UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

☑

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2020

or

  

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from________ to ___________

 

Commission File No. 000-54090

 

CAREVIEW COMMUNICATIONS, INC.

(Exact name of registrant as specified in its charter)

 

Nevada	95-4659068
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

  

405 State Highway 121, Suite B-240, Lewisville, TX 75067

(Address of principal executive offices

 

(972) 943-6050

(Registrant’s telephone number

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Title of each class		Trading Symbol		Name of each exchange on which registered

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☑	Smaller reporting company	☑
		Emerging growth company	☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☑

 

The number of shares outstanding of each of the issuer’s classes of Common Stock as of November 23, 2020 was 139,380,748.

 

 

CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES

INDEX

				Page
PART I - FINANCIAL INFORMATION
	Item. 1	Financial Statements
		Condensed Consolidated Balance Sheets as of September 30, 2020 (Unaudited) and December 31, 2019		3
		Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2020 and 2019 (Unaudited)		4
		Condensed Consolidated Statements of Changes in Equity for the Three and Nine Months Ended September 30, 2020 and 2019 (Unaudited)		5
		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019 (Unaudited)		6
		Notes to the Condensed Consolidated Financial Statements		7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		29
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk		38
	Item 4.	Controls and Procedures		38
PART II - OTHER INFORMATION
	Item 1.	Legal Proceedings		40
	Item 1A.	Risk Factors		40
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		40
	Item 3.	Defaults Upon Senior Securities		40
	Item 4.	Mine Safety Disclosures		40
	Item 5.	Other Information		40
	Item 6.	Exhibits		40

 

 

CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

		September 30,
		2020				December 31,
		(unaudited)				2019
ASSETS
Current Assets:
Cash and cash equivalents		$	433,825			$	269,741
Accounts receivable			1,399,508				1,666,338
Inventory			404,750				—
Other current assets			391,690				220,464
Total current assets			2,629,773				2,156,543
Property and equipment, net			1,653,242				1,978,020
Other Assets:
Intangible assets, net			919,590				830,682
Operating lease asset			682,833				85,942
Other assets, net			187,413				240,700
Total other assets			1,789,836				1,157,324
Total assets		$	6,072,851			$	5,291,887
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current Liabilities:
Accounts payable		$	308,348			$	439,851
Notes payable, current portion net of debt costs of $0 and $0, respectively			20,863,786				20,563,786
Senior secured notes, current portion net of debt discount and debt costs of $1,896,299 and $0, respectively			44,070,650				—
Payroll protection program loan			483,971				—
Operating lease liability			147,166				91,363
Other current liabilities			7,364,579				4,505,505
Total current liabilities			73,238,500				25,600,505
Long-term Liabilities:
Senior secured notes, net of debt discount and debt costs of $921,931 and $5,774,915, respectively			9,721,255				50,835,220
Senior secured convertible notes, net of debt discount and debt costs of $3,837,065 and $4,320,038, respectively			23,222,782				20,599,475
Payroll protection program loan			297,829				—
Operating lease liability			587,068				—
Total long-term liabilities			33,828,934				71,434,695
Total liabilities			107,067,434				97,035,200
Commitments and Contingencies (Note 13)
Stockholders’ Deficit:
Preferred stock - par value $0.001; 20,000,000 shares authorized; no shares issued and outstanding			—				—
Common stock - par value $0.001; 500,000,000 shares authorized; 139,380,748 issued and outstanding			139,381				139,381
Additional paid in capital			84,339,286				84,244,343
Accumulated deficit			(185,473,250	)			(176,127,037	)
Total stockholders’ deficit			(100,994,583	)			(91,743,313	)
Total liabilities and stockholders’ deficit		$	6,072,851			$	5,291,887

 

The accompanying footnotes are an integral part of these condensed consolidated financial statements.

 

 

CAREVIEW COMMUNICATIONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(Unaudited)

		Three Months Ended								Nine Months Ended
		September 30, 2020				September 30, 2019				September 30, 2020				September 30, 2019
Revenues, net		$	1,566,240			$	1,621,962			$	4,956,909			$	4,641,418
Operating expenses:
Network operations			791,762				716,815				2,265,243				2,139,327
General and administration			709,510				602,926				1,994,322				1,958,692
Sales and marketing			136,278				117,161				379,203				307,269
Research and development			446,429				402,227				1,253,638				1,115,747
Depreciation and amortization			178,142				178,251				529,313				539,598
Total operating expense			2,262,121				2,017,380				6,421,720				6,060,634
Operating loss			(695,881	)			(395,418	)			(1,464,811	)			(1,419,216	)
Other income and (expense)
Interest expense			(2,657,211	)			(2,769,755	)			(7,906,024	)			(8,173,586	)
Interest income			82				118				363				329
Other expense			—				—				(2,754	)			(61,340	)
Other income			26,310				600				27,013				5,822
Total other income (expense)			(2,630,819	)			(2,769,037	)			(7,881,402	)			(8,228,775	)
Loss before taxes			(3,326,700	)			(3,164,455	)			(9,346,213	)			(9,647,991	)
Provision for income taxes			—				—				—				—
Net loss		$	(3,326,700	)		$	(3,164,455	)		$	(9,346,213	)		$	(9,647,991	)
Net loss per share		$	(0.02	)		$	(0.02	)		$	(0.07	)		$	(0.07	)
Weighted average number of common shares outstanding, basic and diluted			139,380,748				139,380,748				139,380,748				139,380,748

 

 

The accompanying footnotes are an integral part of these condensed consolidated financial statements.

 

 

CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

										Additional
		Common Stock								Paid in				Accumulated
		Shares				Amount				Capital				Deficit				Total
Balance, December 31, 2018			139,380,748			$	139,381			$	84,027,883			$	(161,986,591	)		$	(77,819,327	)
Options granted as compensation			—				—				54,613				—				54,613
Beneficial conversion features for senior secured convertible notes			—				—				6,391				—				6,391
Net loss			—				—				—				(3,075,763	)			(3,075,763	)
Balance, March 31, 2019			139,380,748				139,381				84,088,887				(165,062,354	)			(80,834,086	)
Options granted as compensation			—				—				54,320				—				54,320
Beneficial conversion features for senior secured convertible notes			—				—				14,411				—				14,411
Net loss			—				—				—				(3,407,773	)			(3,407,773	)
Balance, June 30, 2019			139,380,748				139,381				84,157,618				(168,470,127	)			(84,173,128	)
Options granted as compensation			—				—				49,933				—				49,933
Beneficial conversion features for senior secured convertible notes			—				—				—				—				—
Net loss			—				—				—				(3,101,407	)			(3,101,407	)
Balance, September 30, 2019			139,380,748			$	139,381			$	84,207,551			$	(171,571,534	)		$	(87,224,602	)
Balance, December 31, 2019			139,380,748			$	139,381			$	84,244,343			$	(176,127,037	)		$	(91,743,316	)
Options granted as compensation			—				—				17,342				—				17,342
Warrants issued			—				—				8,687								8,687
Net loss			—				—				—				(2,944,413	)			(2,944,413	)
Balance, March 31, 2020			139,380,748				139,381				84,270,372				(179,071,450	)			(94,661,697	)
Options granted as compensation			—				—				18,882				—				18,883
Net loss			—				—				—				(3,075,098	)			(3,075,098	)
Balance, June 30, 2020			139,380,748				139,381				84,289,254				(182,146,548	)			(97,717,912	)
Options granted as compensation			—				—				50,029				—				50,032
Net loss			—				—				—				(3,326,700	)			(3,326,700	)
Balance, September 30, 2020			139,380,748			$	139,381			$	84,339,283			$	(185,473,248	)		$	(100,994,583	)

 

The accompanying footnotes are an integral part of these consolidated financial statements.

 

 

CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(Unaudited)

		Nine Months Ended
		September 30, 2020				September 30, 2019
CASH FLOWS FROM OPERATING ACTIVITES
Net loss		$	(9,346,213	)		$	(9,647,991	)
Adjustments to reconcile net loss to net cash flows used in operating activities:
Depreciation			483,456				500,546
Bad debt recovery			—				(7,588	)
Amortization of debt discount			3,396,306				3,255,935
Amortization of deferred installation costs			29,102				67,360
Amortization of deferred debt issuance and debt financing costs			43,352				722,959
Amortization of intangible assets			45,857				39,052
Non-cash lease expense			84,196				110,778
Interest incurred and paid in kind			2,040,334				1,978,923
Stock based compensation related to options granted			86,257				158,866
Loss on disposal of intangible assets			2,754				—
Write off of deferred installation costs			21,886				—
Changes in operating assets and liabilities:
Accounts receivable			266,830				47,730
Inventory			(404,750	)			—
Other current assets			(171,226	)			(54,658	)
Other assets			(74,903	)			12,295
Accounts payable			(131,503	)			(159,741	)
Accrued interest			2,413,914				2,212,833
Other current liabilities			445,160				6,384
Operating lease liability			55,802				(116,118	)
Net cash flows used in operating activities			(713,390	)			(872,435	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment			(158,679	)			(114,654	)
Payment for deferred installation costs			(8,128	)			(47,472	)
Patent, trademark and other intangible asset costs			(137,519	)			(89,915	)
Net cash flows used in investing activities			(304,326	)			(252,041	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from senior secured convertible promissory notes			100,000				50,000
Proceeds from payroll protection program loan			781,800				—
Proceeds from promissory notes			500,000				200,000
Repayment of notes payable			(200,000	)			(150,000	)
Net cash flows provided by financing activities			1,181,800				100,000
Increase (Decrease) in cash			164,084				(1,024,476	)
Cash and cash equivalents, beginning of period			269,741				1,950,725
Cash and cash equivalents, end of period		$	433,825			$	926,249
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest		$	—			$	150,000
Cash paid for income taxes		$	—			$	—
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Remeasurement of operating lease		$	690,568			$	—
Beneficial conversion features for senior secured convertible notes		$	—			$	20,802

 

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”, the “Company”, “we”, “us” or “our”) have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, such financial statements include all adjustments (consisting solely of normal recurring adjustments) necessary for the fair statement of the financial information included herein in accordance with GAAP and the rules and regulations of the Securities and Exchange Commission (the “SEC”). The balance sheet at December 31, 2019 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. Results of operations for interim periods are not necessarily indicative of results for the full year. The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2019 as filed with the SEC on March 30, 2020.

