The accompanying footnotes are an integral part of these condensed consolidated financial statements.
The accompanying footnotes are an integral part of these condensed consolidated financial statements.
The accompanying footnotes are an integral part of these condensed consolidated financial statements.
NOTE 1 – BASIS OF PRESENTATION AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Interim Financial Statements
The accompanying unaudited interim condensed consolidated financial statements of CareView Communications, Inc. (“CareView” or the “Company”) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles (“GAAP”) for complete financial statements. In the opinion of management, such financial statements include all adjustments (consisting solely of normal recurring adjustments) necessary for the fair statement of the financial information included herein in accordance with GAAP and the rules and regulations of the Securities and Exchange Commission (the “SEC”). The balance sheet at December 31, 2012 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. Results of operations for interim periods are not necessarily indicative of results for the full year. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2012.
Significant Accounting Policy
Common Stock Subscribed
The Company sells Common Stock in order to provide additional capitalization for operations as needed. For the consideration received, the Company records the value for shares sold but not yet issued as Common Stock Subscribed.
Recently Issued and Newly Adopted Accounting Pronouncements
Adoption of New Accounting Standards
There have been no material changes to the Company’s significant accounting policies as summarized in Note 2 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. The Company does not expect that the adoption of any recent accounting pronouncements will have a material impact on its condensed consolidated financial statements.
NOTE 2 – LIQUIDITY AND MANAGEMENT’S PLAN
Our cash position at March 31, 2013 was approximately $7.6 million. We are required to maintain a minimum cash balance $5 million pursuant to existing loan documents (see NOTE 14 – AGREEMENT WITH HEALTHCOR and NOTE 15 – LOAN AND SECURITY AGREEMENT WITH COMERICA BANK AND BRIDGE BANK). Falling below that balance triggers an immediate default with Comerica Bank and Bridge Bank. In view of these facts, the continued successful operation of the Company is dependent upon us achieving positive cash flow through operations while maintaining adequate liquidity, however we may be required to obtain additional financing. In order to support current and future operations, on March 1, 2013, we entered into a three-month exclusive placement agent agreement with Ladenburg Thalman for the purpose of selling shares of our Common Stock in a private placement.
CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – LIQUIDITY AND MANAGEMENT’S PLAN (continued)
We closed a private offering on April 1, 2013 through which we sold an (i) an aggregate of 6,220,000 shares of Common Stock for $0.495 per share and (ii) an aggregate of 2,500,000 shares under common stock purchase warrants for $0.01 per share for an aggregate purchase price, net of expenses of $2,856,400. The proceeds from this private offering, as well as the Company’s existing cash flow from billable contracts, is expected to enable the Company to continue to operate for the next twelve month period. With that and the combination of our aggressive sales and marketing plan to attract new business and our ongoing deployment and installation of units under existing hospital agreements, we believe we will meet our cash needs during 2013, will provide positive cash flow in the future, and will achieve future operating profitability. As more fully described in NOTE 15 – LOAN AND SECURITY AGREEMENT WITH COMERICA BANK AND BRIDGE BANK, we have an additional financial resource with the Comerica/Bridge Bank revolving credit line. At present, we have sufficient inventory to install and service a select number of large customers, but eventually we will need to address additional capital needs through the revolving credit line where we can borrow up to an additional $19.4 million by using eligible signed customer contracts as collateral toward the amount borrowed. The revolving credit line expires in June 2014 unless mutually extended.
The Company believes it will achieve operating profitability; however, due to conditions and influences out of the Company’s control including the current state of the national economy, the Company cannot guarantee that profitability will be achieved or that it will be achieved in the stated time frame, nor is there any assurance that such an operating level can ever be achieved.
NOTE 3 – STOCKHOLDERS’ EQUITY
Private Placement
On March 1, 2013, the Company entered into a three-month exclusive placement agent agreement with Ladenburg Thalman for the purpose of selling shares of our Common Stock in a private placement. On March 27, 2013, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with multiple investors relating to the issuance and sale of the Company’s Common Stock in a private offering. On April 1, 2013, the closing date of the Purchase Agreement, the Company sold (i) an aggregate of 6,220,000 shares of common stock for $0.495 per share and (ii) an aggregate of 2,500,000 shares under common stock purchase warrants for $0.01 per share (the “Warrants”) for an aggregate purchase price of approximately $3.1 million, of which $2,650,000 was received on March 29, 2013, and was recorded as common stock subscribed on the accompanying condensed consolidated financial statements. The five-year Warrants vest immediately upon issuance, have an exercise price of $0.60 per share and contain provisions for a cashless exercise.
Warrants to Purchase Common Stock of the Company
The Company uses the Black-Scholes-Merton option pricing model (“Black-Scholes Model”) to determine the fair value of warrants to purchase Common Stock of the Company (“Warrant(s)”) that it issues (except warrants issued to HealthCor Partners Fund, LP and HealthCor Hybrid Offshore Master Fund, LP (the “HealthCor Warrants”) discussed more fully later in this paragraph). The Black-Scholes Model is an acceptable model in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 718-10. 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.
CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – STOCKHOLDERS’ EQUITY (continued)
Warrants to Purchase Common Stock of the Company (continued)
The fair value of the HealthCor Warrants was computed using the Lattice Model, incorporating transaction details such as the Company’s stock price, contractual terms, maturity and risk free rates, as well as assumptions about future financings, volatility, and holder behavior. Due to the anti-dilution provisions within the embedded conversion feature and that associated with the exercise price of the HealthCor Warrants, the Company determined that the Lattice Model was the most appropriate model for valuing these instruments.
As of March 31, 2013, Warrants outstanding (excluding the HealthCor Warrants) covered an aggregate of 22,293,851 shares of the Company’s Common Stock with exercise prices ranging from $0.52 to $1.65 per share resulting in a weighted average exercise price of $0.75 per share and a weighted average contractual life of 2.6 years. As of March 31, 2013, unamortized costs associated with capitalized Warrants, excluding the HealthCor Warrants, totaled approximately $829,000.
Warrant Activity during the Three Months Ended March 31, 2013
During the three months ended March 31, 2013, the Company did not issue any Warrants; however, we amortized certain previously capitalized Warrant costs in the accompanying condensed consolidated financial statements as follows: (i) $79,449 as non-cash costs in general and administration and (ii) $133,537 as interest expense.
