NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BASIS OF PRESENTATION AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Interim Financial Statements
The accompanying unaudited interim condensed consolidated financial statements of CareView Communications, Inc. (“CareView” 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.
Recently Issued and Newly Adopted Accounting Pronouncements
Adoption of New Accounting Standards
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, 2012. We do not expect that the adoption of any recent accounting pronouncements will have a material impact on our condensed consolidated financial statements.
NOTE 2 – LIQUIDITY AND MANAGEMENT’S PLAN
Our cash position at June 30, 2013 was approximately $6.0 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 for more details). Falling below that balance triggers an immediate default with Comerica Bank and Bridge Bank. In view of these facts, our continued successful operation 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, 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) Common Stock Purchase Warrants for the purchase of an aggregate of 2,500,000 shares for $0.01 per share for an aggregate purchase price, net of expenses of $2,728,129. We expect that the proceeds from this private offering, as well as our existing and projected cash flow from billable contracts, will enable us to continue to operate for the next twelve month period. We believe that our sales and marketing plan to attract new business and our ongoing deployment and installation of units under existing hospital agreements, will meet our near-term cash need and will help us achieve future operating profitability.
CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – LIQUIDITY AND MANAGEMENT’S PLAN (Continued)
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 under which we can borrow up to $19.3 million by using eligible signed customer contracts as collateral. At June 30, 2013, approximately $36,000 of eligible contracts was available for additional borrowings on the revolving credit line. This revolving credit line expires in June 2014 unless mutually extended.
We believe that we will achieve operating profitability; however, due to conditions and influences out of our control including the current state of the national economy, we 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 (DEFICIT)
Private Placement
On March 27, 2013, we entered into a Securities Purchase Agreement (the “Purchase Agreement”) with multiple investors relating to the issuance and sale of our Common Stock in a private offering. On April 1, 2013, the closing date of the Purchase Agreement, we sold (i) an aggregate of 6,220,000 shares of our Common Stock for $0.495 per share and (ii) Common Stock Purchase Warrants for the purchase of an aggregate of 2,500,000 shares for $0.01 per share (the “Private Placement Warrants”) for an aggregate gross purchase price of approximately $3.1 million. The five-year Private Placement Warrants vest immediately upon issuance, have an exercise price of $0.60 per share and contain provisions for a cashless exercise.
Pursuant to terms in the Purchase Agreement, the 6,220,000 shares of Common Stock and the 2,500,000 shares available for purchase under Warrants, were registered in a Form S-1 Registration Statement under the Securities Act of 1933 on May 4, 2013 (“Form S-1”). On May 9, 2013, the Form S-1 was deemed effective by the SEC.
As discussed below, the Private Placement Warrants are classified as liabilities and recorded at fair value at the date of issuance. The total proceeds received from the Private Placement were allocated between the Common Stock issued and the Private Placement Warrants based on the residual method. Accordingly, $672,909 was allocated to the Private Placement Warrants and $2,475,991 was allocated to stockholders’ equity upon issuance.
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 shares of our Common Stock (“Warrant(s)”) (except warrants issued to HealthCor Partners Fund, LP and HealthCor Hybrid Offshore Master Fund, LP (the “HealthCor Warrants”) and the Private Placement 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 Stock Compensation (“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. The fair value of the HealthCor Warrants and the Private Placement Warrants were computed using the Binomial Lattice model, incorporating transaction
CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – STOCKHOLDERS’ EQUITY (DEFICIT) (Continued)
Warrants to Purchase Common Stock of the Company (continued)
details such as the price of our Common Stock, contractual terms, maturity and risk free rates, as well as assumptions about future financings, volatility, and holder behavior. Due to the round down provisions associated with the exercise price of the HealthCor Warrants and Private Placement Warrants, we determined that the Binomial Lattice model was the most appropriate model for valuing these instruments.
As of June 30, 2013, Warrants outstanding (excluding the HealthCor Warrants) covered an aggregate of 24,793,851 shares of our Common Stock with exercise prices ranging from $0.52 to $1.65 per share resulting in a weighted average exercise price of $0.73 per share and a weighted average contractual life of 2.6 years. As of June 30, 2013, unamortized costs associated with capitalized Warrants, excluding the HealthCor Warrants, totaled approximately $569,000.