 

COVID-19 Outbreak

 

In December 2019, a novel strain of coronavirus (COVID-19) was identified in Wuhan, China, and has subsequently spread to other regions of the world, and has resulted in increased travel restrictions, business disruptions and emergency quarantine measures across the world including the United States.

 

The Company has considered the effects of COVID-19 in the preparation of the financial statements as of and for the period ended September 30, 2020.   We have been able to continue providing services to our current customer base and have not experienced a slowdown in collections. However, the continued shelter-in-place orders have limited our ability to install currently contracted units as well as make sales visits to existing and potential customers and market our new Gen5 product.

 

The full impact of the COVID-19 outbreak continues to evolve. As such, it is uncertain as to the full magnitude that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations. Management is actively monitoring the global situation on its financial condition, liquidity, operations, industry, and workforce. Although the Company cannot estimate the length or gravity of the impact of the COVID-19 outbreak at this time, if the pandemic continues, it may have an adverse effect on the Company’s results of future operations, financial position, and liquidity in fiscal year 2020.

 

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act (the “Act”) was enacted. The CARES Act is an approximately $2 trillion emergency economic stimulus package in response to the Coronavirus outbreak, which among other things contains numerous income tax provisions. Some of these tax provisions are expected to be effective retroactively for years ending before the date of enactment. The Company applied for, and received, funds under the Paycheck Protection Program in the amount of $781,800. The application for these funds requires the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support operations of the Company. This certification further requires the Company to consider our current business activity and our ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. The receipt of these funds, and the forgiveness of the loan attendant to these funds, is dependent on the Company having initially qualified for the loan and qualifying for the forgiveness of such loan based on our future adherence to the forgiveness criteria.

 

As of the date of this Quarterly Report, the Company has applied for forgiveness of the Paycheck Protection Program loan and the lender has requested full forgiveness of the loan and payment from the Small Business Administration (SBA). The loan forgiveness application is currently under review by the SBA.

 

Revenue Recognition

 

We adopted Accounting Standards Codification (“ASC”) Topic 606 (“ASC 606”) on January 1, 2018 using the full retrospective transition method for recognizing revenue. The adoption of ASC 606 represents a change in accounting principle that will more closely align revenue recognition with the delivery of our services to our customers and will provide financial statement readers with enhanced disclosures. We have employed the practical expedient discussed in ASC 606-10-55-18 related to invoicing as we have the right to consideration from our customers in the amount that corresponds directly with the value to the customer of our performance completed to date and therefore we recognize revenue upon invoicing as further discussed below. Further, for those customers for which we are required to collect sales taxes, we record such sales taxes on a net basis which has no effect on the amount of revenue or expenses recognized as the sales taxes are a flow through to the taxing authority.

 

In accordance with ASC 606, revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which we expect to be entitled to receive in exchange for these goods or services. The provisions of ASC 606 include a five-step process by which we determine revenue recognition, depicting the transfer of goods or services to customers in amounts reflecting the payment to which we expect to be entitled in exchange for those goods or services. ASC 606 requires us to apply the following steps: (1) identify the contract with the customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, we satisfy the performance obligation.

 

We offer CareView’s services through a subscription-based with each healthcare facility for a standard term of three to five years and have determined we have one performance obligation for our services and hardware. Under the subscription-based contract, we begin to bill monthly subscription fees to the healthcare facility upon official acceptance of the CareView System by the healthcare facility which is when the service is initiated. When services begin, the customer simultaneously receives the use and benefit of that service and we recognize the revenue over time based on the service completed to date as the amount invoiced each month. The contract requires the healthcare facility to pay us the subscription fee monthly. During the term of the contract, we provide continuous monitoring of the CareView System and are required to maintain and service all CareView System equipment. If the healthcare facility requires additional services, the contract is amended accordingly. The Company evaluated the disaggregation criteria of ASC 606 and determine that based on the nature, amount, timing and uncertainty of our service revenues, there were no material differences that merited further disaggregation as compared to the total revenue as reported in the accompanying consolidated statements of operations. We defer and capitalize all costs associated with the installation of the CareView System into a healthcare facility until the CareView System is fully operational and accepted by the healthcare facility. Installation costs are specifically identifiable based on the amounts we incur or directly identifiable labor hours incurred for each installation. Upon acceptance, the associated costs are expensed on a straight-line basis over the life of the contract with the healthcare facility. These costs are included in network operations on the accompanying consolidated statements of operations.

 

Under our sale-based contract, the hardware, installation costs, and software license are billed to the facility upon receipt of hardware and at “Go-Live” for installation costs and software licensing. Upon Go-Live and when services begin, the customer simultaneously receives the use and benefit of that service and we recognize the revenue from the sale of hardware, installation, and software licensing over time. If the healthcare facility requires additional services or hardware, the contract is amended accordingly. The Company is currently evaluating the criteria of ASC 606 to determine how to recognize revenue for the new sales model and based on the nature, amount, timing, and uncertainty of our service revenues, if there are any material differences that merit further disaggregation.

 

 

The table below details the activity in these deferred installation costs during the nine months ended September 30, 2020 and 2019, included in other assets in the accompanying condensed consolidated balance sheet.

 

		Nine Months Ended September 30,
		2020				2019
Balance, beginning of period		$	81,188			$	134,686
Additions			8,128				47,472
Transfer to expense			(50,988	)			(67,360	)
Balance, end of period		$	38,328			$	114,798

 

From time to time, we enter into contracts with healthcare facilities wherein full payment of the contractual obligation is paid in advance (“PIA Contracts”). The transaction is recorded as a contract liability in and is included in other current liabilities in the accompanying condensed consolidated financial statements, with revenue recorded and the contract liability reduced as services are provided under the contract. Of the total transfers to revenue $154,765 was from 2019 additions and $133,391 was from 2020 additional. The table below details this activity during the nine months ended September 30, 2020 and 2019.

 

		Nine Months Ended September 30,
		2020				2019
Balance, beginning of period		$	255,398			$	58,559
Additions			422,715				175,370
Transfer to revenue			(288,156	)			(131,527	)
Balance, end of period		$	389,957			$	102,402

 

As of September 30, 2020, future transfers to revenue are as follows:

 

Years Ending December 31,			Amount
2020			$	84,494
2021				239,526
2022				66,207
			$	389,957

 

Based on our contracts, we invoice customers once our performance obligations have been satisfied, at which point payment is unconditional. Accordingly, except in the case of PIA Contracts as detailed above, our contracts do not give rise to contract assets or liabilities under ASC 606. Accounts receivable are recorded when the right to consideration becomes unconditional and are reported accordingly on our consolidated financial statements.

 

Earnings Per Share

 

We calculate earnings per share (“EPS”) in accordance with GAAP, which requires the computation and disclosure of two EPS amounts, basic and diluted. Basic EPS is computed based on the weighted average number of common shares outstanding during the period. Diluted EPS is computed based on the weighted average number of common shares outstanding plus all potentially dilutive common shares outstanding during the period under the treasury stock method. Such potential dilutive common shares consist of stock options, warrants to purchase our Common Stock (the “Warrants”) and convertible debt. Potential common shares totaling approximately 203,000,000 and 157,000,000 at September 30, 2020 and 2019, respectively, have been excluded from the diluted earnings per share calculation as they are anti-dilutive due to our reported net loss.

 

 

Recently Issued and Newly Adopted Accounting Pronouncements

 

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, 2019. We do not expect that the adoption of any recent accounting pronouncements will have a material impact on our accompanying condensed consolidated financial statements.

 

Reclassification

 

Certain amounts reported in the prior year financial statements may have been reclassified to conform to the current year presentation.

 

NOTE 2 – GOING CONCERN, LIQUIDITY AND MANAGEMENT’S PLAN

 

Our cash position on September 30, 2020 was approximately $434,000.

 

We evaluated our ability to continue as a going concern within one year subsequent to the date of the filing of this Form 10-Q (“evaluation period”). U.S. generally accepted accounting principles requires that in making this determination, the Company cannot consider any remedies that are outside the Company’s control and have not been fully implemented. As a result, the Company could not consider future potential fundraising activities. We have evaluated if cash and cash equivalents on hand and cash generated through operating activities would be sufficient to sustain projected operating activities through November 24, 2021. We anticipate that our current resources, along with cash generated from operations, will not be sufficient to meet our cash requirements throughout the evaluation period, including funding anticipated losses and scheduled debt maturities. Our PDL BioPharma, Inc. note payable will mature on November 30, 2020 (see NOTE 9 for details), our Rockwell Holdings I, LLC facility will mature on December 31, 2020 (see NOTE 11 for details), and our HealthCor Partners Fund, LP, HealthCor Hybrid Offshore Master Fund, LP note will mature on April 21, 2021 (see NOTE 10 for details), and our Tranche Three Loan, with a maturity date of October 7, 2020 (see NOTE 9 for details) . These notes have been included in current liabilities on our balance sheet, and we do not have sufficient funds to cover the amounts due upon maturity of these notes of approximately $64 million. We additionally continue to generate operating losses. Because of anticipated losses and scheduled debt maturities in the following twelve months, substantial doubt is deemed to exist about the Company’s ability to continue as a going concern through November 24, 2021.

 

NOTE 3 – STOCKHOLDERS’ EQUITY

 

On April 11, 2019, the Board of Directors of the Company approved an amendment (the “Charter Amendment”) to our Articles of Incorporation to increase the number of authorized shares of Common Stock, par value $0.001, from 300,000,000 shares to 500,000,000 shares. Subsequently, on May 14, 2019, the Charter Amendment was approved by written consent of the holders of 72,863,770 shares of our Common Stock, representing approximately 52% of our outstanding shares of Common Stock, in lieu of a special meeting. The Charter Amendment was filed with the Secretary of State of the State of Nevada on, and effective as of, June 26, 2019. Also, on April 11, 2019, the Board of Directors approved an amendment to the Company’s Bylaws to amend Section 8, Action Without a Meeting, to replace the wording of that section in its entirety.

 

Warrants to Purchase Common Stock of the Company

 

We use the Black-Scholes-Merton option pricing model (“Black-Scholes Model”) to determine the fair value of warrants to purchase Common Stock of the Company (“Warrants”). The Black-Scholes Model is an acceptable model in accordance with the GAAP. The Black-Scholes Model requires the use of a number of assumptions including volatility of the stock price, the weighted average risk-free interest rate, and the weighted average term of the Warrant.

