Healthcare
System
The Company accomplished
its first contract with a VA facility, specifically the Central Arkansas Veterans Healthcare System (“CAVHS”). The
CareView System is now completely installed at John L. McClellan Memorial Veterans Hospital in Little Rock with 103 units installed
and billable. Central Arkansas Memorial Veterans Hospital added 40 beds to the CareView contract in September 2018.
The Eugene J. Towbin Healthcare
Center awarded CareView a contract for 85 beds in September 2018. This is the first Community Living Center, a VA Nursing Home,
to use CareView, and could lead to adoption by other VA Community Living Centers.
These agreement are pursuant
to the Company’s General Service Administration (“GSA”) Multiple Award Schedule contract (“MAS”). The MAS allows
us to sell the CareView System at a negotiated rate to the approximate 169 VA facilities with over 39,000 licensed beds and the
approximate 42 DOD hospitals with over 2,600 licensed beds. The MAS is one of the most widely accepted government contract vehicles
available to agency procurement officers. GSA’s application process requires potential vendors to be recognized as highly credible
and well established. We are hopeful that once installation and training is complete, the other VA hospitals will also want to
participate. Our products and services represent an enormous opportunity to improve the health and safety of our Nation’s
veterans.
Other VA Opportunities
The Company is currently
in discussions with several other large VA Hospitals and anticipates additional orders under its MAS. Specifically, the Company
is in the contracting process with other VA facilities, including the Mountain Home VA Healthcare System in Tennessee, the VA Puget
Sound Health Care System in Seattle Washington, the Oklahoma City VA Health Care System, in Oklahoma City, Oklahoma and the Lexington
VA Medical Center in Lexington Kentucky.
Steward Healthcare
On April 13, 2017 the Company
signed a Master Agreement under the HealthTrust GPO Agreement with Steward Health Care (“Steward”). Steward is headquartered
in Boston, Massachusetts. Steward recently announced the acquisition of IASIS Healthcare and eight hospitals from CHS bringing
its total to 35 hospital facilities in its network. Under the Master Agreement, CareView will install approximately 867 units in
11 hospitals in Massachusetts and 66 units in one hospital in Pennsylvania. CareView is already installed in 19 facilities and
anticipates being rolled-out to the additional 5 hospitals in 2018. All totaled, we anticipate being installed in all 35 of the
Steward Hospital facilities with a total of over 3,200 units installed. There have been unexpected delays unrelated to the Company.
We anticipate installation to commence within 60 days of this filing.
Atlantic Health System
On January 24, 2017 the
Company executed a Purchase Agreement under its HealthTrust GPO Agreement with Atlantic Health System (“AHS”). AHS is
headquartered in Morristown, New Jersey and one of the leading non-profit health care systems in the state of New Jersey. In March
2018 AHS notified us of their intent to extend their use of the CareView System to the full 36-month term and contracted to add
41 units to Morristown Medical Center. In July 2018 AHS and the Company entered into an agreement to place 40 beds at Newton Medical
Center. Discussions have begun with other AHS facilities regarding further expansion. AHS consists of 5 hospitals and approximately
893 staffed beds.
Baptist Southeast Texas
On May 15, 2017 we executed
a Purchase Agreement under its HealthTrust GPO Agreement with Baptist Southeast Texas. Billing for 105 units began on November
1, 2017.
Montefiore
On June 8, 2017 the Company
executed a P&S Pilot Agreement with Montefiore Medical Center located in New York City. The Agreement calls for the installation
of 46 units. After the 6-month pilot, which began on October 31, 2017, we anticipate converting to a Master P&S Agreement and
expanding within the Montefiore Health System, which is comprised of 6 hospitals and approximately 2,000 staffed beds. On December
18, 2017, CareView executed a P&S Agreement with a Montefiore rehabilitation hospital for 31 units.