Warrant Activity during the Six Months Ended June 30, 2013
During the six months ended June 30, 2013, the Company issued 2,500,000 Private Placement Warrants as discussed above. The Private Placement Warrants contain provisions that protect the holders from a decline in the issue price of our Common Stock or “downround” provisions. We have evaluated the following guidance ASC 480-10 Distinguishing Liabilities from Equity and ASC 815-40 Contracts in an Entity’s Own Equity. Based on this guidance, our management concluded these instruments are to be accounted for as liabilities instead of equity due to the down round protection feature available on the exercise price of the Warrants. We recognized these Warrants as liabilities at their fair value and will re-measure them at fair value on each reporting date. ASC 820 Fair Value Measurement provides requirements for disclosure of liabilities that are measured at fair value on a recurring basis in periods subsequent to the initial recognition. Fair values for warrants are determined using the Binomial Lattice Model valuation technique. The Binomial Lattice Model valuation model provides for dynamic assumptions regarding volatility and risk-free interest rates within the total period to maturity. Accordingly, within the contractual term, we provided multiple date intervals over which multiple volatilities and risk free interest rates were used. These intervals allow the Binomial Lattice Model valuation to project outcomes along specific paths which consider volatilities and risk free rates that would be more likely in an early exercise scenario. As of April 1, 2013, the date of issuance, we recorded the Warrant liability at $672,909 in the accompanying condensed consolidated financial statements. At June 30, 2013, the Warrants were re-valued with a fair value of $668,859 with the difference of $4,050 recorded as a reduction to non-cash costs in general and administration in the accompanying condensed consolidated financial statements. We also amortized certain previously capitalized Warrant costs in the accompanying condensed consolidated financial statements as follows: (i) $76,535 as non-cash costs in general and administration and (ii) $284,694 as interest expense.
On January 15, 2013, we entered into a Second Amendment of the Agreement (“Second Amendment”) in which Comerica Bank and Bridge Bank (the “Banks”) agreed to amend the defining term for “Eligible Accounts” and add the defining term for “Verification of Accounts.” In conjunction with this Second Amendment, the Warrants issued to the Banks were amended to reduce the exercise price from $1.40 to $1.10 per share (subject to adjustment for capital events) and to extend the expiration date from August 8, 2018 to January 15, 2020. All other provisions of the Agreement and the Warrants remained unchanged. The Warrants were revalued in January and April 2013 resulting in $11,429 and $52,857 increases in fair value, respectively, both of which are amortized to interest expense using the effective interest method.
CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – STOCKHOLDERS’ EQUITY (DEFICIT) (Continued)
Warrant Activity during the Six Months Ended June 30, 2013 (continued)
During the six months ended June 30, 2013, we recorded a $23,764 charge to non-cash costs in the accompanying condensed consolidated financial statements as a result of the following agreement effective May 7, 2012. We 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 our 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 and contained specific vesting requirements, we followed ASC 505-50 Equity Based Payments to Non-Employees (“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 credit to income. Upon full vesting, and after applying ASC 505-50, the fair value of these Warrants totaled $124,720.
Warrant Activity during the Six Months Ended June 30, 2012
During the six months ended June 30, 2012, we issued warrants to certain unaffiliated parties for services, recording them in the accompanying condensed consolidated financial statements as follows: (i) on April 2, 2012, we issued a five-year Warrant to an entity to purchase 50,000 shares of our Common Stock (with a fair value of $48,200) at an exercise price of $1.52 per share, all of which was recorded as non-cash compensation and (ii) on May 31, 2012, we entered into an addendum to a two year sales consulting agreement with an entity, wherein a portion of the compensation was paid through the issuance of a five-year Warrant to purchase 50,000 shares of our Common Stock (with a fair value of $52,300) at an exercise price of $1.55 per share; $4,358 was charged to expense and recorded as non-cash compensation and $47,942 as prepaid costs in other assets. We also amortized certain previously capitalized Warrant costs in the accompanying condensed consolidated financial statements as follows: (i) $27,666 as distribution/service costs in network operations, (ii) $249,353 as non-cash compensation in general and administration, and (iii) $263,265 as interest expense.