 

 

The risk-free interest rate assumption is based upon observed interest rates on zero coupon U.S. Treasury bonds whose maturity period is appropriate for the term of the Warrants. Estimated volatility is a measure of the amount by which our stock price is expected to fluctuate each year during the expected life of the award. Our estimated volatility is an average of the historical volatility of our stock prices (and that of peer entities whose stock prices were publicly available) over a period equal to the expected life of the awards. Where appropriate we used the historical volatility of peer entities due to the lack of sufficient historical data of our stock price during 2007-2009.

 

On May 15, 2019, we issued 250,000 ten-year Warrants (with a fair value of $4,000) at an exercise price of $0.03 per share to a director. On February 6, 2020, we issued 1,000,000 ten-year Warrants (with a fair value of $9,000) at an exercise prices of $0.01 per share to a director. See NOTE 10 for details.

 

Options to Purchase Common Stock of the Company

 

On August 6, 2020, the Company’s Board of Directors approved the adoption of the CareView Communications, Inc. 2020 Stock Incentive Plan (the “2020 Plan”) pursuant to which 20 million shares of the Company’s common stock has been reserved for issuance to employees, officers, directors, consultants and advisors. During the nine months ended September 30, 2020, the Company granted 7,747,976 options from the 2016 Plan and 13,517,024 from the 2020 Plan.

 

Below is a summary of options to purchase common stock of the Company (“Options”) granted during the nine months ended September 30, 2020.

 

			Options Granted				Exercise Price				Fair Value
January 6, 2020				100,000			$	0.050			$	1,000
February 25, 2020				100,000			$	0.050				1,000
June 25, 2020				5,000			$	0.050				150
July 6, 2020				10,000			$	0.050				300
August 10, 2020				21,050,000			$	0.035				631,500
				21,265,000							$	633,950

 

During the nine months ended September 30, 2020, 849,980 Options expired and 113,335 Options were canceled. During the nine months ended September 30, 2019, 938,665 Options expired, and 40,000 Options were canceled.

 

A summary of our stock option activity and related information follows:

 

		Number of Shares Under Options				Weighted Average Exercise Price				Weighted Average Remaining Contractual Life				Aggregate Intrinsic Value
Balance at December 31, 2019			20,524,792			$	0.25				6.3			$	—
Granted			21,265,000
Expired			(849,980	)
Canceled			(113,335	)
Balance on September 30, 2020			40,826,477			$	0.13				10.2			$	105,250
Vested and Exercisable on September 30, 2020			17,237,805			$	0.25				5.5			$	—

 

 

Share-based compensation expense for Options charged to our operating results for the nine months ended September 30, 2020 and 2019 ($86,257 and $158,866, respectively) is based on awards vested. The estimate of forfeitures is to be recorded at the time of grant and revised in subsequent periods if actual forfeitures differ from the estimates. We have not included an adjustment to our stock-based compensation expense based on the nominal amount of the historical forfeiture rate. We do, however, revise our stock-based compensation expense based on actual forfeitures during each reporting period.

 

At September 30, 2020, total unrecognized estimated compensation expense related to non-vested Options granted prior to that date was $613,005, which is expected to be recognized over a weighted-average period of 2.8 years. No tax benefit was realized due to a continued pattern of operating losses.

 

NOTE 4 – INVENTORY

 

Inventory is valued at the lower of cost, determined on a first-in, first-out (FIFO), or net realizable value.  Inventory items are analyzed to determine cost and net realizable value, and appropriate valuation adjustments are then established.

 

Inventory consists of the following:

		September 30, 2020				December 31, 2019
Inventory		$	404,750			$	0
TOTAL INVENTORY		$	404,750			$	0

 

NOTE 5 – OTHER CURRENT ASSETS

 

Other current assets consist of the following:

		September 30, 2020				December 31, 2019
Prepaid insurance		$	361,657			$	94,005
Prepaid equipment			0				102,215
Other prepaid expenses			25,746				15,180
Other current assets			4,287				9,064
TOTAL OTHER CURRENT ASSETS		$	391,690			$	220,464

 

NOTE 6 – PROPERTY AND EQUIPMENT

 

Property and equipment consist of the following:

		September 30, 2020				December 31, 2019
Network equipment		$	12,570,039			$	12,424,248
Office equipment			220,495				207,608
Vehicles			217,004				217,004
Test equipment			197,090				197,090
Furniture			91,341				91,341
Warehouse equipment			9,524				9,524
Leasehold improvements			5,121				5,121
							13,151,936
Less: accumulated depreciation			(11,657,372	)			(11,173,916	)
TOTAL PROPERTY AND EQUIPMENT		$	1,653,242			$	1,978,020

 

Depreciation expense for the nine months ended September 30, 2020 and 2019 was $483,456 and $500,546, respectively.

 

 

 

NOTE 7 – OTHER ASSETS

 

Intangible assets consist of the following:

		September 30, 2020
		Cost				Accumulated Amortization				Net
Patents and trademarks		$	1,169,237			$	281,194			$	888,043
Other intangible assets			83,745				52,198				31,547
TOTAL INTANGIBLE ASSETS		$	1,252,982			$	333,392			$	919,590

 

		December 31, 2019
		Cost				Accumulated Amortization				Net
Patents and trademarks		$	1,070,871			$	243,702			$	827,169
Other intangible assets			63,509				59,996				3,513
TOTAL INTANGIBLE ASSETS		$	1,134,380			$	303,698			$	830,682

 

Other assets consist of the following:

		September 30, 2020
		Cost				Accumulated Amortization				Net
Deferred installation costs		$	1,274,398			$	1,236,070			$	38,328
Prepaid license fee			249,999				148,907				101,093
Other Asset			1,868				—				1,868
Security deposit			46,124				—				46,124
TOTAL OTHER ASSETS		$	1,570,522			$	1,384,977			$	187,413

 

		December 31, 2019
		Cost				Accumulated Amortization				Net
Deferred installation costs		$	1,288,156			$	1,206,968			$	81,188
Prepaid license fee			249,999				136,611				113,388
Security deposit			46,124				—				46,124
TOTAL OTHER ASSETS		$	1,584,279			$	1,343,579			$	240,700

 

 

NOTE 8 – OTHER CURRENT LIABILITIES

 

Other current liabilities consist of the following:

 

		September 30,  2020				December 31, 2019
Accrued interest		$	6,164,975			$	3,751,061
Insurance premium financing (1)			246,238				19,360
Deferred revenue			389,957				255,398
Allowance for system removal			206,000				152,800
Deferred compensation (2)			139,041				139,041
Accrued paid time off			134,496				112,176
Accrued taxes			62,988				29,309
Other accrued liabilities			20,884				24,199
Accrued rent expense			—				22,161
TOTAL OTHER CURRENT LIABILITIES		$	7,364,579			$	4,505,505

(1)	Insurance premium financing is related to the Company’s renewal of directors and officers insurance.

(2)	Between February 15, 2018 and September 30, 2020 we deferred $139,041 in salary for Steve Johnson, CEO.

 

NOTE 9 – 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 2020 as a result of the losses recorded during the nine months ended September 30, 2020 and the additional losses expected for the remainder of 2020 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 the benefits of deferred tax assets will not be realized. As of September 30, 2020, we maintained a full valuation allowance for all deferred tax assets. Based on these requirements, no provision or benefit for income taxes has been recorded. There were no recorded unrecognized tax benefits at the end of the reporting period.

 

The Tax Cuts and Jobs Act (the “Act”) was signed into law on December 22, 2017. Among its numerous changes to the Internal Revenue Code, the Act reduces U.S. corporate rates from 35% to 21%. Additionally, the Act limits the use of net operating loss carry backs, however any future net operating losses will instead be carried forward indefinitely. Net operating losses generated from January 1, 2018 are limited to offset 80% of current income, with the remainder of the net operating loss continuing to carry forward indefinitely. Net operating losses incurred before January 1, 2018 are not subject to the 80% limitations and will begin to expire in 2027. Based on an assessment of the Act, the Company believes that the most significant impact on the Company’s consolidated financial statements will be limitations in tax deductions on interest expense. Under the Act, interest deductions disallowed from current income will carryforward indefinitely. The Act did not impact management’s valuation allowance position.

 

The effective tax rate for the nine months ended September 30, 2020 was different from the federal statutory rate due primarily to change in the valuation allowance and nondeductible interest and amortization expense.

 

NOTE 10 – AGREEMENT WITH PDL BIOPHARMA, INC.

 

On June 26, 2015, we entered into a Credit Agreement (as subsequently amended) with PDL BioPharma, Inc. (“PDL”), as administrative agent and lender (“the Lender”) (the “PDL Credit Agreement”). Under the PDL Credit Agreement the Lender made available to us up to $40 million in two tranches of $20 million each. Tranche One was funded on October 8, 2015 (the “Tranche One Loan’). Pursuant to the terms of the PDL Credit Agreement and having not met the Tranche Two Milestones by July 26, 2017, the Tranche Two funding was terminated in full.

 

 

From October 8, 2015 through May 14, 2019, the outstanding borrowings under the Tranche One Loan bore interest at the rate of 13.5% per annum, payable quarterly. On May 15, 2019, pursuant to the terms of the Fifth Amendment to the PDL Credit Agreement (see below for additional details), the interest increased to 15.5% per annum, payable quarterly. Also, on May 15, 2019, pursuant to the terms of the Fourteenth Amendment to the PDL Modification Agreement (see below for additional details), the minimum cash balance requirement of $750,000 was reduced to $0.

 

On December 28, 2017, the Company and PDL Investment Holdings, LLC (as assignee of PDL) (“PDL Investment”) entered into a Binding Forbearance Term Sheet (the “Forbearance Term Sheet”) in order to modify certain provisions of the PDL Credit Agreement to prevent any Events of Default from occurring on December 31, 2017. This Forbearance Term Sheet was the governing document until February 2, 2018, at which time, the Company and PDL Investment entered into a Modification Agreement (the “PDL Modification Agreement”), effective December 28, 2017, with respect to the PDL Credit Agreement which reiterated the terms included in the Forbearance Term Sheet and effective February 2, 2018, entered into certain consents and amendments with respect to other existing agreements. In accordance with GAAP, we accounted for this transaction as a debt modification, wherein consideration given to PDL was recorded as deferred closing costs and all third-party payments were considered an expense and recorded as such on the accompanying condensed consolidated financial statements. Details of the PDL Modification Agreement, as amended, are included in our Form 10-K filed with the SEC on March 29, 2019.