LifePoint
On September 29, 2017 the
Company executed a P&S Pilot Agreement with Jackson Purchase Medical Center located in Mayfield, Kentucky. This is our first
agreement in the LifePoint Health System (‘LifePoint”). We began billing for 42 units in January 2018 and finalized
a P&S Agreement with LifePoint in April 2018. We signed a P&S Agreement with Logan Regional Medical Center located in Logan,
West Virginia in July 2018 for 40 units and will begin billing during the 4
th
Quarter of 2018.
Kootenai Health
On October 3, 2017, the
Company executed a three-year P&S Agreement with Kootenai Health (“Kootenai”) located in Coeur d’ Alene,
Idaho. The agreement calls for the installation of 48 units. Kootenai provides a comprehensive range of medical services to patients
in north Idaho, eastern Washington, Montana and the Inland Northwest at several facility locations. We began billing Kootenai in
February 2018. Following positive results, we anticipate future growth in the Kootenai system.
Hays Medical Center
On November 10, 2017, the
Company executed a P&S Agreement with Hays Medical Center located in Hays, Kansas. The agreement calls for the installation
of 53 units. The Hays Medical Center was founded in 1942 and is part of the University of Kansas Health System.
Franciscan Missionaries of Our Lady Health
System
In November 2017, we executed
a 6-month P&S Pilot Agreement with Franciscan Missionaries of Our Lady Health System’s (“FMOL”) Our Lady
of the Lake Regional Medical Center for 139 units and in July 2018, we moved into a P&S Agreement and added an additional 100
units. We anticipate future growth in the FMOL which consists of six hospitals and 1,735 staffed beds.
Texas Health Resources
On December 13, 2017, we
executed a Master Agreement with Texas Health Resources (“THR”) and a 6-month P&S Pilot Agreement with Texas Health
Presbyterian Hospital Dallas for 53 units. Following positive results, we anticipate future growth in the THR system which consists
of 14 hospitals and 2,853 staffed beds.
Strategic Expansion into Nursing Homes, Skilled Nursing and Assisted
Living Center Markets
We always intended to expand
into the skilled nursing and assisted living center markets. With the adoption of our technology, the traction of our products
in the healthcare facility space and the combined interest from new and existing customers, our management believes that it is
time to pursue this market.
The skilled nursing home
market consists of approximately 2,000,000 beds, which is double the size of the current hospital/healthcare facility bed market.
The assisted living center market is even larger at approximately 3,000,000 beds. Our products flow naturally into the nursing
home space as it is substantially the same setting as hospital rooms. To service this intended expansion, we have hired sales staff
to pursue new business in these markets and we anticipate that we will sign new contracts in these markets before the end of the
year.
Strategic Expansion With New Sensor Product
In the 2nd quarter of 2018,
the Company introduced a new sensor product that will have application in both the residential assisted living center market and
the home health market. The Company has developed a sensor product, called CareView Connect – Quality of Life System
TM
that leverages both passive and active sensors to track the activities of daily life of its subscribers.
CareView’s Quality
of Life System provides peace of mind by using data from the resident’s activity, existing conditions, and environment to
notify your staff or loved ones of potential emergencies and identify the need for dignified support. CareView’s Quality
of Life System consists of a small emergency assist button, up to four motion sensors, one bed sensor, and one toilet sensor. Resident
activity levels, medication administration, sleep patterns, and toileting can all be monitored depending on which options are selected.
The Company anticipates
marketing this new product to the residents of its Independent Living and Assisted Living Center customers as well as direct sales
to home health customers.
Life Care Services, LLC
In June 2018 the Company
executed a Pilot Services Agreement (“PSA”) with LCS-Westminster, a life plan community in Austin, Texas. Westminster
is managed by Life Care Services LLC, (“LCS”) the nation’s third largest developer and manager of over 130 senior
living communities nationwide. The PSA has proven to be a success. The Company anticipates executing a Group Purchasing Organization
(GPO) contract with LCS’s internal GPO during the 4
th
Quarter of 2018
CHRISTUS St. Joseph Village
In July 2018, the Company
executed a PSA with CHRISTUS St. Joseph Village, a life plan community in Coppell, Texas. St. Joseph Village is owned by CHRISTUS
Health. The PSA has proven to be a success and the Company anticipates expanding its presence in other CHRISTUS Health locations.