On January 16, 2012 and February 6, 2012, an unaffiliated entity exercised a Warrant to purchase an aggregate of 400,000 shares of our 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 our Common Stock at an aggregate exercise price of $20,635. On February 28, 2012, an unaffiliated entity exercised a Warrant to purchase an aggregate of 450,000 shares of our Common Stock. In order to exercise the Warrant pursuant to the cashless provisions thereof, the unaffiliated entity surrendered its right to receive 138,143 shares, resulting in an issuance of 311,857 shares of Common Stock.
Options to Purchase Common Stock of the Company
During the six months ended June 30, 2013 and 2012, we did not grant any options to purchase shares of ours Common Stock (“Option(s)”). During the same six month periods, resulting from the resignation or termination of employees, Options for the purchase of 129,168 and 310,305 shares, respectively, were cancelled. During the six months ended June 30, 2013, Options for the purchase of 5,000 shares expired. No Options expired during the same period in 2012. As of June 30, 2013, 8,959,809 Options remained outstanding.
CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – STOCKHOLDERS’ EQUITY (DEFICIT) (Continued)
Options to Purchase Common Stock of the Company (continued)
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, 2012 | | | 9,093,977 | | | $ | 0.66 | | | | 6.6 | | | $ | 2,376,961 | |
| Granted | | | -0- | | | | -0- | | | | | | | | | |
| Exercised | | | -0- | | | | -0- | | | | | | | | | |
| Expired | | | (5,000 | ) | | $ | 1.51 | | | | | | | | | |
| Cancelled | | | (129,168 | ) | | $ | 1.06 | | | | | | | | | |
| Balance at June 30, 2013 | | | 8,959,809 | | | $ | 0.65 | | | | 6.1 | | | $ | 399,963 | |
| Vested and Exercisable at June 30, 2013 | | | 7,876,474 | | | $ | 0.59 | | | | 5.7 | | | $ | 399,963 | |
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.
The assumptions used in the Black-Scholes Model are set forth in the table below.
| | | Six Months Ended June 30,
2013 | | | Year Ended
December 31,
2012 | |
| Risk-free interest rate | | | N/A | | | | 0.34 | % |
| Volatility | | | N/A | | | | 101.90 | % |
| Expected life | | | N/A | | | | 3 | |
| Dividend yield | | | N/A | | | | 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 a blended average of the historical volatility of peer entities whose stock prices were publicly available and our historical volatility during the available trading period, and is calculated using this blended average over a period equal to the expected life of the awards. We use the historical volatility of peer entities due to the lack of sufficient historical data of our stock price.
Share-based compensation expense for Options recognized in our results for the three and six months ended June 30, 2013 ($41,416 and $139,567, respectively) and for the three and six months ended June 30, 2012 ($172,650 and $407,699, respectively) 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.
CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – STOCKHOLDERS’ EQUITY (DEFICIT) (Continued)
Options to Purchase Common Stock of the Company (continued)
At June 30, 2013, total unrecognized estimated compensation expense related to non-vested Options granted prior to that date was approximately $539,600, which is expected to be recognized over a weighted-average period of 2.0 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:
| | | June 30, 2013 | | | December 31, 2012 | |
| Prepaid expenses | | $ | 141,500 | | | $ | 130,825 | |
| Other current assets | | | 63,428 | | | | 63,767 | |
| TOTAL OTHER CURRENT ASSETS | | $ | 204,928 | | | $ | 194,592 | |
NOTE 5 – PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
| | | June 30, 2013 | | | December 31, 2012 | |
| Network equipment | | $ | 10,286,301 | | | $ | 10,170,480 | |
| Vehicles | | | 132,382 | | | | 136,082 | |
| Office equipment | | | 121,345 | | | | 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 | |
| | | | 10,701,407 | | | | 10,587,771 | |
| Less: accumulated depreciation | | | (3,485,598 | ) | | | (2,726,234 | ) |
| TOTAL PROPERTY AND EQUIPMENT | | $ | 7,215,809 | | | $ | 7,861,537 | |
Depreciation expense for the six month periods ended June 30, 2013 and 2012 was $761,561 and $807,887, respectively.