 

Pursuant to the terms of the PDL Modification Agreement, as amended, the first principal payment on the Tranche One Loan due on December 31, 2017 in the amount of $1,666,667, and similar principal payments due on December 31, 2018, March 31, 2019, June 30, 2019, September 30, 2019, December 31, 2019, March 31, 2020, June 30, 2020, and September 30, 2020 have been delayed and are included in the final payment due on November 30, 2020 (see Twenty-First Amendment to the PDL Modification Agreement below for additional details).

 

In accordance with the PDL Credit Agreement, as amended, quarterly interest only payments of $675,000 for each of the first 12 interest payment dates (December 31, 2015 through September 30, 2018) were made timely. Pursuant to the terms of the PDL Modification Agreement, as amended, quarterly interest payments due on December 31, 2018, March 31, 2019, June 30, 2019, September 30, 2019, December 31, 2019, March 31, 2020, June 30,2020, and September 30, 2020 have been delayed and are also included in the final payment due on November 30, 2020 (see Twenty-First Amendment to the PDL Modification Agreement below for additional details).

 

The obligations under the PDL Credit Agreement, as modified, are secured by a pledge of substantially all of the assets of the Company and certain of its domestic subsidiaries. We executed a Subordination and Intercreditor Agreement (the “Subordination and Intercreditor Agreement”), with the Lender, HealthCor, the 2015 Investors, the February 2018 Investors, the July 2018 Investors, the 2019 Investor and the February 2020 Investor (as defined in NOTE 10) pursuant to which we granted first-priority liens on our pledged assets to the Lender and second-priority liens on such pledged assets to HealthCor, the 2015 Investors, the February 2018 Investors, the July 2018 Investors, the 2019 Investor and the February 2020 Investor.

 

The PDL Credit Agreement, as modified, contains customary affirmative covenants for transactions of this type and other affirmative covenants agreed to by the Company and the Lender, including, among others, the provision of annual and quarterly reports, maintenance of property, insurance, compliance with laws and contractual obligations and payment of taxes. The PDL Credit Agreement, as modified, contains customary negative covenants for transactions of this type and other negative covenants agreed to by the Company and the Lender, including, among others, restrictions on the incurrence of indebtedness, the granting of liens, making restricted payments and investments, entering into affiliate transactions and transferring assets. The PDL Credit Agreement, as modified, calls for a reduction of our operating expenses compared to such expense incurred in October 2017 by at least (i) $113,000 for January 2018, (ii) $148,000 for February 2018 and (iii) $167,000 for each other month for the duration of the Modification Period (see Twenty-First Amendment to the PDL Modification Agreement below for additional details). We are in compliance with this covenant as of the date of this filing. The PDL Credit Agreement, as modified, also provides for a number of customary events of default, including payment, bankruptcy, covenant, representation and warranty and judgment defaults.

 

 

In addition, contemporaneously with the execution of the PDL Credit Agreement the Company and the Lender executed (i) a Registration Rights Agreement (as amended in the PDL Modification Agreement as discussed above) pursuant to which we agreed to provide the Lender with certain registration rights with respect to the shares of Common Stock issuable upon exercise of the PDL Warrant, (ii) a Guarantee and Collateral Agreement pursuant to which certain of our subsidiaries guaranteed the performance of our obligations under the PDL Credit Agreement, as modified, and granted the Lender a security interest in such subsidiaries’ tangible and intangible assets securing our performance of the same, and (iii) a Patent Security Agreement and a Trademark Security Agreement pursuant to which we granted the Lender a security interest in a certain subsidiary’s tangible and intangible assets securing the performance of our obligations under the PDL Credit Agreement, as modified.

 

On January 31, 2019, February 28, 2019, March 29, 2019 and April 29, 2019, the Company and Lender entered into the Tenth, Eleventh, Twelfth, and Thirteenth Amendments to the PDL Modification Agreement, as previously amended, respectively, pursuant to which the parties agreed to amend the PDL Modification Agreement to provide that (A) the dates on which the Lender may elect, in the Lender’s sole discretion, to terminate the Modification Period would be July 31, 2018 and, pursuant to the Thirteenth Amendment to the PDL Modification Agreement, May 15, 2019 (rather than January 31, February 28, June 30, and April 30, respectively) (with each such date permitted to be extended by the Lender in its sole discretion); (B) the Company could satisfy its obligations under the PDL Modification Agreement, as amended, to obtain financing by obtaining (a) at least $2,050,000 in net cash proceeds from the issuance of Capital Stock (other than Disqualified Capital Stock) or Debt on or prior to February 23, 2018 and (b) an additional (i) $750,000 in net cash proceeds from the issuance of Capital Stock (other than Disqualified Capital Stock) or Debt on or prior to July 13, 2018 and (ii) $750,000 in net cash proceeds from the issuance of Capital Stock (other than Disqualified Capital Stock) or Debt on or prior to May 15, 2019 (rather than January 31, February 28, June 30, and April 30, respectively) (resulting in aggregate net cash proceeds of at least $3,550,000); and (C) the Company’s quarterly interest payments that would otherwise have been due to Lender on December 31, 2018 and June 30, 2019 would be deferred until May 15, 2019 (the end of the extended Modification Period) and that such deferral would be a Covered Event.

 

On April 9, 2019, the Company, PDL Investment entered into a Fourth Amendment to PDL Credit Agreement (the “Fourth Amendment to the PDL Credit Agreement”), wherein the Company executed an Amended and Restated Tranche One Term Note in the principal amount of $20,000,000 to PDL Investments (the “Amended Tranche One Loan”), pursuant to which the parties agreed, among other things, to amend the note from registered to unregistered form.

 

On May 15, 2019, the Company, the Lender, Steven G. Johnson (our Chief Executive Officer, President, Secretary and Treasurer), individually, and Dr. James R. Higgins (a member of our board of directors), individually (Mr. Johnson and Dr. Higgins, collectively, the “Tranche Three Lenders”) entered into a Fifth Amendment to the PDL Credit Agreement (the “Fifth PDL Credit Agreement Amendment”), pursuant to which the parties agreed to amend the PDL Credit Agreement to, among other things, (i) provide for a new tranche of term loan in the aggregate principal amount of $200,000, from the Tranche Three Lenders, with a maturity date of October 7, 2020 and bearing interest at the rate of 15.5% per annum, payable quarterly in arrears (subject to the terms of the PDL Modification Agreement, as amended) (the “Tranche Three Loan”); (ii) increase the interest rate for outstanding borrowings under the Amended Tranche One Loan from 13.5% per annum to 15.5% per annum, payable quarterly in arrears (subject to the terms of the PDL Modification Agreement, as amended), effective May 15, 2019,; and (iii) provide for the issuance of the Twelfth Amendment Note, pursuant to the terms of the Twelfth Amendment to the HealthCor Agreement (see NOTE 10 for details). Under the accounting standards, we determined that the restructuring of the Tranche One Loan resulted in a troubled debt restructuring. As the future cash flows were greater than the carrying amount of the debt at the date of the amendment, we accounted for the change prospectively using the new effective interest rate. Also on May 15, 2019, upon the execution of the Fifth PDL Credit Agreement Amendment, (i) the Company sold and issued the Tranche Three Lenders term notes in the aggregate principal amount of $200,000, payable in accordance with the terms of the PDL Credit Agreement (the “Tranche Three Loans”), $150,000 from Mr. Johnson and $50,000 from Dr. Higgins, and (ii) the Company issued a warrant for the purchase of 250,000 shares of Common Stock, with an exercise price per share equal to $0.03 (subject to adjustment as described therein) and an expiration date of May 15, 2029 (the “Tranche Three Loan Warrant”), to Dr. Higgins in connection with his Tranche Three Loan. Mr. Johnson declined to be issued a Tranche Three Loan Warrant.

 

 

On May 15, 2019 the Company and the Lender entered into the Fourteenth Amendment to the PDL Modification Agreement (the “Fourteenth Amendment to the PDL Modification Agreement”), pursuant to which, in connection with the Twelfth Amendment to the HealthCor Purchase Agreement (see NOTE 10 for further details) and the Fifth Amendment to the PDL Credit Agreement, the parties agreed to amend the PDL Modification Agreement, as previously amended, to provide that (A) the dates on which the Lender may elect, in the Lender’s sole discretion, to terminate the Modification Period would be July 31, 2018 and September 30, 2019 (with each such date permitted to be extended by the Lender in its sole discretion); (B) the Borrower could satisfy its obligations under the PDL Modification Agreement, as amended, to obtain financing by obtaining (a) at least $2,050,000 in net cash proceeds from the issuance of Capital Stock (other than Disqualified Capital Stock) or Debt on or prior to February 23, 2018 and (b) an additional (i) $1,000,000 in net cash proceeds from the issuance of Capital Stock (other than Disqualified Capital Stock) or Debt on or prior to July 13, 2018 and (ii) $250,000 in net cash proceeds from the issuance of Capital Stock (other than Disqualified Capital Stock) or Debt on or prior to May 15, 2019 (resulting in aggregate net cash proceeds of at least $3,300,000); (C) the Liquidity required during the Modification Period would be lowered to $0 from $750,000; and (D) the Company’s interest payments that would otherwise be due to Lender on December 31, 2018, June 30, 2019 and June 30, 2019 would be deferred until September 30, 2019 (the end of the extended Modification Period) and that such deferrals would be a Covered Event.

 

On September 30, 2019, the Company, the Borrower, the Subsidiary Guarantor and the Lender entered into a Fifteenth Amendment to Modification Agreement (the “Fifteenth Modification Agreement Amendment”), pursuant to which the parties agreed to amend the Modification Agreement to provide that the dates on which the Lender may elect, in the Lender’s sole discretion, to terminate the Modification Period would be July 31, 2018 and November 30, 2019 (with each such date permitted to be extended by the Lender in its sole discretion); and that the Borrower’s interest payments that would otherwise be due to Lender on December 31, 2018, June 30, 2019, June 30, 2019, and September 30, 2019 would be deferred until November 30, 2019 (the end of the extended Modification Period) and that such deferrals would be a Covered Event.