Pandion GPO
On October 1, 2018, the
Company executed a Group Purchasing Agreement with Pandion Optimization Alliance a Group Purchasing Organization (GPO) and Supply
Chain Management Company (“Pandion”). Pandion is an owner of Premier, Inc., one of the nation’s largest GPOs
with more than $56 billion in purchasing volume from 2,900 US community hospitals and 100,000+ member organizations.
HealthTrust GPO
On October 1, 2018, the
Company executed an amendment to its HealthTrust GPO Agreement to add CareView Connect to the GPO Agreement. Thereafter, the Company
will be able to begin to market and sell CareView Connect to the approximately 300 LTC facilities who are members of the HealthTrust
GPO.
Events Occurring During Third Quarter
2018
None
Summary of Product and Service Usage
The following table shows
the number of healthcare facilities using our products and services including the number of deployed units, installed units and
billable units as of October 31, 2018. The table also shows the number of pilot programs in place and hospital proposals pending
approval, estimated bed count if the pilot programs and pending proposals result in executed contracts, and the estimated total
number of licensed beds available under the pilot programs and hospital proposals. There are no assurances that the pilot programs
will be extended or the pending proposals will be approved to ultimately result in the number of estimated beds. Further, there
are no assurances that we will have access to the total number of licensed beds in each healthcare facility.
Installed Hospitals
|
Installed Units
|
Billable Units
|
Total Staffed Beds in Contracted/ Pilot Hospitals
|
Potential Units Available Under Current Contract/ Pilot Contracts
(*)
|
Units in Negotiation Prior to Contract/ Pilot
|
125
|
10,303
|
7,991
|
154,115
|
57,508
|
55,710
|
(*)
|
|
This number represents management’s best estimate of the number of units available
to us in hospitals that are currently under contract. We assume that in any given acute care facility, our products and services
are appropriate for deployment in approximately 70% of the total staffed beds. If we have specific information from a current
contracted or pilot hospital that the number of potential units in that hospital is either higher or lower than 70%, specific
number has been used in the aggregate estimate.
|
Results of Operations
Three months ended September 30, 2018 compared to three months
ended September 30, 2017
|
|
Three months ended
September 30,
|
|
|
|
|
2018
|
|
2017
|
|
Change
|
|
|
|
(000’s)
|
|
Revenue
|
|
$
|
1,512
|
|
|
$
|
1,565
|
|
|
$
|
(53
|
)
|
Operating expenses
|
|
|
2,295
|
|
|
|
3,305
|
|
|
|
1,010
|
|
Operating loss
|
|
|
(783
|
)
|
|
|
(1,740
|
)
|
|
|
957
|
|
Other, net
|
|
|
(2,431
|
)
|
|
|
(3,384
|
)
|
|
|
953
|
|
Net loss
|
|
$
|
(3,214
|
)
|
|
$
|
(5,124
|
)
|
|
$
|
1,910
|
|
Revenue
Revenue decreased approximately
$53,000 for the three months ended September 30, 2018 as compared to the same period in 2017. Although hospitals with billable
units increased from 98 on September 30, 2017 to 102 on September 30, 2018, revenue decreased as a result of pricing contracts
procured through our HealthTrust GPO Agreement Of the 102 hospitals with billable units on September 30, 2018, two hospital groups
accounted for 26% of the total. Billable units (RCPs and Nurse Stations) for all hospitals totaled 7,978 (7,459 and 519, respectively)
on September 30, 2018 as compared to 8,078 (7,543 and 535, respectively) on September 30, 2017.