On January 15, 2013, the Company and the Banks entered into a Second Amendment of the Agreement in which the Banks agreed to amend the defining term for “Eligible Accounts” and add the defining term for “Verification of Accounts.” In conjunction with this amendment, amendments to the Warrants issued to the Banks were also made. This amendment affected the exercise price which was reduced from $1.40 to $1.10 per share (subject to adjustment for capital events) and the expiration date which was extended from August 8, 2018 to January 15, 2020. All other provisions of the Agreement and the Warrants remained unchanged. The Warrants were revalued as of January 15, 2013 resulting $11,429 increase in fair value which is amortized to interest expense using the effective interest method.
During the three months ended March 31, 2013, the Company recorded a $17,400 charge to non-cash costs in the accompanying condensed consolidated financial statements as a result of the following agreement effective May 7, 2012. The Company entered into a 12 month advisory services agreement (the “AS Agreement”) with an unrelated entity, wherein compensation was paid through the issuance of a five-year Warrant to purchase 240,000 shares of the Company’s Common Stock (see NOTE 11 – SERVICE AGREEMENTS for further details). Vesting of the underlying shares occurs at the rate of 20,000 shares on the monthly anniversary date of the AS Agreement as long as the AS Agreement has not been terminated. At grant date the Warrant had a fair value of $265,200 at an exercise price of $1.65 per share. Since the Warrant was issued to a non-employee which had specific vesting requirements, the Company follows ASC 505-50 which requires that the fair value of the Warrant be re-valued at each reporting period and any change in the fair value of the unvested portion of the Warrant recorded as a charge or gain to income.
Warrant Activity during the Three Months Ended March 31, 2012
During the three months ended March 31, 2012, the Company did not issue any Warrants; however, it amortized certain previously capitalized Warrant costs in the accompanying condensed consolidated financial statements as follows: (i) $13,833 as distribution/service costs in network operations, (ii) $146,616 as non-cash costs in general and administration, and (iii) $131,633 as interest expense.
CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – STOCKHOLDERS’ EQUITY (continued)
Warrants to Purchase Common Stock of the Company (continued)
On January 16, 2012 (partial exercise) and February 6, 2012 (exercised the balance), an unaffiliated entity exercised a Warrant to purchase an aggregate of 400,000 shares of the Company’s Common Stock. In order to exercise the Warrant pursuant to the cashless provisions thereof, the unaffiliated entity surrendered its right to receive 122,191 shares, resulting in an issuance to the entity of 277,809 shares of Common Stock. On January 19, 2012, two unaffiliated entities exercised Warrants to purchase an aggregate of 39,683 shares of the Company’s Common Stock at an aggregate exercise price of $20,635. On February 28, 2012, an unaffiliated entity exercised Warrants to purchase an aggregate of 450,000 shares of the Company’s Common Stock. In order to exercise the Warrants pursuant to the cashless provisions thereof, the individual surrendered its right to receive 138,143 shares, resulting in an issuance to the individual of 311,857 shares of Common Stock.
Options to Purchase Common Stock of the Company
During the three months ended March 31, 2013 and 2012, the Company did not grant any options to purchase shares of the Company’s Common Stock (“Option(s)”). During those same three month periods, resulting from the resignation or termination of employees, 16,667 and 10,000 Options, respectively were cancelled. During the three months ended March 31, 2013, 1,167 Options expired, while no Options expired during the same period in 2012. As of March 31, 2013, 9,075,643 Options remained outstanding.
A summary of the Company’s 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, 2012 | | | 9,093,977 | | | $ | 0.66 | | | | 6.6 | | | $ | 2,376,961 | |
| Granted | | | -0- | | | | -0- | | | | | | | | | |
| Exercised | | | -0- | | | | -0- | | | | | | | | | |
| Expired | | | (1,667 | ) | | $ | 1.51 | | | | | | | | | |
| Cancelled | | | (16,667 | ) | | $ | 1.08 | | | | | | | | | |
| Balance at March 31, 2013 | | | 9,075,643 | | | $ | 0.66 | | | | 6.4 | | | $ | 561,129 | |
| Vested and Exercisable at March 31, 2013 | | | 7,878,140 | | | $ | 0.59 | | | | 5.9 | | | $ | 561,129 | |
The valuation methodology used to determine the fair value of the Options issued during the year was the Black-Scholes Model, an acceptable model in accordance with ASC 718-10. The Black-Scholes Model requires the use of a number of assumptions including volatility of the stock price, the weighted average risk-free interest rate, and the weighted average expected term of the options.
CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – STOCKHOLDERS’ EQUITY (continued)
Options to Purchase Common Stock of the Company (continued)
The assumptions used in the Black-Scholes Model are set forth in the table below.
| | | Three Months Ended March 31, 2013 | | Year Ended December 31, 2012 | |
| Risk-free interest rate | | NA | | | 0.34 | % |
| Volatility | | NA | | | 101.90 | % |
| Expected life | | NA | | | 3 | |
| Dividend yield | | NA | | | 0.00 | % |
The risk-free interest rate assumption is based upon observed interest rates on zero coupon U.S. Treasury bonds whose maturity period is appropriate for the expected term of the stock option and is calculated by using the average daily historical stock prices through the day preceding the grant date.
Estimated volatility is a measure of the amount by which the Company’s stock price is expected to fluctuate each year during the expected life of the award. The Company’s estimated volatility is a blended average of the historical volatility of peer entities whose stock prices were publicly available and the Company’s historical volatility during its available trading period, and is calculated using this blended average over a period equal to the expected life of the awards. The Company uses the historical volatility of peer entities due to the lack of sufficient historical data of its stock price.
Share-based compensation expense for Options recognized in our results for the three months ended March 31, 2013 and 2012 amounted to $98,151 and $235,049, respectively and is based on awards granted, with expected forfeitures at 0%. ASC 718-10 requires forfeitures to be estimated at the time of grant and revised in subsequent periods if actual forfeitures differ from the estimates.
At March 31, 2013, total unrecognized estimated compensation expense related to non-vested Options granted prior to that date was approximately $675,041, which is expected to be recognized over a weighted-average period of 2.1 years. No tax benefit was realized due to a continued pattern of operating losses.