 

On November 29, 2019, the Company, the Borrower, the Subsidiary Guarantor and the Lender entered into a Sixteenth Amendment to Modification Agreement (the “Sixteenth Modification Agreement Amendment”), pursuant to which the parties agreed to amend the Modification Agreement to provide that the dates on which the Lender may elect, in the Lender’s sole discretion, to terminate the Modification Period would be July 31, 2018 and December 31, 2019 (with each such date permitted to be extended by the Lender in its sole discretion); and that the Borrower’s interest payments that would otherwise be due to Lender on December 31, 2018, June 30, 2019, June 30, 2019, and September 30, 2019 would be deferred until December 31, 2019 (the end of the extended Modification Period) and that such deferrals would be a Covered Event.

 

On December 31, 2019, the Company, the Borrower, the Subsidiary Guarantor and the Lender entered into a Seventeenth Amendment to Modification Agreement (the “Seventeenth Modification Agreement Amendment”), pursuant to which the parties agreed to amend the Modification Agreement to provide that the dates on which the Lender may elect, in the Lender’s sole discretion, to terminate the Modification Period would be July 31, 2018 and January 17, 2020 (with each such date permitted to be extended by the Lender in its sole discretion); and that the Borrower’s interest payments that would otherwise be due to Lender on December 31, 2018, June 30, 2019, June 30, 2019, September 30, 2019, and December 31, 2019 would be deferred until January 17, 2020 (the end of the extended Modification Period) and that such deferrals would be a Covered Event.

 

 

On January 17, 2020, the Company, the Borrower, the Subsidiary Guarantor and the Lender entered into an Eighteenth Amendment to Modification Agreement (the “Eighteenth Modification Agreement Amendment”), pursuant to which the parties agreed to amend the Modification Agreement to provide that the dates on which the Lender may elect, in the Lender’s sole discretion, to terminate the Modification Period would be July 31, 2018 and January 28, 2020 (with each such date permitted to be extended by the Lender in its sole discretion); and that the Borrower’s interest payments that would otherwise be due to Lender on December 31, 2018, June 30, 2019, June 30, 2019, September 30, 2019, and December 31, 2019 would be deferred until January 28, 2020 (the end of the extended Modification Period) and that such deferrals would be a Covered Event.

 

On January 28, 2020, the Company, the Borrower, the Subsidiary Guarantor and the Lender entered into a Nineteenth Amendment to Modification Agreement (the “Nineteenth Modification Agreement Amendment”), pursuant to which the parties agreed to amend the Modification Agreement to provide that the dates on which the Lender may elect, in the Lender’s sole discretion, to terminate the Modification Period would be July 31, 2018 and (i) April 30, 2020 (provided that Borrower obtains at least $600,000 in cash proceeds from the issuance of Capital Stock (other than Disqualified Capital Stock) or Debt subordinated to the Tranche One Loan (as defined in the Credit Agreement) pursuant to the terms of the Intercreditor Agreement (as defined in the Credit Agreement) on or prior to February 11, 2020) or (ii) February 11, 2020 (if Borrower has not obtained such cash proceeds by such date) (with each such date permitted to be extended by the Lender in its sole discretion); and that the Borrower’s interest payments that would otherwise be due to Lender on December 31, 2018, June 30, 2019, June 30, 2019, September 30, 2019, December 31, 2019, and June 30, 2020 would be deferred until the end of the extended Modification Period (but with respect to the June 30, 2020 interest payment, such payment would be deferred only in the event that the end of the extended Modification Period is April 30, 2020 rather than February 11, 2020; otherwise the Borrower will make the interest payment due under the Credit Agreement on June 30, 2020), and that such deferrals would be a Covered Event.

 

The Company has evaluated the Eighteenth and Nineteenth Modification Agreement Amendments and as the effective borrowing rate under the restructured agreement is less than the effective borrowing rate on the old agreement, a concession is deemed to have been granted under ASC 470-60-55-10. As a concession has been granted, the agreement is to be accounted for as a troubled debt restructuring by debtors (TDR) under ASC 470-60.

 

On February 6, 2020, the Company, the Borrower, the Lender (in its capacity as administrative agent and lender) and the Tranche Three Lenders entered into a Sixth Amendment to Credit Agreement (the “Sixth Credit Agreement Amendment”), pursuant to which the parties agreed to amend the Credit Agreement to, among other things, (i) provide for additional funding under the Tranche Three Loan, in the aggregate principal amount of $500,000, from the Tranche Three Lenders (the “Additional Tranche Three Loan”), with a maturity date of October 7, 2020 (the fifth anniversary of the funding date of the Tranche One Loan (as defined in the Credit Agreement)), with outstanding borrowings bearing interest at the rate of 15.5% per annum, payable quarterly in arrears (subject to the terms of the Modification Agreement, as amended), and with payment of the Additional Tranche Three Loan and any other Obligations (as defined in the Credit Agreement) incurred in connection with the Additional Tranche Three Loan subordinated and subject in right and time of payment to the Payment in Full (as defined in the Credit Agreement) of the Tranche One Loan and any other Obligations incurred in connection with the Tranche One Loan, to the extent and in the manner set forth in the Credit Agreement; and (ii) provide for the issuance of the Thirteenth Amendment Supplemental Closing Note.

 

Also on February 6, 2020, upon the execution of the Sixth Credit Agreement Amendment, (i) the Borrower borrowed the Additional Tranche Three Loan and issued to the Tranche Three Lenders term notes in the aggregate principal amount of $500,000, payable in accordance with the terms of the Credit Agreement (the “Additional Tranche Three Term Notes”), $250,000 from Mr. Johnson and $250,000 from Dr. Higgins, and (ii) the Company issued a warrant for the purchase of 1,000,000 shares of Common Stock, with an exercise price per share equal to $0.01 (subject to adjustment as described therein) and expiration date of February 6, 2030 (the “Additional Tranche Three Loan Warrant”), to Dr. Higgins in connection with his Additional Tranche Three Loan. Mr. Johnson declined to be issued an Additional Tranche Three Loan Warrant. Mr. Johnson is our Chief Executive Officer, President, Secretary and Treasurer and is one of our directors. Dr. Higgins is one of our directors.

 

 

On April 17, 2020, the Company and PDL Investment Holdings, LLC, entered into a Consent and Agreement Regarding SBA Loan Agreement (the “PDL Consent Agreement”), pursuant to which the Lender (i) consented under the Credit Agreement to the Borrower’s issuing the Promissory Note and borrowing the SBA Loan and (ii) agreed that the SBA Loan would be deemed to be debt that is permitted under the Credit Agreement and Loan Documents.

 

On April 17, 2020, the Company and the Lender entered into a Twentieth Amendment to the PDL Modification Agreement (the “Twentieth Modification Agreement Amendment”), pursuant to which the parties agreed to amend the Modification Agreement to provide that the dates on which the Lender may elect, in the Lender’s sole discretion, to terminate the Modification Period would be July 31, 2018 and September 30, 2020 (with each such date permitted to be extended by the Lender in its sole discretion); and that the Borrower’s interest payments that would otherwise be due to Lender on December 31, 2018, June 30, 2019, June 30, 2019, September 30, 2019, December 31, 2019, June 30, 2020 and June 30, 2020 would be deferred until September 30, 2020 (the end of the extended Modification Period), and that such deferrals would be a Covered Event. The Company has evaluated the Twentieth Modification Agreement Amendment and as the effective borrowing rate under the restructured agreement is less than the effective borrowing rate on the old agreement, a concession is deemed to have been granted under ASC 470-60-55-10. As a concession has been granted, the agreement is to be accounted for as a troubled debt restructuring by debtors (TDR) under ASC 470-60.

 

On September 30, 2020, the Company, the Borrower, the Subsidiary Guarantor, the Lender and the Tranche Three Lenders entered into a Twenty-First Amendment to Modification Agreement (the “Twenty-First Modification Agreement Amendment”), pursuant to which the parties agreed to amend the Modification Agreement to provide that the dates on which the Lender may elect, in the Lender’s sole discretion, to terminate the Modification Period would be July 31, 2018 and November 30, 2020 (with each such date permitted to be extended by the Lender in its sole discretion); and that the Borrower’s (i) interest payments that would otherwise be due under the Credit Agreement on December 31, 2018, March 31, 2019, June 30, 2019, September 30, 2019, December 31, 2019, March 31, 2020, June 30, 2020, September 30, 2020 and October 7, 2020 and (ii) payments for principal and for any other Obligations then outstanding under the Tranche One Loan and the Tranche Three Loans that would otherwise be due under the Credit Agreement on October 7, 2020, would each be deferred until November 30, 2020 (the end of the extended Modification Period), and that such deferrals would be a Covered Event. The Company has evaluated the Twenty-First Modification Agreement Amendment and as the effective borrowing rate under the restructured agreement is less than the effective borrowing rate on the old agreement, a concession is deemed to have been granted under ASC 470-60-55-10. As a concession has been granted, the agreement is to be accounted for as a troubled debt restructuring by debtors (TDR) under ASC 470-60.

 

Accounting Treatment

 

In connection with the PDL Credit Agreement, as amended, we issued the PDL Warrant to the Lender. The fair value of the PDL Warrant at issuance was $1,257,778, which has been recorded as deferred issuance costs in the accompanying condensed consolidated financial statements. The deferred debt issuance and closing costs associated with the PDL Credit Agreement, as amended, have been presented as contra debt in accordance with the accounting standards. In December 2017, in connection with the PDL Modification Agreement, as amended, the Amended PDL Warrant was again amended (the “Second Amendment to the PDL Warrant’) resulting in an increase in fair value of $44,445, which was recorded as additional deferred debt issuance costs in the accompanying consolidated financial statements. As of September 30, 2020, the Amended PDL Warrant has not been exercised.

 

 

During the year ended December 31, 2019, the Company and Lender entered into eight amendments to the PDL Modification Agreement (as detailed above), resulting in restructuring of the PDL Credit Agreement and the accounting treatment of the related costs. Under debt modification/troubled debt guidance, we determined that the first of the eight amendments qualified for modification accounting, while the final seven qualified for troubled debt restructuring accounting. The Eighteenth, Nineteenth, Twentieth, and Twenty-First Modification Agreement Amendments entered during the nine months ended September 30, 2020 (as detailed above) also qualified for troubled debt restructuring accounting. As appropriate, we expensed the debt issuance costs paid to third parties as a deferred debt issuance costs and accounted for the change in the effective interest rate prospectively. For the nine months ended September 30, 2020 and 2019, pursuant to the terms of the PDL Modification Agreement, as amended, $2,325,000 and $2,858,611, respectively was recorded as interest expense in the accompanying condensed consolidated financial statements.