Operating Expenses
Our principal operating
costs include the following items as a percentage of total operating expense.
|
|
Three Months Ended
September 30,
|
|
|
2018
|
|
2017
|
Human resource costs, including non-cash compensation
|
|
|
51
|
%
|
|
|
53
|
%
|
Professional and consulting costs
|
|
|
11
|
%
|
|
|
6
|
%
|
Depreciation and amortization
|
|
|
13
|
%
|
|
|
15
|
%
|
Oher product deployment costs
|
|
|
6
|
%
|
|
|
8
|
%
|
Travel and entertainment expense
|
|
|
5
|
%
|
|
|
7
|
%
|
Other expenses
|
|
|
14
|
%
|
|
|
11
|
%
|
Operating expenses decreased by 31% as a result of the following
items:
|
|
|
(000’s)
|
|
Human resource costs, including benefits
|
|
$
|
(581
|
)
|
Depreciation and amortization
|
|
|
(174
|
)
|
Other product deployment costs, excluding human resources and
|
|
|
|
|
travel and entertainment expense
|
|
|
(125
|
)
|
Travel and entertainment expense
|
|
|
(104
|
)
|
Other expenses
|
|
|
(95
|
)
|
Professional and consulting costs
|
|
|
69
|
|
|
|
$
|
(1,010
|
)
|
Human resource
related costs (including salaries and benefits) decreased primarily as a result of a significant reduction in head count
during the three months ended September 30, 2018 compared to the same period in 2017. We had 54 employees at September 30,
2018 as compared to 83 for the comparable date for the prior year. Other product development costs and travel and
entertainment expense both decreased approximately $125,000 and $104,000, respectively as a result of a reduction in product
installations during the three-month period ended September 30, 2018 compared to the same period in 2017. For the comparable
periods other expenses decreased approximately $95,000, as a result of reductions in sales and marketing and research and
development costs. For the comparable periods professional and consulting costs increased approximately $69,000 as a result
of legal expense related to changes to the PDL BioPharma, Inc. Credit Agreement and the HealthCor Partners Fund, LP and
HealthCor Hybrid Offshore Master Fund, LP (“HealthCor”) Note and Warrant Purchase Agreement (the “HealthCor
Purchase Agreement”) (discussed in NOTES 9 and 10, respectively, in the Notes to Condensed Consolidated Financial
Statements included herewith).
Other, net
Other non-operating income
and expense decreased by $953,000, or 28%, for the three months ended September 30, 2018 in comparison to the same period in 2017,
primarily a result of reductions in interest expense related to the HealthCor Purchase Agreement.
Net Loss
As a result of the factors
above, our third quarter 2018 net loss of approximately $3,214,000 decreased $1,910,000, or 37%, from approximately $5,124,000
for the third quarter of 2017.
Nine months ended September 30, 2018 compared to Nine months
ended September 30, 2017
|
|
Nine months ended
September 30,
|
|
|
|
|
2018
|
|
2017
|
|
Change
|
|
|
|
(000’s)
|
|
Revenue
|
|
$
|
4,603
|
|
|
$
|
4,666
|
|
|
$
|
(63
|
)
|
Operating expenses
|
|
|
7,473
|
|
|
|
9,775
|
|
|
|
2,302
|
|
Operating loss
|
|
|
(2,870
|
)
|
|
|
(5,109
|
)
|
|
|
(2,239
|
)
|
Other, net
|
|
|
(9,687
|
)
|
|
|
(9,868
|
)
|
|
|
(181
|
)
|
Net loss
|
|
$
|
(12,557
|
)
|
|
$
|
(14,977
|
)
|
|
$
|
(2,420
|
)
|
Revenue
Revenue decreased approximately
$63,000 for the nine months ended September 30, 2018 as compared to the same period in 2017. As discussed in the three months ending
September 30, 2018 presentation above, revenue decreased as a result of pricing contracts procured through our HealthTrust GPO
Agreement.
Operating Expenses
Our principal operating
costs include the following items as a percentage of total operating expense.