NOTE 4 – OTHER CURRENT ASSETS
Other current assets consist of the following:
| | | March 31, 2013 | | | December 31, 2012 | |
| Prepaid expenses | | $ | 188,192 | | | $ | 130,825 | |
| Other current assets | | | 64,143 | | | | 63,767 | |
| TOTAL OTHER CURRENT ASSETS | | $ | 252,335 | | | $ | 194,592 | |
CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – PROPERTY AND EQUIPMENT
Fixed assets consist of the following:
| | | March 31, 2013 | | | December 31, 2012 | |
| Network equipment | | $ | 10,170,480 | | | $ | 10,170,480 | |
| Vehicles | | | 132,382 | | | | 136,082 | |
| Office equipment | | | 120,642 | | | | 119,830 | |
| Furniture | | | 75,673 | | | | 75,673 | |
| Test equipment | | | 73,719 | | | | 73,719 | |
| Warehouse equipment | | | 6,866 | | | | 6,866 | |
| Leasehold improvements | | | 5,121 | | | | 5,121 | |
| | | | 10,584,883 | | | | 10,587,771 | |
| Less: accumulated depreciation | | | (3,096,639 | ) | | | (2,726,234 | ) |
| TOTAL PROPERTY AND EQUIPMENT | | $ | 7,488,244 | | | $ | 7,861,537 | |
Depreciation expense for the three months ended March 31, 2013 and 2012 was $371,700 and $412,390, respectively.
NOTE 6 – OTHER ASSETS
Intangible assets consist of the following:
| | | March 31, 2013 | |
| | | Cost | | | Accumulated Amortization | | | Net | |
| Patents and trademarks | | $ | 195,873 | | | $ | 7,109 | | | $ | 188,764 | |
| Computer software | | | 46,220 | | | | 17,114 | | | | 29,106 | |
| Software development costs | | | 2,002,933 | | | | 2,002,933 | | | | -0- | |
| Other intellectual property | | | 750,000 | | | | 750,000 | | | | -0- | |
| TOTAL INTANGIBLE ASSETS | | $ | 2,995,026 | | | $ | 2,777,156 | | | $ | 217,870 | |
| | | December 31, 2012 | |
| | | Cost | | | Accumulated Amortization | | | Net | |
| Patents and trademarks | | $ | 182,593 | | | $ | 6,525 | | | $ | 176,068 | |
| Other tangible assets | | | 46,220 | | | | 13,314 | | | | 32,906 | |
| Software development costs | | | 2,002,933 | | | | 2,002,933 | | | | -0- | |
| Other intellectual property | | | 750,000 | | | | 750,000 | | | | -0- | |
| TOTAL INTANGIBLE ASSETS | | $ | 2,981,746 | | | $ | 2,772,772 | | | $ | 208,974 | |
Amortization expense for the three months ended March 31, 2013 and 2012 was $4,384 and $139,388, respectively.
CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – OTHER ASSETS (continued)
Other assets consist of the following:
| | | March 31, 2013 | |
| | | Cost | | | Accumulated Amortization | | | Net | |
| Deferred debt issuance costs | | $ | 1,547,143 | | | $ | 879,458 | | | $ | 667,685 | |
| Deferred installation costs | | | 958,418 | | | | 310,108 | | | | 648,310 | |
| Prepaid consulting | | | 1,131,300 | | | | 1,116,814 | | | | 14,486 | |
| Deferred closing costs | | | 548,487 | | | | 296,002 | | | | 252,485 | |
| Prepaid license fee | | | 249,999 | | | | 25,955 | | | | 224,044 | |
| Security deposit | | | 83,624 | | | | -0- | | | | 83,624 | |
| TOTAL OTHER ASSETS | | $ | 4,518,971 | | | $ | 2,628,337 | | | $ | 1,890,634 | |
| | | December 31,2012 | |
| | | Cost | | | Accumulated Amortization | | | Net | |
| Deferred debt issuance costs | | $ | 1,535,714 | | | $ | 745,920 | | | $ | 789,794 | |
| Deferred installation costs | | | 799,114 | | | | 209,598 | | | | 589,516 | |
| Deferred closing costs | | | 516,050 | | | | 247,413 | | | | 268,637 | |
| Prepaid license fee | | | 233,606 | | | | 21,857 | | | | 211,749 | |
| Security deposit | | | 83,624 | | | | -0- | | | | 83,624 | |
| Prepaid consulting | | | 1,131,300 | | | | 1,054,764 | | | | 76,536 | |
| Deferred distribution/service costs | | | 166,000 | | | | 166,000 | | | | -0- | |
| TOTAL OTHER ASSETS | | $ | 4,465,409 | | | $ | 2,445,552 | | | $ | 2,019,856 | |
NOTE 7 – OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
| | | March 31, 2013 | | | December 31, 2012 | |
| Accrued taxes | | $ | 430,105 | | | $ | 360,587 | |
| Other accrued liabilities | | | 506,091 | | | | 441,941 | |
| TOTAL OTHER CURRENT LIABILITIES | | $ | 936,196 | | | $ | 802,528 | |
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. The Company does not expect to pay any significant federal or state income tax for 2013 as a result of the losses recorded during the three months ended March 31, 2013 as well as additional losses expected for the remainder of 2013 and net operating loss carry forwards from prior years. Accounting standards require the consideration of a valuation allowance for deferred tax assets if it is “more likely than not” that some component or all of the benefits of deferred tax assets will not be realized. As of March 31, 2013, the Company maintains 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.
CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 – JOINT VENTURE AGREEMENT
On November 16, 2009, the Company 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, the Company will use 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)”).
Both Rockwell and the Company own 50% of each Project LLC. CareView contributed its intellectual property rights and its hospital contract with each Project Hospital and Rockwell contributed cash to be used for the purchase of equipment for the Project LLCs. Rockwell provided $1,151,205 as the initial funding, $575,603 was provided under promissory notes (the “Project Notes”) and $575,602 was provided under an investment interest (“Rockwell’s Preferential Return”). The Company classified Rockwell’s Preferential Return as a liability since it represents an unconditional obligation by the Company and is recorded in mandatorily redeemable equity in joint venture on the accompanying condensed consolidated balance sheet. The Project Notes and Rockwell’s Preferential Returns both earn interest at the rate of ten percent (10%) and are secured by a security interest in all of the equipment in the Project Hospitals, intellectual property rights, and the Project Hospital Contract.