 

The Tranche Three Warrant issued with the Fifth PDL Credit Agreement Amendment did not contain features requiring liability accounting and were recorded at fair value on the date of issuance with the offsetting credit recorded in equity. The Tranche Three Warrant issued with the Sixth PDL Credit Agreement Amendment was valued at $8,687 and was recorded as interest expense on March 31, 2020.

 

NOTE 11 – AGREEMENT WITH HEALTHCOR

 

On April 21, 2011, we entered into a Note and Warrant Purchase Agreement (as subsequently amended) with HealthCor Partners Fund, LP (“HealthCor Partners”) and HealthCor Hybrid Offshore Master Fund, LP (“HealthCor Hybrid” and, together with HealthCor Partners, “HealthCor”) (the “HealthCor Purchase Agreement”). Pursuant to the terms of the HealthCor Purchase Agreement, we sold and issued Senior Secured Convertible Notes to HealthCor in the principal amount of $9,316,000 and $10,684,000, respectively (collectively the “2011 HealthCor Notes”). The 2011 HealthCor Notes have a maturity date of April 20, 2021. We also issued Warrants to HealthCor for the purchase of an aggregate of up to 5,488,456 and 6,294,403 shares, respectively, of our Common Stock at an exercise price of $1.40 per share (collectively the “2011 HealthCor Warrants”). So long as no event of default has occurred, the outstanding principal balances of the 2011 HealthCor Notes accrue interest from April 21, 2011 through April 20, 2016 (the “First Five-Year Note Period”) at the rate of 12.5% per annum, compounding quarterly and shall be added to the outstanding principal balances of the 2011 HealthCor Notes on the last day of each calendar quarter. Interest accruing from April 21, 2016 through April 20, 2021 (the “Second Five Year Note Period”) at a rate of 10% per annum, compounding quarterly, may be paid quarterly in arrears in cash or, at our option, such interest may be added to the outstanding principal balances of the 2011 HealthCor Notes on the last day of each calendar quarter. For the period from April 21, 2016 through September 30, 2018 interest has been added to the outstanding principal balance. Pursuant to the terms of the Ninth Amendment, as discussed below, the accrual of interest has been suspended after September 30, 2018. From the date any event of default occurs, the interest rate, then applicable, shall be increased by five percent (5%) per annum. HealthCor has the right, upon an event of default, to declare due and payable any unpaid principal amount of the 2011 HealthCor Notes then outstanding, plus previously accrued but unpaid interest and charges, together with the interest then scheduled to accrue (calculated at the default rate described in the immediately preceding sentence) through the end of the First Five Year Note Period or the Second Five Year Note Period, as applicable. Subject to the terms of the Ninth Amendment as discussed below, HealthCor’s ability to convert any portion of the outstanding and unpaid accrued interest on and principal balances of the 2011 HealthCor Notes into fully paid and non-assessable shares of our Common Stock has been eliminated.

 

 

On January 31, 2012, we entered into the Second Amendment to the HealthCor Purchase Agreement with HealthCor (the “Second Amendment”) amending the HealthCor Purchase Agreement and sold Senior Secured Convertible Notes to HealthCor in the principal amounts of $2,329,000 and $2,671,000, respectively (collectively the “2012 HealthCor Notes”). As provided by the Second Amendment, the 2012 HealthCor Notes are in substantially the same form as the 2011 HealthCor Notes, with changes to the “Issuance Date,” “Maturity Date,” “First Five-Year Note Period” and other terms to take into account the timing of the issuance of the 2012 HealthCor Notes. The 2012 HealthCor Notes have a maturity date of January 30, 2022. In addition, the provisions regarding interest payments, interest acceleration, optional conversion, negative covenants, and events of default, preemptive rights and registration rights are the same as those of the 2011 HealthCor Notes. At any time after January 30, 2012, HealthCor is entitled to convert any portion of the outstanding and unpaid accrued interest on and principal balances of the 2012 HealthCor Notes into fully paid and non-assessable shares of our Common Stock at a conversion rate of $1.25 per share, subject to adjustment in accordance with anti-dilution provisions set forth in the 2012 HealthCor Notes. Pursuant to the terms of the Ninth Amendment, as discussed below, the accrual of interest has been suspended after September 30, 2018.

 

On August 20, 2013, we entered into a Third Amendment to the HealthCor Purchase Agreement with HealthCor (the “Third Amendment”) to redefine our minimum cash balance requirements. Previously we were required to maintain a minimum cash balance of $5,000,000 and should we drop below that balance, it triggered a default. The Third Amendment allowed for a reduced minimum cash period, as defined in the HealthCor Purchase Agreement, which allowed us to drop below $5,000,000, but not below $4,000,000. All other terms and conditions of the HealthCor Purchase Agreement, including all amendments thereto, remain the same. Upon entering the reduced minimum cash period (which occurred on October 7, 2013), we had 120 days to return our minimum cash balance to the original $5,000,000. On January 16, 2014, we increased our cash balance to in excess of the original $5,000,000 minimum allowable balance.

 

On January 16, 2014, we entered into a Fourth Amendment to the HealthCor Purchase Agreement with HealthCor (the “Fourth Amendment”) and sold Senior Secured Convertible Notes to HealthCor in the principal amounts of $2,329,000 and $2,671,000 (collectively the “2014 HealthCor Notes”). As provided by the Fourth Amendment, the 2014 HealthCor Notes are in substantially the same form as the 2011 HealthCor Notes, with changes to the “Issuance Date,” “Maturity Date,” “First Five-Year Note Period” and other terms to take into account the timing of the issuance of the 2014 HealthCor Notes. The 2014 HealthCor Notes have a maturity date of January 15, 2024. In addition, the provisions regarding interest payments, interest acceleration, optional conversion, negative covenants, and events of default, preemptive rights and registration rights are the same as those of the 2011 HealthCor Notes. At any time after January 16, 2014, HealthCor is entitled to convert any portion of the outstanding and unpaid accrued interest on and principal balances of the 2014 HealthCor Notes into fully paid and non-assessable shares of our Common Stock at a conversion rate of $0.40 per share, subject to adjustment in accordance with anti-dilution provisions set forth in the 2014 HealthCor Notes. Additionally, we issued Warrants to HealthCor for the purchase of an aggregate of up to 4,000,000 shares of our Common Stock at an exercise price of $0.40 per share (collectively the “2014 HealthCor Warrants”). As of September 30, 2020, the underlying shares of our Common Stock related to the 2014 HealthCor Notes totaled approximately 27,400,000.

 

On December 4, 2014, we entered into a Fifth Amendment to the HealthCor Purchase Agreement (the “Fifth Amendment”) with HealthCor and certain additional investors (such additional investors, the “2015 Investors” and, collectively with HealthCor, the “Investors”) and agreed to sell and issue (i) additional notes in the initial aggregate principal amount of $6,000,000,with a conversion price per share of $0.52 (subject to adjustment as described therein) (the “Fifth Amendment Notes”) and (ii) additional Warrants for an aggregate of up to 3,692,308 shares of our Common Stock at an exercise price per share of $0.52 (subject to adjustment as described therein) (the “Fifth Amendment Warrants”). As provided by the Fifth Amendment, the Fifth Amendment Notes are in substantially the same form as the 2011 HealthCor Notes, with changes to the “Issuance Date,” “Maturity Date,” “First Five-Year Note Period” and other terms to take into account the timing of the issuance of the Fifth Amendment Notes. The Fifth Amendment Notes have a maturity date of February 16, 2025. In addition, the provisions regarding interest payments, interest acceleration, optional conversion, negative covenants, and events of default, preemptive rights and registration rights are the same as those of the 2011 HealthCor Notes. The 2015 Investors are composed of all but one of our current directors and one of our officers. On February 17, 2015, the Company and the Investors closed on the transactions contemplated by the Fifth Amendment. In connection with this closing, the Company and the Investors entered into an Amended and Restated Pledge and Security Agreement (the “Amended Security Agreement”), amending and restating that certain Pledge and Security Agreement dated as of April 20, 2011, and an Amended and Restated Intellectual Property Security Agreement (the “Amended IP Security Agreement”), amending and restating that certain Intellectual Property Security Agreement dated as of April 20, 2011. As of September 30, 2020, the underlying shares of our Common Stock related to the Fifth Amendment Notes totaled approximately 3,800,000 to HealthCor and 18,900,000 to the 2015 Investors.

 

 

On March 31, 2015, we entered into the Ninth Amendment to the HealthCor Purchase Agreement (the “Ninth Amendment”) pursuant to which, among other things, (i) the requirement to maintain a minimum cash balance of $5,000,000 was reduced to a minimum cash balance of $2,000,000 and (ii) the amendment provision was revised to permit the HealthCor Purchase Agreement to be amended by the Company and the holders of the majority of the Common Stock underlying the outstanding notes and warrants to purchase shares of our Common Stock sold pursuant to the HealthCor Purchase Agreement. On March 31, 2015, we also issued a warrant to HealthCor to purchase up to an aggregate of 1,000,000 shares of our Common Stock in consideration for certain prior waivers of the minimum cash balance requirement in the HealthCor Purchase Agreement (the “Ninth Amendment Warrant”). The Ninth Amendment Warrant has an exercise price per share of $0.53 (subject to adjustment as described therein) and an expiration date of March 31, 2025.

 

On June 26, 2015, we (i) entered into a Seventh Amendment to the HealthCor Purchase Agreement (the “Seventh Amendment”) pursuant to which the HealthCor Purchase Agreement was amended to permit the Company to enter into and perform its obligations under the PDL Credit Agreement (as detailed in NOTE 9); (ii) executed an Amendment to the Registration Rights Agreement between the Company and HealthCor dated April 21, 2011 (the “RR Agreement”) pursuant to which the RR Agreement was amended to make its priority of registration consistent with the Registration Rights Agreement executed by the Company and PDL; (iii) amended the 2011 HealthCor Notes to extend the maturity date, in the event that Tranche Two of the PDL Credit Agreement is funded, for such notes to 90 days after the earlier of the Tranche Two maturity date or repayment date, but not later than December 31, 2022, (iv) amended the 2012 HealthCor Notes, to set the maturity date at January 30, 2022 and, in the event that Tranche Two of the PDL Credit Agreement is funded, to extend such maturity date to 90 days after the earlier of the Tranche Two maturity date or repayment date, but later than December 31, 2022; and (v) amended each of the Senior Secured Convertible Notes issued under the HealthCor Purchase Agreement (the “HealthCor Notes”) to, among other things, subordinate the HealthCor Notes to the loans under the PDL Credit Agreement and to increase certain event of default acceleration and payment thresholds. ). As pertains to (iii) and (iv) above, pursuant to the terms of the PDL Credit Agreement and having not met the Tranche Two Milestones by July 26, 2017, the Tranche Two funding was terminated in full.