|
|
Nine Months Ended
September 30,
|
|
|
2018
|
|
2017
|
Human resource costs, including non-cash compensation
|
|
|
53
|
%
|
|
|
51
|
%
|
Professional and consulting costs
|
|
|
9
|
%
|
|
|
7
|
%
|
Depreciation and amortization
|
|
|
14
|
%
|
|
|
14
|
%
|
Oher product deployment costs
|
|
|
6
|
%
|
|
|
7
|
%
|
Travel and entertainment expense
|
|
|
6
|
%
|
|
|
8
|
%
|
Other expenses
|
|
|
12
|
%
|
|
|
13
|
%
|
Operating expenses decreased by 24% as a result of the following
items:
|
|
|
(000’s)
|
|
Human resource costs, including benefits
|
|
$
|
(1,018
|
)
|
Travel and entertainment expense
|
|
|
(391
|
)
|
Depreciation and amortization
|
|
|
(377
|
)
|
Other expenses
|
|
|
(323
|
)
|
Other product deployment costs, excluding human resources and
|
|
|
|
|
travel and entertainment expense
|
|
|
(213
|
)
|
Professional and consulting costs
|
|
|
20
|
|
|
|
$
|
(2,302
|
)
|
As discussed in the three
months ending September 30, 2018 presentation above, the change in human resource costs is related to our decrease in personnel
Travel and entertainment expense and other product deployment costs decreased approximately $391,000 and $213,000, respectively,
as a result of a reduction in product installations during the nine-month period ended September 30, 2018 compared to the same
period in 2017. For the comparable period, other expenses decreased approximately $323,000, primarily a result of the lease drafting
error impacting 2017 costs and the reversal of prior periods reserve for sales tax (approximately $59,000). Professional and consulting
fees increase slightly as a result of increased legal fees partially offset by decrease in other professional fees.
Other, net
Other non-operating income
and expense decreased by approximately $429,000, or 4%, for the nine months ended September 30, 2018 in comparison to the same
period in 2017, primarily a result of reductions in interest expense related to the HealthCor Purchase Agreement.
Net Loss
As a result of the factors
above, our net loss of approximately $12,557,000 for the nine months ended September 30, 2018 decreased approximately $2,420,000,
or 16%, as compared to approximately $14,977,000 for the nine months ended September 30, 2017.
Liquidity and Capital Resources
Our cash position at September
30, 2018 was approximately $646,000. We also have $1,825,000 recorded as restricted cash related to a debt covenant in our credit
agreement with PDL BioPharma, Inc.
HealthCor Partners Fund, LP and HealthCor
Hybrid Offshore Master Fund, LP
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
10
for further details), and we are in compliance with the minimum cash balance as of the date of this filing.
On February 23, 2018,
we entered into the Eighth Amendment to the HealthCor Purchase Agreement (the “Eighth Amendment”) with HealthCor and
certain investors ( the “February 2018 Investors”) and agreed to sell and issue (i) additional notes in the initial
aggregate principal amount of $2,050,000,with a conversion price per share of $0.05 (subject to adjustment as described therein)
(the “Eighth Amendment Notes”) and (ii) additional Warrants for an aggregate of up to 512,500 shares of our Common
Stock at an exercise price per share of $0.05 (subject to adjustment as described therein) (the “Eighth Amendment Warrants”).
As provided by the Eighth Amendment, the Eighth 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 Eighth Amendment Notes have a maturity
date of February 22, 2028. 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 February 2018 Investors are composed of all but one of our current directors, one of our officers and an entity.