The Project LLCs were within the scope of the variable interest entities (VIE) subsection of the FASB ASC and we determined the Project LLCs are VIEs based on the fact that the total equity investment at risk was not sufficient to finance the entities activities without additional financial support. The Company consolidates the Project LLCs as it has the power to direct the activities and an obligation to absorb losses of the VIEs.
As additional consideration to Rockwell for providing the funding, the Company granted Rockwell 1,151,206 Warrants, and using the Black-Scholes Model valued the Warrants at $1,124,728 (the “Project Warrant”). The Project Warrant is classified as equity and is included in additional paid-in-capital on the accompanying condensed consolidated financial statements. The Company allocated the proceeds to the Project Warrant, the Project Notes and Preferential Returns based on the relative fair value. The originally recorded debt discount of $636,752 is being amortized over the life of the debt, and recorded as interest expense on the accompanying condensed consolidated financial statements. Amortization expense totaled $44,906 and $47,452 of the three month periods ended March 31, 2013 and 2012, respectively.
Hillcrest notified the Company of its desire to terminate its hospital agreement. This termination, effective January 27, 2012, resulted in the loss of monthly revenue totaling approximately $20,000, which revenue was used to make payments on its indebtedness to the Rockwell. The Company incurred de-installation costs of approximately $3,000 for removing its equipment from the hospital premises.
As of March 31, 2013, the Project LLCs’ indebtedness to Rockwell Holdings totaled approximately $963,000, including principal and interest. The Project Notes and Rockwell’s Preferential Returns are due in May 2013 (as relates to the CareView-Hillcrest, LLC) and August 2013 (as relates to the CareView-Saline, LLC).
CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – VARIABLE INTEREST ENTITIES
The Company consolidates VIEs of which it is the primary beneficiary. The liabilities recognized as a result of consolidating these VIEs do not necessarily represent additional claims on our general assets; rather, they represent claims against the specific assets of the consolidated VIEs. Conversely, assets recognized as a result of consolidating these VIEs do not represent additional assets that could be used to satisfy claims against our general assets.
The total consolidated VIE assets and liabilities reflected on our consolidated balance sheets at March 31, 2013 and December 31, 2012 are as follows:
| | | March 31, 2013 | | | December 31, 2012 | |
| Assets | | | | | | |
| Cash | | $ | 879 | | | $ | 956 | |
| Receivables | | | 5,221 | | | | 5,221 | |
| Total current assets | | | 6,100 | | | | 6,177 | |
| Property, net | | | 185,726 | | | | 189,003 | |
| Total assets | | $ | 191,826 | | | $ | 195,180 | |
| | | | | | | | | |
| Liabilities | | | | | | | | |
| Accounts payable | | $ | 107,153 | | | $ | 103,217 | |
| Notes payable, net of debt discount of $10,536 and $32,988, respectively | | | 433,038 | | | | 410,586 | |
| Mandatorily redeemable interest, net of debt discount of $10,536 and $32,988, respectively | | | 433,038 | | | | 410,586 | |
| Accrued interest | | | 76,549 | | | | 59,872 | |
| Other current liabilities | | | 42,367 | | | | 53,371 | |
| Total current liabilities | | | 1,092,145 | | | | 1,037,632 | |
| Total liabilities | | $ | 1,092,145 | | | $ | 1,037,632 | |
The financial performance of the consolidated VIEs reflected on our condensed consolidated statements of operations for the three months ended March 31, 2013 and 2012 is as follows:
| | | March 31, 2013 | | | March 31, 2012 | |
| | | | | | | |
| Revenue | | $ | 7,285 | | | $ | 34,639 | |
| Network operations expense | | | 4,231 | | | | 10,300 | |
| General and administrative expense | | | (9,136 | ) | | | 3,040 | |
| Depreciation | | | 14,505 | | | | 28,664 | |
| Total operating costs (cost recovery) | | | (9,600 | ) | | | 42,004 | |
| Operating income (loss) | | | (2,315 | ) | | | (7,365 | ) |
| Other income (expense) | | | (49,243 | ) | | | (69,495 | ) |
| Loss before taxes | | | (51,558 | ) | | | (76,860 | ) |
| Provision for taxes | | | -0- | | | | -0- | |
| Net loss | | | (51,558 | ) | | | (76,860 | ) |
| Net loss attributable to noncontrolling interest | | | (25,779 | ) | | | (38,429 | ) |
| Net loss attributable to CareView Communications, Inc. | | $ | (25,779 | ) | | $ | (38,431 | ) |
CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 – SERVICE AGREEMENTS
Advisory Services Agreement
On May 7, 2012, the Company entered into an Advisory Services Agreement with an unrelated entity (the “Advisor”) under which the Advisor will provide services related to micro-cap market research and investor relations. The Agreement is for a term of twelve months and may be terminated by either party upon thirty (30) days written notice. Compensation for the Advisor includes a retainer of $5,000 per month payable in advance. In addition, the Company issued a five-year Common Stock Purchase Warrant for the purchase of 240,000 shares of the Company’s Common Stock at an exercise price of $1.65 per share. Vesting of the underlying shares occurs at the rate of 20,000 shares on the monthly anniversary date of the Agreement so long as the Agreement has not been terminated. In the event the Agreement is terminated prior to full vesting of the underlying shares, a prorated portion of the shares will vest through the date of termination and the right to purchase the remaining underlying shares shall be canceled. The Warrant was not exercised at March 31, 2013. For the three months ended March 31, 2013 $17,400 was charged to expense and recorded as non-cash cost in general and administration in the accompanying condensed consolidated financial statements.