NOTE 6 – OTHER ASSETS
Intangible assets consist of the following:
| | | June 30, 2013 | |
| | | Cost | | | Accumulated
Amortization | | | Net | |
| Patents and trademarks | | $ | 203,175 | | | $ | 9,311 | | | $ | 193,864 | |
| Computer software | | | 46,220 | | | | 20,955 | | | | 25,265 | |
| Software development costs | | | 2,002,933 | | | | 2,002,933 | | | | -0- | |
| Other intellectual property | | | 750,000 | | | | 750,000 | | | | -0- | |
| TOTAL INTANGIBLE ASSETS | | $ | 3,002,328 | | | $ | 2,783,199 | | | $ | 219,129 | |
CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – OTHER ASSETS (Continued)
| | | 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 six month periods ended June 30, 2013 and 2012 was $10,427 and $282,381, respectively.
Other assets consist of the following:
| | | June 30, 2013 | |
| | | Cost | | | Accumulated
Amortization | | | Net | |
| Deferred debt issuance costs | | $ | 1,600,000 | | | $ | 1,030,614 | | | $ | 569,386 | |
| Deferred installation costs | | | 989,904 | | | | 370,221 | | | | 619,683 | |
| Prepaid consulting | | | 1,131,300 | | | | 1,131,300 | | | | -0- | |
| Deferred closing costs | | | 556,712 | | | | 348,918 | | | | 207,794 | |
| Prepaid license fee | | | 249,999 | | | | 30,054 | | | | 219.945 | |
| Security deposit | | | 83,624 | | | | -0- | | | | 83,624 | |
| TOTAL OTHER ASSETS | | $ | 4,611,539 | | | $ | 2,911,107 | | | $ | 1,700,432 | |
| | | 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 | | $ | 4,465,408 | | | $ | 2,445,552 | | | $ | 2,019,856 | |
NOTE 7 – OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
| | | June 30, 2013 | | | December 31, 2012 | |
| Accrued taxes | | $ | 391,042 | | | $ | 360,587 | |
| Other accrued liabilities | | | 482,794 | | | | 441,941 | |
| TOTAL OTHER CURRENT LIABILITIES | | $ | 873,836 | | | $ | 802,528 | |
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 2013 as a result of the losses recorded during the six months ended June 30, 2013 and the 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 June 30, 2013, 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.
NOTE 9 – JOINT VENTURE AGREEMENT
On November 16, 2009, we entered into a Master Investment Agreement (the “Rockwell Agreement”) with Rockwell Holdings I, LLC, a Wisconsin limited liability (“Rockwell”). Under the terms of the Rockwell Agreement, we 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 we and Rockwell own 50% of each Project LLC. We contributed our intellectual property rights and hospital contract with each Project Hospital and Rockwell contributed cash to be used for the purchase of equipment for the Project LLCs. Rockwell provided $1,151,205 as the initial funding, $575,603 was provided under promissory notes (the “Project Notes”) and $575,602 was provided under an investment interest (“Rockwell’s Preferential Return”). We classified Rockwell’s Preferential Return as a liability since it represents an unconditional obligation by us and is recorded in mandatorily redeemable equity in joint venture on the accompanying 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. We consolidate the Project LLCs as we have the power to direct the activities and an obligation to absorb losses of the VIEs.
As additional consideration to Rockwell for providing the funding, we 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. We allocated the proceeds to the Project Warrant, the Project Notes and Preferential Returns based on the relative fair value. The originally recorded debt discount of $636,752 is being amortized over the life of the debt, and recorded as interest expense on the accompanying condensed consolidated financial statements. Amortization expense totaled $65,976 and $95,432 of the six month periods ended June 30, 2013 and 2012, respectively.
Hillcrest notified us 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 our indebtedness to Rockwell. We incurred de-installation costs of approximately $3,000 for removing our equipment from the hospital premises.
CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 – JOINT VENTURE AGREEMENT (Continued)
As of June 30, 2013, the Project LLCs’ indebtedness to Rockwell Holdings totaled approximately $981,000, including principal and interest. The Project Notes and Rockwell’s Preferential Returns, previously due in May 2013 (as relates to the CareView-Hillcrest, LLC) and August 2013 (as relates to the CareView-Saline, LLC), have been extended to December 31, 2013.
NOTE 10 – VARIABLE INTEREST ENTITIES
We consolidate VIEs of which we are 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 condensed consolidated balance sheets at June 30, 2013 and December 31, 2012 are as follows:
| | | June 30, 2013 | | | December 31,
2012 | |
| Assets | | | | | | |
| Cash | | $ | 577 | | | $ | 956 | |
| Receivables | | | 5,041 | | | | 5,221 | |
| Total current assets | | | 5,618 | | | | 6,177 | |
| Property, net | | | 144,828 | | | | 189,003 | |
| Total assets | | $ | 150,446 | | | $ | 195,180 | |
| | | | | | | | | |
| Liabilities | | | | | | | | |
| Accounts payable | | $ | 109,583 | | | $ | 103,217 | |
| Notes payable, net of debt discount of $0 and $32,988, respectively | | | 443,574 | | | | 410,586 | |
| Mandatorily redeemable interest, net of debt discount of $0 and $32,988, respectively | | | 443,574 | | | | 410,586 | |
| Accrued interest | | | 94,170 | | | | 59,872 | |
| Other current liabilities | | | 40,935 | | | | 53,371 | |
| Total current liabilities | | | 1,131,836 | | | | 1,037,632 | |
| Total liabilities | | $ | 1,131,836 | | | $ | 1,037,632 | |
CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – VARIABLE INTEREST ENTITIES (Continued)
The financial performance of the consolidated VIEs reflected on our condensed consolidated statements of operations for the six months ended June 30, 2013 and 2012 is as follows:
| | | June 30,
2013 | | | June 30,
2012 | |
| | | | | | | |
| Revenue | | $ | 14,573 | | | $ | 49,220 | |
| Network operations expense | | | 8,462 | | | | 14,531 | |
| General and administrative expense | | | (9,101 | ) | | | 10,923 | |
| Depreciation | | | 28,631 | | | | 51,767 | |
| Total operating costs | | | 27,992 | | | | 77,221 | |
| Operating loss | | | (13,419 | ) | | | (28,001 | ) |
| Other income (expense) | | | (90,986 | ) | | | (140,065 | ) |
| Loss before taxes | | | (104,405 | ) | | | (168,066 | ) |
| Provision for taxes | | | -0- | | | | -0- | |
| Net loss | | | (104,405 | ) | | | (168,066 | ) |
| Net loss attributable to noncontrolling interest | | | (52,203 | ) | | | (84,033 | ) |
| Net loss attributable to CareView Communications, Inc. | | $ | (52,202 | ) | | $ | (84,033 | ) |
NOTE 11 – SERVICE AGREEMENTS
Advisory Services Agreement
On May 7, 2012, we 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 12 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, we issued a five-year Common Stock Purchase Warrant for the purchase of 240,000 shares of our 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 and became fully vested on May 7, 2013. No Warrants have been exercised as of June 30, 2013.
Consulting Agreement
On April 29, 2012, as amended on November 13, 2012, we entered into a Consulting Agreement with Heartland Energy Partners (“Heartland” or the “Consultant”) to represent us and our products to the Department of Veteran Affairs. On May 1, 2013, we exercised our right to terminate the Consulting Agreement effective May 31, 2013 (the “Termination Date”).
Under the terms of the Consulting Agreement, we paid the Consultant a monthly fee of $10,000, payable beginning immediately after we obtained GSA Approval on October 4, 2012 and continuing through the Termination Date. Payments to Heartland totaled $80,000. In addition, the Consultant was entitled to earn Warrants to purchase shares of our Common Stock (the “Consulting Warrants”) during each successive ninety (90) period calculated from the first business day after receipt of GSA approval and continuing for the 12 month period designated as the term of the Consulting Agreement, which would result in the issuance of four (4) Consulting Warrants (totaling a maximum of 1,000,000 shares). On January 2, 2013 and April 2, 2013, our
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 – SERVICE AGREEMENTS (Continued)
Consulting Agreement (continued)
management determined that no Consulting Warrants would be issued for the first and second ninety-day periods ending on January 2, 2013 and April 2, 2013, respectively, and with the termination of the Consulting Agreement, we have no further obligation to issue Consulting Warrants.