On July 10, 2018, we entered
into the Ninth Amendment to the HealthCor Purchase Agreement (the “Ninth Amendment”) with HealthCor, the 2015 Investors
and the February 2018 Investors, pursuant to which the parties agreed to amend the HealthCor Purchase Agreement, the 2011 HealthCor
Notes, the 2012 HealthCor Notes, the 2014 HealthCor Notes, the Fifth Amendment Notes and the Eighth Amendment Notes, as applicable,
to (i) remove the rights of the holders of the 2011 HealthCor Notes and the 2012 HealthCor Notes to convert such notes to Common
Stock after September 30, 2018; (ii) suspend the accrual of interest on the 2011 HealthCor Notes and the 2012 HealthCor Notes for
periods after September 30, 2018; (iii) provide for the potential earlier repayment of the 2011 HealthCor Notes and the 2012 HealthCor
Notes by the Company, 120 calendar days following a written demand for payment by the holder of such notes; provided, however,
that such written demand may not be given prior to the twelve-month anniversary of the date on which the obligations of the Company
under the PDL Credit Agreement are repaid in full; (iv) cancel the 2011 HealthCor Warrants; (v) provide for the seniority of the
2011 HealthCor Notes and the 2012 HealthCor Notes in right of payment over notes subsequently issued pursuant to the Purchase Agreement,
including the 2014 HealthCor Notes, the Fifth Amendment Notes and the Eighth Amendment Notes; (vi) amend the terms of the 2014
HealthCor Notes, the Fifth Amendment Notes and the Eighth Amendment Notes to reflect the seniority in payment of the 2011 HealthCor
Notes and 2012 HealthCor Notes; and (vii) reduce the number of shares of Common Stock that the Company must at all times have authorized
and reserved for the purpose of issuance upon conversion of the notes issued pursuant to the HealthCor Purchase Agreement (collectively,
the “Notes”) and exercise of the warrants issued pursuant to the HealthCor Purchase Agreement (collectively, the “Warrants”),
from at least 120% of the aggregate number of shares of Common Stock then issuable upon full conversion of the Notes and exercise
of the Warrants to at least 100% of such aggregate number of shares. In addition, on July 10, 2018, along with PDL, HealthCor,
the 2015 Investors and the February 2018 Investors, we entered into a Second Amendment to the Subordination and Intercreditor Agreement,
to amend the Subordination and Intercreditor Agreement dated as of June 26, 2015, as amended to provide that, in the event of a
sale of the Company’s hospital assets, after the net proceeds are first applied to repay obligations under the PDL Credit
Agreement, as amended, until paid in full, up to the next $5,000,000 of such net proceeds may be retained by the Company for working
capital purposes before all remaining net proceeds are then applied to repay the obligations under the Notes in accordance with
the priorities set forth in the HealthCor Purchase Agreement and the Notes.
On July 13, 2018, we entered
into the Tenth Amendment to the HealthCor Purchase Agreement with HealthCor and certain investors (all of which are directors of
the Company) (the “July 2018 Investors”), pursuant to which we sold and issued convertible secured promissory notes
for an aggregate of $1,000,000 to the July 2018 Investors with a conversion price per share equal to $0.05 and a maturity date
of July 12, 2028.
PDL BioPharma, Inc.
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, as amended, 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
the Lender was recorded as deferred closing costs and all third-party payments were considered an expense and recorded as such
on the accompanying condensed consolidated financial statements. Details of the PDL Modification Agreement are included in our
Form 10-K filed with the SEC on March 30, 2018.
On May 31, 2018, the Company
and PDL Investment entered into an amendment to the PDL Modification Agreement (the “PDL Modification Agreement Amendment”),
pursuant to which the parties agreed to amend the PDL Modification Agreement to provide that the dates on which the Lender may
elect, in the Lender’s sole discretion, to terminate the Modification Period would be July 31, 2018 and September 30, 2018
(with each such date permitted to be extended by the Lender in its sole discretion); and that the Company could satisfy its obligations
under the PDL Modification Agreement, as amended to obtain financing by obtaining (i) at least $2,050,000 in net cash proceeds
from the issuance of Capital Stock (other than Disqualified Capital Stock) or Debt on or prior to February 23, 2018 and (ii) an
additional (A) $750,000 in net cash proceeds from the issuance of Capital Stock (other than Disqualified Capital Stock) or Debt
on or prior to June 15, 2018 and (B) $750,000 in net cash proceeds from the issuance of Capital Stock (other than Disqualified
Capital Stock) or Debt on or prior to August 31, 2018 (resulting in aggregate net cash proceeds of at least $3,550,000).
On June 14, 2018, the Company
and PDL Investment entered into a second amendment to PDL Modification Agreement (the “Second PDL Modification Agreement
Amendment”), pursuant to which the parties agreed to further amend the PDL Modification Agreement to provide that the Company
could satisfy its obligations under the PDL Modification Agreement, as amended, to obtain financing by obtaining (i) at least $2,050,000
in net cash proceeds from the issuance of Capital Stock (other than Disqualified Capital Stock) or Debt on or prior to February
23, 2018 and (ii) an additional (A) $750,000 in net cash proceeds from the issuance of Capital Stock (other than Disqualified Capital
Stock) or Debt on or prior to July 3, 2018 (rather than June 15, 2018) and (B) $750,000 in net cash proceeds from the issuance
of Capital Stock (other than Disqualified Capital Stock) or Debt on or prior to August 31, 2018 (resulting in aggregate net cash
proceeds of at least $3,550,000).