Consulting Agreement
On April 29, 2012, the Company entered into a Consulting Agreement with Heartland Energy Partners (“Heartland”) to represent the Company and its products to the Department of Veteran Affairs. Heartland provides business and technology solutions to government and commercial clients by helping clients effectively develop and manage programs and assets in the fields of energy and environment, information technology, infrastructure protection, and healthcare. Under the Consulting Agreement, Heartland will work with the Company to develop a strategy to raise the profile of CareView within the Department of Veteran Affairs and to raise awareness of the value that the Company’s offerings related to patient safety for veterans. A monthly fee of $10,000 is payable thereunder beginning immediately after the Company’s obtains GSA Approval and continuing for a period of twelve months thereafter unless extended by the parties. In addition, the Company was to issue to the consultant a five-year Warrant for the purchase of 1,000,000 shares of the Company’s Common Stock at an exercise price of $1.51 per share. On November 13, 2012, the Company and the consultant signed a First Addendum to amend the language regarding the Warrant issuance. As such, the consultant is entitled to earn a Warrant during each successive ninety (90) period calculated from the first business day after receipt of GSA approval (or October 4, 2012) and continuing for the twelve (12) month period designated as the term of the Consulting Agreement, resulting in the issuance of four (4) Warrants to the consultant. The maximum aggregate number of shares that the consultant is entitled to receive under the Warrants is 1,000,000 shares. Each Warrant shall be issued at the end of each ninety (90) day period, the shares thereunder shall vest immediately upon issuance and the exercise price shall be equal to the ten (10) day average closing price of the Company’s Common Stock ending on the day before the issuance of each Warrant; provided, however, in no event shall the exercise price be lower than $1.25 per share not higher than $1.50 per share. Prior to the end of each ninety (90) day period, the consultant’s performance under the Consulting Agreement shall be evaluated by the Company. Thereafter, the number of shares to be granted under the Warrant for the respective ninety (90) day period shall be determined at the discretion of the Company’s management in conjunction with its Board of Directors. In the event the Consulting Agreement is terminated prior to the completion of the term thereof, the Company shall have no obligation to issue a Warrant to consultant for the respective ninety (90) day period during which the Agreement is terminated. GSA Approval was obtained on October 4, 2012 with the first $10,000 monthly fee paid immediately thereafter. On January 2, 2013, management of the Company determined that no Warrant would be issued for the first ninety-day period ending on January 2, 2013. On April 2, 2013, management of the Company determined that no Warrant would be issued for the second ninety-day period ending on April 2, 2013.
CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 – SUBSCRIPTION AND INVESTOR RIGHTS AGREEMENT
On August 20, 2010, in an effort to resolve all past, current and future claims due pursuant to a Subscription and Investor Rights Agreement (“Subscription Agreement”) with an entity known as T2 Consulting, LLC (“T2”), and the principals of T2, namely Tommy G. Thompson (“Thompson”), Gerald L. Murphy (“Murphy”) , and Dennis Langley (“Langley”), the Company entered into a Revocation and Substitution Agreement with T2, Thompson, Murphy and Langley (the “Agreement”). In exchange for the revocation of the Subscription Agreement by T2, Thompson, Murphy and Langley, the Company agreed to issue to each of Thompson, Murphy, and Langley a five-year Common Stock Purchase Warrant (“Warrant”) to purchase 1,000,000 shares of the Company’s Common Stock at an exercise price of $1.00 per share. The Warrants were valued on the date of the grant using their five (5) year term; volatility of 94.12%; risk free rate of 1.47%; and a dividend yield of 0%. The valuation methodology used to determine the fair value of the Warrants issued was the Black-Scholes Model, and accordingly calculated a fair value of $4,080,000 and reported as contract modification expense in general and administration during the year ended December 31, 2010. The Company’s Board of Directors believes the Agreement is in the best interest of all the shareholders of the Company and has determined that it was not necessary to obtain a ‘fairness’ opinion from an independent third-party.
As additional consideration for the revocation of the Subscription Agreement, the Company executed an Agreement Regarding Gross Income Interest (the “GII Agreement”) with each of Thompson, Murphy and Langley dated August 20, 2010. The GII Agreement does not have a termination date; however it does provide that the Company has the right to acquire the GII of Thompson, Murphy and Langley from September 1, 2013 until December 31, 2015, and that Thompson, Murphy and Langley each have the right to require that their respective GII be purchased by the Company any time from September 1, 2011 until December 31, 2015. At March 31, 2013, based on actual revenue, the Company recorded a liability for the GII owner’s put of approximately $25,000 (the estimated fair value of the GII owner’s put). This liability is analyzed and updated quarterly, based on actual revenues. In an additional term in the GII Agreement with Langley, the Company agreed that an affiliate of Langley shall be granted a distribution and sales agreement for the Company’s products for government entities in the U.S. including, but not limited to, HHS, VA, DOD and state and local governments. Terms of the distribution agreement will be negotiated at a future date.
NOTE 13 – AGREEMENT WITH HMA
On March 8, 2011, the Company entered into a Master Agreement with Hospital Management Associates, Inc., a Delaware corporation (“HMA”). Terms of the Master Agreement provide for (i) HMA to use the CareView System in each of its approximately 66 hospitals across the U.S. through the execution of a separate Hospital Agreement for each location and (ii) CareView to provide the Primary Package and preferential pricing in exchange for the volume provided by HMA. On November 27, 2012, HMA notified the Company that due to a variety of budgetary concerns (i.e., Patient Protection and Affordable Care Act and other economic concerns specifically, the fiscal cliff), they wanted to reduce their number of billable units to 1,050 from 3,096, a difference of 2,046. At March 31, 2013, the Company is still billing for 1,050 units and the 2,046 subject units remained installed in HMA hospitals. The contract between HMA and CareView remains in force through December 31, 2014. The Company continues to work with HMA to explore options to return the 2,046 subject units to billable unit status. However, no assurances can be made as to the outcome of the negotiations with HMA.
Accordingly, at December 31, 2012, the Company recorded a removal allowance liability of $28,000 and also impaired $415,000 of deferred installation costs related to the change in the status of billable units, which prior to the billing change, was accounted for as Other Assets and was being amortized ratably over the life of the contract with the HMA hospital. The Company did not have an accounts receivable balance with HMA at March 31, 2013 as HMA had paid their invoice timely. Billable revenue for HMA for the three months ended as of March 31, 2013 and 2012, was approximately $157,000 and $312,000, respectively.
CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 – AGREEMENT WITH HEALTHCOR
On April 21, 2011, the Company entered into and closed a Note and Warrant Purchase Agreement (the “Purchase Agreement”) with HealthCor Partners Fund, LP and HealthCor Hybrid Offshore Master Fund, LP (the “Investors”). Pursuant to the Purchase Agreement, the Company sold Senior Secured Convertible Notes to the Investors in the principal amount of $9,316,000 and $10,684,000, respectively (collectively the “Convertible Debt”). The Notes have a maturity date of April 20, 2021. Along with the Convertible Debt, the Company issued Common Stock purchase warrants (the “HealthCor Warrants”). Due to certain anti-dilution provisions associated with both the conversion feature of the Convertible Debt and the exercise price of the HealthCor Warrants, both instruments required liability treatment on the consolidated balance sheet under ASC 815-10. The full fair value of the derivatives related to the embedded conversion feature of the Convertible Debt and the HealthCor Warrants was recorded as long-term liability in the amount of $33,461,512 at the time of issuance. This transaction resulted in a discount of $20,000,000 on the Convertible Debt and the excess of the fair value of the derivatives over the discount recorded totaling $13,461,512 was recorded as non-cash expense in other expense. The fair value of these derivative liabilities was computed using a Monte Carlo simulation embedded in the Binomial Lattice option pricing model (the “Lattice Model”). Due to the complexities provided by the anti-dilution provisions within the embedded conversion feature and that associated with the exercise price of the HealthCor Warrants, the Company determined that the Lattice Model was most appropriate for valuing these instruments. The Lattice Model relies on multiple inputs, using multiple stock price paths and incorporates several Level 1 inputs such as the Company’s stock price and risk free rates based on the U.S Treasury strip note yield curve at the valuation date. The model also took into consideration that that future financings, especially those that would invoke the anti-dilution provision, would be remote due to the Company’s liquidity at the time of issuance. The model also assumed a dilutive event would occur approximately one year from the date of issuance as the anti-dilution provision gives the greatest benefit to the note holders in the first year. Lastly, the volatility rate at the valuation dates was 55% and the overall probability of a dilutive event occurrence was assigned a 5% chance based on the Company’s liquidity at the time of issuance and valuation.
Between the date of issuance, April 21, 2011, and December 29, 2011, the Company re-measured the fair values of all of its derivative liabilities and recorded an aggregate decrease of $10,495,147 in their fair value, resulting in a net charge to other expense of $2,966,365 related to the derivative liabilities.
On December 30, 2011, the Company and the Investors entered into a Note and Warrant Amendment Agreement (“Amendment Agreement”) agreeing to (a) amend the Purchase Agreement in order to modify the Investors’ right to restrict certain equity issuances; and (b) amend the HealthCor Notes and the HealthCor Warrants, in order to eliminate certain anti-dilution provisions. The elimination of the anti-dilution provision resulted in the reclassification of approximately $23,000,000 in related long-term liabilities to stockholders’ equity.
So long as no Event of Default (defined in the Notes) has occurred and is continuing, the outstanding principal balances of the Notes accrue interest from April 21, 2011 through April 20, 2016 (the “First Five Year Note Period”), at the rate of twelve and one-half percent (12.5%) per annum (based on a 360-day year and the actual number of days elapsed in any partial year) (the “First Five Year Interest Rate”), compounding quarterly, which accrued interest shall be added to the outstanding principal balances of the Notes on the last day of each calendar quarter and shall thereafter, as part of such principal balances, accrue Interest at the First Five Year Interest Rate (and, during the Second Five Year Note Period (as defined below), at the Second Five Year Interest Rate (as defined below), compounding quarterly. All such accrued interest added to the outstanding principal balances pursuant to the immediately preceding sentence shall be payable on the same terms and subject to the same conditions set forth in the Notes.
CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 – AGREEMENT WITH HEALTHCOR (continued)
So long as no Event of Default has occurred and is continuing, the outstanding principal balances of the Notes shall accrue interest from and after the end of the First Five Year Note Period through the maturity date (the “Second Five Year Note Period”), at the rate of ten percent (10%) per annum (based on a 360-day year and the actual number of days elapsed in any partial year) (the “Second Five Year Interest Rate”). The interest accruing during the Second Five Year Note Period may be paid quarterly in arrears in cash or, at the Company’s option, such interest may be added to the outstanding principal balances of the Notes on the last day of each calendar quarter and shall thereafter, as part of such principal balances, accrue interest at the Second Five Year Interest Rate, compounding quarterly. All such accrued interest added to the outstanding principal balances pursuant to the immediately preceding sentence shall be payable on the same terms and subject to the same conditions set forth in the Notes.
From and after the date any Event of Default occurs, the First Five Year Interest Rate or the Second Five Year Interest Rate, whichever is then applicable, shall be increased by five percent (5%) per annum. The Investors have the right, upon an Event of Default, to declare due and payable any unpaid principal amount of the Notes then outstanding, plus previously accrued but unpaid interest and charges, together with the interest then scheduled to accrue (calculated at the default rate described in the immediately preceding sentence) through the end of the First Five Year Note Period or the Second Five Year Note Period, as applicable.
At any time after April 21, 2011, the Investors are entitled to convert any portion of the outstanding and unpaid accrued interest on and principal balances of the Notes into fully paid and non-assessable shares of Common Stock at a conversion rate of $1.25 per share, subject to adjustment in accordance with anti-dilution provisions set forth in the Notes. The initial conversion rate is subject to adjustment upon the occurrence of stock splits, reverse stock splits, and similar capital events. Until the first anniversary of the issuance of the Notes, subject to certain exceptions, if the Company issues common shares at a price per share less than the conversion rate at the time, the conversion rate will be adjusted to the price at which the new shares were issued. If the Company issues shares at a price per share lower than the conversion rate following the first anniversary of the issuance of the Notes, then the conversion rate will be adjusted on a weighted average basis. This provision was removed as more fully described above. As of March 31, 2013, the underlying shares of the Company’s Common Stock related to the Convertible Debt totaled approximately 20,323,000 (after applying the Payment In Kind (“PIK”) for the period from April 21, 2011 through March 31, 2013).
In the event of a change of control of the Company occurring during either the First Five Year Note Period or the Second Five Year Note Period, the remaining interest scheduled to be paid through the end of the applicable five-year period will be accelerated and paid to the Investors in the form of an additional convertible debt instrument, with the same terms as the Notes. In such event, interest will cease to accrue on the Notes or such additional debt instruments until the end of the applicable five-year period, and the Investors will have the right, at their option, to convert or redeem the Notes and any such additional debt instruments.