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”), we 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, we 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 our Common Stock at an exercise price of $1.00 per share. 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. Our Board of Directors believes the Agreement is in the best interest of all of our shareholders 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, we 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 we have 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 June 30, 2013, we recorded a liability for the GII owner’s put of approximately $27,000 (the estimated fair value of the GII owner’s put).
NOTE 13 – AGREEMENT WITH HMA
On March 8, 2011, we 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) for us to provide the Primary Package of the CareView System and preferential pricing in exchange for the volume provided by HMA. On November 27, 2012, HMA notified us 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 June 30, 2013, we are 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. We continue to work with HMA to explore options to return the 2,046 subject units to billable unit status as well as provide incremental services that HMA is not taking advantage of today. However, no assurances can be made as to the outcome of the negotiations with HMA.
We did not have an accounts receivable balance with HMA at June 30, 2013 as HMA had paid their invoice timely. Billable revenue for HMA for the six months ended as of June 30, 2013 and 2012 was approximately $314,700 and $684,000, respectively.
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NOTE 14 – AGREEMENT WITH HEALTHCOR
On April 21, 2011, we entered into 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, we sold Senior Secured Convertible Notes to the Investors 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 purchase an aggregate of up to 5,488,456 and 6,294,403 shares, respectively, of our Common Stock at an exercise price per share equal to $1.40 per share to the Investors (collectively the “HealthCor Warrants”).
On December 30, 2011, we 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 2011 HealthCor Notes and the HealthCor Warrants, in order to eliminate certain anti-dilution provisions.
So long as no event of default has occurred and is continuing, 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 (the “First Five Year Interest Rate”) and from April 21, 2016 to April 20, 2021 (the “Second Five Year Note Period”), at a rate of 10% per annum, compounding quarterly (the “Second Five Year Interest Rate”). Interest accrued during the First Five Year Note Period, shall be added to the outstanding principal balances of the 2011 HealthCor 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 at the Second Five Year Interest Rate. Interest accruing during the Second Five Year Note Period 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 and shall thereafter, as part of such principal balances, accrue interest at the Second Five Year Interest Rate.
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 2011 HealthCor Notes then outstanding, plus previously accrued but unpaid interest and charges, together with the interest then scheduled to accrue (calculated at the default rate described in the immediately preceding sentence) through the end of the First Five Year Note Period or the Second Five Year Note Period, as applicable.
At any time after April 21, 2011, the Investors are entitled to convert any portion of the outstanding and unpaid accrued interest on and principal balances of the 2011 HealthCor Notes into fully paid and non-assessable shares of our Common Stock at a conversion rate of $1.25 per share, subject to adjustment in accordance with anti-dilution provisions set forth in the 2011 HealthCor Notes. As of June 30, 2013, the underlying shares of our Common Stock related to the 2011 HealthCor Notes totaled approximately 20,957,909.
On January 9, 2012, we entered into a Binding Term Sheet with HealthCor Partners Management, L.P., on behalf of certain affiliated funds (collectively, “HCP”) regarding the issuance by us to HCP of a $5,000,000 Senior Convertible Note(s). To that end, on January 31, 2012, we entered into the Second Amendment to Note and Warrant Purchase Agreement with the Investors (the “Second Amendment”) amending the Purchase Agreement, and issued the additional Senior Convertible Notes to the Investors, each as described below.
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NOTE 14 – AGREEMENT WITH HEALTHCOR (Continued)
Concurrent with the execution of the Second Amendment, we issued and sold Senior Secured Convertible Notes to the Investors 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 31, 2022. So long as no event of default has occurred and is continuing, the outstanding principal balances of the 2012 HealthCor Notes accrue interest as follows: (i) during years 1-5, interest shall accrue at the rate of 12.5% per annum, compounding quarterly and be added to the outstanding principal balances of the 2012 HealthCor Notes on the last day of each calendar quarter and shall thereafter, as part of such principal balances, accrue interest accordingly; (ii) during years 6-10, interest shall accrue at the rate of 10.0% per annum, compounding quarterly and may be paid quarterly in arrears in cash or, at our option, such interest may be added to the outstanding principal balances of the 2012 HealthCor Notes on the last day of each calendar quarter and shall thereafter, as part of such principal balances, accrue interest accordingly; and (iii) 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.