 

On February 23, 2018, we entered into an Eighth Amendment to the HealthCor Purchase Agreement (the “Eighth Amendment”) with HealthCor, the 2015 Investors and certain investors (such additional investors, the “February 2018 Investors”) and agreed to sell and issue (i) additional notes in the initial aggregate principal amount of $2,050,000,with a conversion price per share of $0.05 (subject to adjustment as described therein) (the “Eighth Amendment Notes”) and (ii) additional Warrants for an aggregate of up to 512,500 shares of our Common Stock at an exercise price per share of $0.05 (subject to adjustment as described therein) (the “Eighth Amendment Warrants”). As provided by the Eighth Amendment, the Eighth Amendment Notes are in substantially the same form as the 2011 HealthCor Notes, with changes to the “Issuance Date,” “Maturity Date,” “First Five- Year Note Period” and other terms to take into account the timing of the issuance of the Eighth Amendment Notes. The Eighth Amendment Notes have a maturity date of February 22, 2028. In addition, the provisions regarding interest payments, interest acceleration, optional conversion, negative covenants, and events of default, preemptive rights and registration rights are the same as those of the 2011 HealthCor Notes. The 2018 Investors are composed of all but one of our current directors, one of our officers and an entity. As of September 30, 2020, the underlying shares of our Common Stock related to the Eighth Amendment Notes totaled approximately 56,500,000 to the February 2018 Investors.

 

 

On July 10, 2018, we entered into the Ninth Amendment to the HealthCor Purchase Agreement (the “Ninth Amendment”) with HealthCor, the 2015 Investors and the February 2018 Investors, pursuant to which the parties agreed to amend the HealthCor Purchase Agreement, the 2011 HealthCor Notes, the 2012 HealthCor Notes, the 2014 HealthCor Notes, the Fifth Amendment Notes and the Eighth Amendment Notes, as applicable, to (i) remove the rights of the holders of the 2011 HealthCor Notes and the 2012 HealthCor Notes to convert such notes to Common Stock after September 30, 2018; (ii) suspend the accrual of interest on the 2011 HealthCor Notes and the 2012 HealthCor Notes for periods after September 30, 2018; (iii) provide for the potential earlier repayment of the 2011 HealthCor Notes and the 2012 HealthCor Notes by the Company, 120 calendar days following a written demand for payment by the holder of such notes; provided, however, that such written demand may not be given prior to the twelve-month anniversary of the date on which the obligations of the Company under the PDL Credit Agreement are repaid in full; (iv) cancel the 2011 HealthCor Warrants; (v) provide for the seniority of the 2011 HealthCor Notes and the 2012 HealthCor Notes in right of payment over notes subsequently issued pursuant to the Purchase Agreement, including the 2014 HealthCor Notes, the Fifth Amendment Notes and the Eighth Amendment Notes; (vi) amend the terms of the 2014 HealthCor Notes, the Fifth Amendment Notes and the Eighth Amendment Notes to reflect the seniority in payment of the 2011 HealthCor Notes and 2012 HealthCor Notes; and (vii) reduce the number of shares of Common Stock that the Company must at all times have authorized and reserved for the purpose of issuance upon conversion of the notes issued pursuant to the HealthCor Purchase Agreement (collectively, the “Notes”) and exercise of the warrants issued pursuant to the HealthCor Purchase Agreement (collectively, the “Warrants”), from at least 120% of the aggregate number of shares of Common Stock then issuable upon full conversion of the Notes and exercise of the Warrants to at least 100% of such aggregate number of shares. In addition, on July 10, 2018, along with PDL, HealthCor, the 2015 Investors and the February 2018 Investors, we entered into a Second Amendment to the Subordination and Intercreditor Agreement, to amend the Subordination and Intercreditor Agreement dated as of September 26, 2015, as amended to provide that, in the event of a sale of the Company’s hospital assets, after the net proceeds are first applied to repay obligations under the PDL Credit Agreement, as amended, until paid in full, up to the next $5,000,000 of such net proceeds may be retained by the Company for working capital purposes before all remaining net proceeds are then applied to repay the obligations under the Notes in accordance with the priorities set forth in the HealthCor Purchase Agreement and the Notes.

 

On July 13, 2018, we entered into the Tenth Amendment to the HealthCor Purchase Agreement with HealthCor, the 2015 Investors, the February 2018 Investors and certain investors (all of which are directors of the Company) (such additional investors, the “July 2018 Investors”), pursuant to which we sold and issued convertible secured promissory notes for an aggregate of $1,000,000 to the July 2018 Investors with a conversion price per share equal to $0.05 (subject to adjustment as described therein) (the “Tenth Amendment Notes”). As provided by the Tenth Amendment, the Tenth Amendment Notes are in substantially the same form as the 2011 HealthCor Notes, with changes to the “Issuance Date,” “Maturity Date,” “First Five-Year Note Period” and other terms to take into account the timing of the issuance of the Tenth Amendment Notes. The Tenth Amendment Notes have a maturity date of July 12, 2028. In addition, the provisions regarding interest payments, interest acceleration, optional conversion, negative covenants, and events of default, preemptive rights and registration rights are the same as those of the 2011 HealthCor Notes. As of September 30, 2020, the underlying shares of our Common Stock related to the Tenth Amendment Notes totaled approximately 26,300,000 to the July 2018 Investors.

 

On March 27, 2019, we entered into the Eleventh Amendment to the HealthCor Purchase Agreement, as amended, with HealthCor, the 2015 Investors, the February 2018 Investors and the July 2018 Investors, pursuant to which all parties agreed to amend and restate Section 5.3 Minimum Cash Balance (“Section 5.3”), wherein the requirement of maintaining a minimum cash balance has been removed and any breach of Section 5.3 has been waived in perpetuity.

 

 

On May 15, 2019, we entered into the Twelfth Amendment to HealthCor Purchase Agreement with HealthCor, the 2015 Investors, the February 2018 Investors, the July 2018 Investors, and an investor (a member of our board of directors) (such additional investor, the “2019 Investor”), pursuant to which we sold and issued a convertible secured promissory note for $50,000 to the 2019 Investor with a conversion price per share equal to $0.03 (subject to adjustment as described therein) (the “Twelfth Amendment Note”). As provided by the Twelfth Amendment, the Twelfth Amendment Note is 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 Twelfth Amendment Note. The Twelfth Amendment Note has a maturity date of May 15, 2029. In addition, the provisions regarding interest payments, interest acceleration, optional conversion, negative covenants, and events of default, preemptive rights and registration rights are the same as those of the 2011 HealthCor Notes. As of September 30, 2020, the underlying shares of our Common Stock related to the Twelfth Amendment Note totaled approximately 1,974,553 to the 2019 Investor.

 

On February 6, 2020, we entered into the Thirteenth Amendment to HealthCor Purchase Agreement with HealthCor, the 2015 Investors, the February 2018 Investors, the July 2018 Investors, the 2019 Investor and an investor (a member of our board of directors) (such additional investor, the “February 2020 Investor”), pursuant to which (i) we sold and issued a convertible secured promissory note for $100,000 to the February 2020 Investor with a conversion price per share equal to $0.01 (subject to adjustment as described therein) (the “Thirteenth Amendment Note”). As provided by the Twelfth Amendment, the Twelfth Amendment Note is 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 Thirteenth Amendment Note. The Thirteenth Amendment Note has a maturity date of February 5, 2030. In addition, the provisions regarding interest payments, interest acceleration, optional conversion, negative covenants, and events of default, preemptive rights and registration rights are the same as those of the 2011 HealthCor Notes. As of September 30, 2020, the underlying shares of our Common Stock related to the Thirteenth Amendment Note totaled approximately 10,800,000 to the 2020 Investor.

 

On April 17, 2020, the Company and holders of at least a majority of the Common Stock underlying the outstanding notes and warrants to purchase shares of our Common Stock, on an as-converted basis, sold pursuant to the Note and Warrant Purchase Agreement dated April 21, 2011, as amended, by and among HealthCor Partners Fund, LP, HealthCor Hybrid Offshore Master Fund, LP and the other investors party thereto (the “Majority Holders”) (the “Purchase Agreement”), entered into a Consent and Agreement Regarding SBA Loan Agreement (the “NWPA Consent Agreement”), pursuant to which the Majority Holders (i) consented under the Purchase Agreement to the Borrower’s issuing the Promissory Note and borrowing the SBA Loan and (ii) agreed that the SBA Loan would be deemed to be Permitted Indebtedness under the Purchase Agreement (as defined therein).

 

Accounting Treatment

 

When issuing debt or equity securities convertible into common stock at a discount to the fair value of the common stock at the date the debt or equity financing is committed, a company is required to record a beneficial conversion feature (“BCF”) charge. We had three separate issuances of equity securities convertible into common stock that qualify under this accounting treatment, (i) the 2011 HealthCor Notes, (ii) the 2012 HealthCor Notes and (iii) the 2014 HealthCor Notes. Because the conversion option and the 2011 HealthCor Warrants on the 2011 HealthCor Notes were originally classified as a liability when issued due to the down round provision and the removal of the provision requiring liability treatment, and subsequently reclassified to equity on December 31, 2011 when the 2011 HealthCor Notes were amended, only the accrued interest capitalized as payment in kind (“PIK”) since reclassification qualifies under this accounting treatment. We recorded an aggregate of $5,445,327 and $3,289,639 in interest for the nine months ended September 30, 2020 and 2019, respectively, related to these transactions. For the nine months ended September 30, 2020 we recorded $4,219,771 of PIK related to the notes included in the HealthCor Purchase Agreement. The face amount of the 2012 HealthCor Notes, 2014 HealthCor Notes, the Fifth Amendment Notes and the Eighth Amendment Notes and all accrued PIK interest also qualify for BCF treatment as discussed above. Under the accounting standards, we determined that the restructuring of the HealthCor notes, pursuant to the terms of the Ninth Amendment, resulted in a troubled debt restructuring. As the future cash flows were greater than the carrying amount of the debt at the date of the amendment, we accounted for the change prospectively using the new effective interest rate. During the nine months ended September 30, 2020 and 2019, respectively, we recorded a BCF of $0 and $20,802, respectively. The BCF was recorded as a charge to debt discount and a credit to additional paid in capital, with the debt discount, using the effective interest method, amortized to interest expense over the term of the notes.