Also, as provided for in the Purchase Agreement, the Company issued to the Investors Warrants (as defined therein) to purchase an aggregate of up to 5,488,456 and 6,294,403 shares, respectively, of the Company’s Common Stock at an exercise price per share equal to $1.40 per share. The initial exercise price is subject to adjustment upon the occurrence of stock splits, reverse stock splits, and similar capital events. Until the first anniversary of the issuance of the Warrants, subject to certain exceptions, if the Company issues common shares at a price per share less than the exercise price at the time, the exercise price will be adjusted to the price at which the new shares were issued. If the Company issues shares at a price per share lower than the exercise price following the first anniversary of the issuance of the Warrants, then the exercise price will be adjusted on a weighted average basis. This provision was removed as more fully described above.
CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 – AGREEMENT WITH HEALTHCOR (continued)
Contemporaneously, the Company and the Investors executed a (i) Registration Rights Agreement pursuant to which the Company agrees to provide the Investors with certain registration rights with respect to the shares of Common Stock issuable upon conversion of the Notes and/or exercise of the Warrants, (ii) a Pledge and Security Agreement and (iii) an Intellectual Property Security Agreement pursuant to which the Company and certain of its subsidiaries granted the Investors a security interest in the Company’s and such subsidiaries’ tangible and intangible assets securing the Company’s performance of its obligations under the Notes.
Pursuant to the terms of the Purchase Agreement with HealthCor, the Company’s Board of Directors shall consist of no more than seven (7) directors and its Compensation Committee and Nominating Committee (or committees serving similar functions) shall consist of no more than three (3) directors. The Investors holding at least a majority of the principal amount of the Notes outstanding, voting as a separate class, had the right to designate one (1) representative (the “Investor Designee”) to serve as a member of the Company’s Board of Directors, and as a member of the Company’s Compensation Committee, if any, and Nominating Committee, if any. The initial Investor Designee who was elected to serve as a member of the Company’s Board of Directors is Jeffrey C. Lightcap. The Company does not currently have a Nominating Committee; however, on June 27, 2011, Mr. Lightcap was named as a member of the Company’s Audit and Compensation Committees. The Investor Designee shall only be removed from the Board of Directors by written request of the Investors holding a majority of the principal amount of the Notes outstanding, unless such removal is for cause, provided that upon any resignation, removal, death or disability of the Investor Designee, the Investors holding at least a majority of the principal amount of the Notes outstanding shall be entitled to designate a replacement Investor Designee.
Second Amendment to HealthCor Note and Warrant Purchase Agreement
On January 9, 2012, the Company entered into a Binding Term Sheet with HealthCor Partners Management, L.P., on behalf of certain affiliated funds (collectively, “HCP”) regarding the issuance by the Company to HCP of a $5,000,000 Senior Convertible Note(s) (the “New Senior Convertible Note(s)”). To that end, on January 31, 2012, the Company and the Investors entered into the Second Amendment to Note and Warrant Purchase Agreement (“Second Amendment”) amending the Purchase Agreement, and issued the New Senior Convertible Notes to the Investors, each as described below.
The Second Amendment provided that, following the Issue Date, the Company was permitted to sell, on the same terms and conditions as those contained in the Purchase Agreement (as amended from time to time), up to $5,000,000 in New Senior Convertible Notes to the Investors. The Second Amendment provided that the New Senior Convertible Notes shall be included within the definition of “Notes” and “Closing Securities” under the Purchase Agreement, and any shares of Common Stock issuable upon conversion of the New Senior Convertible Notes shall be included within the definition of “Note Shares” under the Purchase Agreement.
CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 – AGREEMENT WITH HEALTHCOR (continued)
Concurrently with the execution of the Second Amendment, the Company issued and sold New Senior Secured Convertible Notes to each of HealthCor Partners and HealthCor Hybrid in the principal amounts of $2,329,000 and $2,671,000, respectively. As provided by the Second Amendment, the New Senior Convertible 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 New Senior Convertible Notes. The New Senior Convertible Notes have a maturity date ten (10) years from the date of issuance. The New Senior Convertible Notes bear interest accordingly:
| | (a) | During years 1-5, interest is payable (on a cumulative basis) by the issuance of additional convertible debt (a PIK) with the same terms as New Senior Convertible Notes, at an interest rate of 12.5%, compounded quarterly. |
| | (b) | During years 6-10, interest may be paid in cash or as a consideration on the cumulative PIK (at the Company’s option), at an annual interest rate of 10.0%, compounded quarterly. |
| | (c) | Interest shall be calculated and payable on a quarterly basis in arrears. |
| | (d) | Notwithstanding the foregoing, during the existence of an event of default, the then applicable interest rate will be increased by 5%. |
In addition, the provisions regarding 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 Company used the proceeds from the sale of the New Senior Secured Convertible Notes (i) to recruit and employ executives and sales personnel with experience in the healthcare/hospital space to establish contracts and pilot programs with hospitals, (ii) to expand its intellectual property portfolio, and (iii) for general working capital purposes.
In conjunction with the execution of the Second Amendment, the Company and its subsidiaries entered into a First Amendment to Loan and Security Agreement with Comerica Bank, as collateral agent and lender, and Bridge Bank, as lender (the “Loan Amendment”), amending the Loan and Security Agreement dated as of August 31, 2011, among the same parties (the “Loan and Security Agreement”). The Loan Amendment effected a change to the definition of “HealthCor Debt” under the Loan and Security Agreement, which is a component of “Permitted Indebtedness” under that agreement, in order to permit the issuance of the New Senior Convertible Notes. Also in connection with the Second Amendment, the Subordination Agreement between Comerica Bank and the Investors was amended to permit the sale and issue of the New Senior Convertible Notes.
At the time of the issuance of the New Senior Secured Convertible Notes to each of HealthCor Partners and HealthCor Hybrid, the underlying shares of the Company’s Common Stock totaled approximately 4,000,000. As of March 31, 2013, the underlying shares of the Company’s Common Stock related to the New Senior Convertible Notes totaled approximately 4,617,000 (after applying the Payment In Kind (“PIK”) for the period from January 31, 2012 through March 31, 2013).
CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 – AGREEMENT WITH HEALTHCOR (continued)
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 in accordance with ASC 470-20. The Company had two separate issuances of equity securities convertible into common stock that qualify under this accounting treatment, (i) the Senior Convertible Notes and (ii) the New Senior Convertible Notes. Because the Senior Convertible Notes were originally classified as a liability when issued and reclassified to equity on December 31, 2011, only the accrued interest capitalized as payment in kind since reclassification qualifies under this accounting treatment. The full amount of the New Senior Convertible Notes and all accrued payment in kind interest also qualifies for this accounting treatment. At March 31, 2013, the Company recorded a BCF of $340,090 related to the PIK. At March 31, 2012, the Company recorded a BCF of $2,082,122 based on the difference between the contractual conversion rate and the current fair value of the Company's Common Shares at original issuance date. The transaction was recorded as a charge to debt discount and the credit to additional paid in capital, with the debt discount, using the effect interest method, amortized to interest expense over the expected term of the notes (through April 2021 for the Senior Convertible Notes and through January 2022 for the New Senior Convertible Notes). The Company recorded an aggregate of $149,430 in interest expense for the three months ended March 31, 2013 related to this discount. The carrying value of the debt with HealthCor at March 31, 2013 approximates fair value as the interest rates used are those currently available to the Company and would be considered level 3 inputs under the fair value hierarchy.
NOTE 15 – LOAN AND SECURITY AGREEMENT WITH COMERICA BANK AND BRIDGE BANK
On August 31, 2011, the Company entered into and closed a Loan and Security Agreement (the “Agreement” or the “Revolving Line”) with Comerica Bank (“Comerica”) and Bridge Bank, National Association (“Bridge Bank”) (collectively the “Banks”) providing for a $20 million revolving line of credit (expiring in June 2014 unless mutually extended.). The Revolving Line will provide the Company with capital, inter alia, to purchase equipment and perform installations pursuant to newly signed contracts that the Company may execute in the future with certain healthcare providers. The borrowings under the Agreement will bear interest on the outstanding daily balance of the advances at the rate of 3.75% plus the Prime Referenced Rate, which is a rate equal to Comerica’s prime rate but no less than the sum of 30-day LIBOR rate plus 2.5% per annum. Interest shall be paid monthly in arrears on any outstanding principal amount. The interest rate was calculated to be 7.0% per annum at March 31, 2013 and 2012.
On January 15, 2013, the Company and the Banks entered into a Second Amendment of the Agreement in which the Banks agreed to amend the defining term for “Eligible Accounts” and add the defining term for “Verification of Accounts.” In conjunction with this amendment, amendments to the previously issued Warrants (detailed below) to the Banks were also made. The Warrant amendment affected the exercise price which was reduced from $1.40 to $1.10 per share (subject to adjustment for capital events) and the expiration date was extended from August 8, 2018 to January 15, 2020. All other provisions of the Agreement and the Warrants remained unchanged. On January 16, 2013, we borrowed $560,110 against the $20,000,000 Revolving Line leaving $19,439,890 available to the Company at March 31, 2013. All $19,439,890 would be available to the Company by using eligible customer contracts as collateral toward the amount borrowed.
After the payment of a $200,000 nonrefundable facility fee, to be shared equally by the Banks, the Agreement requires the Company to pay (i) a quarterly unused facility fee equal to one quarter of one percent (0.25%) per annum of the difference between the amount of the Revolving Line and the average outstanding principal balance of the Revolving Line during the applicable quarter and (ii) all reasonable expenses incurred by the Banks in connection with the Agreement, including reasonable attorneys’ fees and expenses.
CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 – LOAN AND SECURITY AGREEMENT WITH COMERICA BANK AND BRIDGE BANK (continued)
The Agreement requires CareView to maintain its primary operating accounts with Comerica and Bridge Bank on a 50:50 basis, with no less than 80% of CareView’s investment accounts with the Banks or their affiliates, unless CareView’s cash falls below $5 million, in which case it must maintain all its cash with the Banks. The Agreement also requires CareView to maintain a fixed charge coverage ratio of at least 5.01 to 1.00. The credit facility also contains certain customary affirmative covenants that include, among others, payment of taxes and other obligations, maintenance of insurance and reporting requirements, as well as customary negative covenants that limit, among other things, the Company’s ability to make dispositions and acquisitions, be acquired, incur debt or pay dividends.
The credit facility contains customary events of default including, among other things, non-payment, inaccurate representations and warranties, violation of covenants, events that constitute a material adverse effect and cross-defaults to other indebtedness. Upon an occurrence of an event of default, the Company shall pay interest on the outstanding principal balance of five percent (5%) above the otherwise applicable interest rate, and the Banks may accelerate the loan.
Pursuant to and in connection with the Agreement, the Company granted the Banks a security interest in all of its assets, including its intellectual property pursuant to an Intellectual Property Security Agreement, and pledged its ownership interests in its subsidiaries and certain joint ventures. Pursuant to and in connection with the Agreement, the Company has entered into a Subordination Agreement with its existing convertible note holders, HealthCor Partners Fund, L.P. and HealthCor Hybrid Offshore Master Fund, L.P.
Also, in connection with the Revolving Line, the Company issued Warrants to the Banks to purchase an aggregate of 1,428,572 shares of the Company’s Common Stock. The Warrants have an exercise price of $1.40 per share and expire on August 31, 2018. The fair value of the Warrants at issuance was $1,535,714, with an additional $11,429 added pursuant to the Second Amendment, and has been recorded as deferred financing costs. The deferred financing costs are amortized to interest expense over the term of the revolving line. During the three months ended March 31, 2013 and 2012, $133,538 and 131,633, respectively, was amortized to interest expense in the accompanying condensed consolidated financial statements. The Warrants have not been exercised.
NOTE 16 - SUBSEQUENT EVENTS
On April 2, 2013, the closing date of the Purchase Agreement (discussed in NOTE 3 – STOCKHOLDERS’ EQUITY), the Company sold (i) an aggregate of 6,220,000 shares of Common Stock for $0.495 per share and (ii) an aggregate of 2,500,000 shares under common stock purchase warrants for $0.01 per share (the “Warrants”) for an aggregate purchase price of approximately $3.1 million. The five-year Warrants vest immediately upon issuance, have an exercise price of $0.60 per share and contain provisions for a cashless exercise.