At any time after January 31, 2012, the Investors are entitled to convert any portion of the outstanding and unpaid accrued interest on and principal balances of the 2012 HealthCor Notes into fully paid and non-assessable shares of our Common Stock at a conversion rate of $1.25 per share, subject to adjustment in accordance with anti-dilution provisions set forth in the 2012 HealthCor Notes. As of June 30, 2013, the underlying shares of our Common Stock related to the 2012 HealthCor Notes totaled approximately 4,761,400.
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. We had two separate issuances of equity securities convertible into common stock that qualify under this accounting treatment, (i) the 2011 HealthCor Notes and (ii) the 2012 HealthCor Notes. Because the 2011 HealthCor 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 (“PIK”) since reclassification qualifies under this accounting treatment. The full amount of the 2012 HealthCor Notes and all accrued payment in kind interest also qualifies for this accounting treatment. At June 30, 2013, we recorded a BCF of $690,809 related to the PIK. At June 30, 2012, we recorded a BCF of $2,392,223 based on the difference between the contractual conversion rate and the current fair value of our Common Shares at original issuance date. These amounts are based on the difference between the contractual conversion rate and the fair value of our 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 effective interest method, amortized to interest expense over the expected term of the notes (through April 2021 for the 2011 HealthCor Notes and through January 2022 for the 2012 HealthCor Notes). We recorded an aggregate of $307,515 and $196,785 in interest expense for the six months ended June 30, 2013 and June 30, 2012, respectively, related to this discount. The carrying value of the debt with HealthCor at June 30, 2013 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.
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NOTE 15 – LOAN AND SECURITY AGREEMENT WITH COMERICA BANK AND BRIDGE BANK
On August 31, 2011, we 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 us with capital, inter alia, to purchase equipment and perform installations pursuant to newly signed contracts that we 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% per annum at June 30, 2013 and 7.0% per annum at June 30, 2012.
On January 15, 2013, we entered into a Second Amendment of the Agreement with the Banks 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 and June 5, 2013, we borrowed $560,110 and $123,534, respectively, against the $20,000,000 Revolving Line. At June 30, 2013, approximately $19.3 million was available to us by using eligible customer contracts as collateral. Approximately $36,000 of eligible contracts was available for additional borrowings on the revolving credit line as of June 30, 2013.
After the payment of a $200,000 nonrefundable facility fee, to be shared equally by the Banks, the Agreement requires us 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.
The Agreement requires us to maintain our primary operating accounts with Comerica and Bridge Bank on a 50:50 basis, with no less than 80% of our investment accounts with the Banks or their affiliates, unless our cash falls below $5 million, in which case we must maintain all our cash with the Banks. The Agreement also requires us 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, our 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, we 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, we granted the Banks a security interest in all of our assets, including our intellectual property pursuant to an Intellectual Property Security Agreement, and pledged our ownership interests in our subsidiaries and certain joint ventures. Pursuant to and in connection with the Agreement, we entered into a Subordination Agreement with our existing convertible note holders, HealthCor Partners Fund, L.P. and HealthCor Hybrid Offshore Master Fund, L.P.
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NOTE 15 – LOAN AND SECURITY AGREEMENT WITH COMERICA BANK AND BRIDGE BANK (Continued)
Also, in connection with the Revolving Line, we issued Warrants to the Banks to purchase an aggregate of 1,428,572 shares of our 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 $64,286 added pursuant to the Second Amendment, which 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 and six months ended June 30, 2013, $151,156 and $284,694, respectively, and during the three and six months ended June 30, 2012, $131,632 and $263,265, respectively, was amortized to interest expense in the accompanying condensed consolidated financial statements. The Warrants have not been exercised at June 30, 2013.