On June 28, 2018, the Company,
and PDL Investment entered into a third amendment to Modification Agreement (the “Third PDL Modification Agreement Amendment”),
pursuant to which the parties agreed to further amend the PDL Modification Agreement to provide that the Company could satisfy
its obligations under the PDL Modification Agreement, as amended, to obtain financing by obtaining (i) at least $2,050,000 in net
cash proceeds from the issuance of Capital Stock (other than Disqualified Capital Stock) or Debt on or prior to February 23, 2018
and (ii) an additional (A) $750,000 in net cash proceeds from the issuance of Capital Stock (other than Disqualified Capital Stock)
or Debt on or prior to July 13, 2018 (rather than July 3, 2018) and (B) $750,000 in net cash proceeds from the issuance of Capital
Stock (other than Disqualified Capital Stock) or Debt on or prior to August 31, 2018 (resulting in aggregate net cash proceeds
of at least $3,550,000).
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 PDL Modification Agreement, as amended, 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 30, 2018 have been delayed and are included in the payment due on December 31, 2018. Quarterly payments under the
PDL Credit Agreement, as amended, subsequent to the PDL Modification Agreement, as amended, will be due as detailed in the PDL
Credit Agreement, as amended. We may elect to prepay the Loans at any time without any premium or penalty, subject to certain conditions.
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 this Form 10-Q (“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
November 14, 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. 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. There can be no assurances, however, that additional funding will be available on terms acceptable
to us, if at all.
Off-Balance Sheet Arrangements
As of September 30, 2018,
we had no material off-balance sheet arrangements.
In the ordinary course
of business, we enter into agreements with third parties that include indemnification provisions which, in our judgment, are normal
and customary for companies in our industry sector. These agreements are typically with business partners, clinical sites, and
suppliers. Pursuant to these agreements, we generally agree to indemnify, hold harmless, and reimburse indemnified parties for
losses suffered or incurred by the indemnified parties with respect to our product candidates, use of such product candidates,
or other actions taken or omitted by us. The maximum potential amount of future payments we could be required to make under these
indemnification provisions is unlimited. We have not incurred material costs to defend lawsuits or settle claims related to these
indemnification provisions. As a result, the estimated fair value of liabilities relating to these provisions is minimal. Accordingly,
we have no liabilities recorded for these provisions as of September 30, 2018.
In the normal course of
business, we may be confronted with issues or events that may result in a contingent liability. These generally relate to lawsuits,
claims, environmental actions or the actions of various regulatory agencies. We consult with counsel and other appropriate experts
to assess the claim. If, in our opinion, we have incurred a probable loss as set forth by accounting principles generally accepted
in the U.S., an estimate is made of the loss and the appropriate accounting entries are reflected in our financial statements.
After consultation with legal counsel, we do not anticipate that liabilities arising out of currently threatened lawsuits and claims,
if any, will have a material adverse effect on our financial position, results of operations or cash flows.
Critical Accounting Estimates
Please refer to our Annual
Report on Form 10-K for the year ended December 31, 2017 filed with the Commission on March 30, 2018 and incorporated herein by
reference, for detailed explanations of our critical accounting estimates, which have not changed significantly during the three
months ended September 30, 2018.
New Accounting Pronouncements
Aside
from the change noted in
Revenue Recognition
as summarized in
NOTE 1
of the accompanying financial statements, there
have been no material changes to our significant accounting policies as summarized in
NOTE 2
of our Annual Report on Form
10-K for the year ended December 31, 2017. We do not expect that the adoption of any recent accounting pronouncements will have
a material impact on our accompanying condensed consolidated financial statements.
Recent Events
None.