 

 

As Warrants were issued with the Fifth Amendment Notes, the proceeds were allocated to the instruments based on relative fair value as the warrants did not contain any features requiring liability treatment and therefore were classified as equity. The value allocated to the Fifth Amendment Warrants was $1,093,105, which was recorded as debt discount with the credit to additional paid in capital. We recorded an aggregate of $134,957 and $25,443 in interest for the nine months ended September 30, 2020 and 2019, respectively, related to the Fifth Amendment Notes and Fifth Amendment Warrants. The Sixth Amendment Warrants and Eighth Amendment Warrants also did not contain features requiring liability accounting and were recorded at fair value on the date of issuance with the offsetting credit recorded in equity. The value allocated to the Ninth Amendment Warrant was $378,000, which was recorded as debt costs with the credit to additional paid in capital. We recorded an aggregate of $43,352 and $43,352 in interest expense for the nine months ended September 30, 2020 and 2019, respectively.

 

NOTE 12 – JOINT VENTURE AGREEMENT

 

On November 16, 2009, we entered into a Master Investment Agreement (the “Rockwell Agreement”) with Rockwell Holdings I, LLC, a Wisconsin limited liability (“Rockwell”). Under the terms of the Rockwell Agreement, we used funds from Rockwell to fully implement the CareView System™ in Hillcrest Medical Center in Tulsa, Oklahoma (“Hillcrest”) and Saline Memorial Hospital in Benton, Arkansas (“Saline”) (the “Project Hospital(s)”). CareView-Hillcrest, LLC and CareView-Saline, LLC were created as the operating entities for the Project Hospitals under the Rockwell Agreement (the “Project LLC(s)”).

 

On January 31, 2017, under the terms of the Rockwell Agreement, wherein we have the option to purchase Rockwell’s interest in the Project LLCs, we exercised that right by entering into a Settlement and LLC Interest Purchase Agreement with Rockwell (the “Settlement Agreement). Pursuant to the terms of the Settlement Agreement, we paid Rockwell the aggregate amount of $1,213,786 by the issuance of a promissory note to Rockwell for $1,113,786 (the “Rockwell Note”) and a cash payment of $100,000. Pursuant to the terms of the Rockwell Note, we will make quarterly principal payments of $100,000, with each payment being made on the last day of each calendar quarter beginning with the first payment date of June 30, 2017 and continuing on the last business day of each subsequent calendar quarter through September 30, 2019. We were not in default of any conditions under the Settlement Agreement as of December 31, 2017. The final payment due on December 31, 2019 was to be a balloon payment of $13,786 representing the remaining principal balance plus all accrued and unpaid interest. On February 2, 2018 the Company entered into an amendment (the “Rockwell Note Amendment”) to the Company’s Promissory Note to Rockwell dated as of January 31, 2017 (the “Rockwell Note”), pursuant to which Rockwell agreed to defer $50,000 of each $100,000 quarterly payment due under the Rockwell Note from January 1, 2018 through the termination of the Modification Period, September 30, 2020 per the Twentieth Modification Agreement Amendment.

 

On December 31, 2019, the Company and Rockwell entered into a Second Amendment to the Rockwell Note (the “Second Rockwell Note Amendment”) pursuant to which Rockwell agreed to extend the term of the Rockwell Note by one year, to December 31, 2020, and agreed to extend the time to make the quarterly payment that would otherwise be due on December 31, 2019 to January 31, 2020. We have evaluated the Second Amendment to the Rockwell Note under ASC 470 and determined that the amendment should be treated as a debt modification.

 

On January 31, 2020, the Company and Rockwell entered into a Third Amendment to the Rockwell Note (the “Third Rockwell Note Amendment”), pursuant to which Rockwell agreed to extend the time to make the quarterly payment that would otherwise be due on January 31, 2020 (per the Second Rockwell Note Amendment) to February 10, 2020. We have evaluated the Third Amendment to the Rockwell Note under ASC 470 and determined that the amendment should be treated as a debt modification.

 

 

Effective as of March 31, 2020, the Company and Rockwell entered into a Fourth Amendment to the Rockwell Note (the “Fourth Rockwell Note Amendment”), pursuant to which Rockwell agreed to extend the time to make the quarterly payment that would otherwise be due on March 31, 2020 to April 16, 2020. We have evaluated the Fourth Amendment to the Rockwell Note under ASC 470 and determined that the amendment should be treated as a debt modification.

 

As additional consideration to Rockwell for entering into the Rockwell Agreement, we granted Rockwell Warrants to purchase 1,151,206 shares of our Common Stock on the date of the Rockwell Agreement, and, using the Black-Scholes Model, valued the Warrants at $1,124,728 (the “Project Warrant”), which amount was fully amortized at December 31, 2015. Pursuant to the terms of the Settlement Agreement, the expiration date of the Project Warrant was extended from November 16, 2017 to November 16, 2022. All other provisions of the Project Warrant remained unchanged. At the time of the extension, the Project Warrant were revalued resulting in a $11,512 increase in fair value, which has been recorded as non-cash costs included in general and administration expense in the accompanying consolidated financial statements. Effective February 2, 2018, pursuant to the terms of the PDL Modification Agreement, we entered into an amendment to the Project Warrant wherein the Project Warrant’s exercise price was changed from $0.52 to $0.05, resulting in a $13,814 increase in fair value, this transaction was recorded as non-cash costs included in general and administration expense in the consolidated financial statements for the year ended December 31, 2018.

 

NOTE 13 – COMMITMENTS AND CONTINGENCIES

 

Amendment to Commercial Lease Agreement

 

On March 4, 2020, we entered into the Fourth Amendment to Commercial Lease Agreement (the “Lease Extension”), wherein we extended the Lease through August 31, 2025. The Lease Extension contains a renewal provision under which we may renew the Lease for an additional five-year period under the same terms and conditions. We believe that these premises are adequate and sufficient for our current needs.

 

Payroll Protection Program

 

On April 10, 2020, the Company received loan proceeds in the amount of $781,800 pursuant to a promissory note agreement (the “Promissory Note”) with a bank under the Paycheck Protection Program (“PPP”). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The Promissory Note has a loan maturity of April 10, 2022, a stated interest rate of 1.0% per annum, and has payments of principal and interest that are due monthly after an initial six-month deferral period where interest accrues, but no payments are due. The Promissory Note provides for customary events of default, including, among others, those relating to failure to make payment when due and breaches of representations. The Company may prepay the principal of the Promissory Note at any time without incurring any prepayment charges. The loan is subject to all the terms and conditions applicable under the PPP and is subject to review by the Small Business Association (the “SBA”) for compliance with program requirements, including the Company’s certification that the current economic uncertainty made the PPP loan request necessary to support ongoing operations and the Company’s obtaining approval from the SBA for the private placement equity transaction.

 

In June 2020, the Payroll Protection Program Flexibility Act (“PPPFA”) was signed into law adjusting certain key terms of loans issued under the PPP. In accordance with the PPPFA, the initial deferral period may be extended from six to up to ten months and the loan maturity may be extended from two to five years. The PPPFA also provided for certain other changes, including the extent to which the loan may be forgiven.

 

 

The loan’s principal and accrued interest are forgivable to the extent that the proceeds are used for eligible purposes, subject to certain limitations, and that the Company maintains its payroll levels over a twenty-four-week period following the loan date. The loan forgiveness amount may be reduced if the Company terminates employees or reduces salaries during the twenty-four-week period. The Company intends to use the proceeds for eligible purposes consistent with the provisions of the PPPFA. However, there can be no assurance that any portion of the loan will be forgiven and that we will not have to repay the loan in full.

 

As the legal form of the Promissory Note is a debt obligation, the Company is accounting for it as debt under Accounting Standards Codification (ASC) 470, Debt and recorded a liability of $781,800 in the condensed consolidated balance sheet upon receipt of the loan proceeds. The Company is accruing interest over the term of the loan and is not imputing additional interest at a market rate because the guidance on imputing interest in ASC 835-30, Interest excludes transactions where interest rates are prescribed by a government agency. A de minimis amount of interest expense has been recognized within interest and other income, net in the condensed consolidated statements of $3,757 for the nine months ended September 30, 2020. If any amount of the loan is ultimately forgiven, income from the extinguishment of debt would be recognized as a gain on loan extinguishment in the consolidated statement of operations and comprehensive loss. 

As of the date of this Quarterly Report, the Company has applied for forgiveness of the Paycheck Protection Program loan and the lender has requested full forgiveness of the loan and payment from the Small Business Administration (SBA). The loan forgiveness application is currently under review by the SBA.

 

NOTE 14 - LEASE

 

Under ASC Topic 842, Leases (“ASC 842”), operating lease expense is generally recognized evenly over the term of the lease. The Company has an operating lease primarily consisting of office space with remaining lease term of 18 months. We adopted ASC 842 under the modified retrospective transition method for all long-term operating leases as of January 1, 2019. The cumulative impact of the adoption of ASC 842 to the condensed consolidated balance sheet as of January 1, 2019 was as follows:

 

Operating Lease Asset		$	236,959
Operating Lease Liability-short term		$	166,955
Operating Lease Liability-long term		$	83,477

 

The adoption of ASC 842 did not result in an adjustment to retained earnings. The adoption of ASC 842 represents a change in accounting principle.

 

On September 8, 2009, we entered into a Commercial Lease Agreement (the “Lease”) for 10,578 square feet of office and warehouse space expiring on June 30, 2015. On March 4, 2020, we entered into the Fourth Amendment to Commercial Lease Agreement (the “Lease Extension”), wherein we extended the Lease through August 31, 2025. The Lease Extension contains a renewal provision under which the Lease has been extended for an additional five-year period under the same terms and conditions of the original Lease Agreement. Management has identified this extension as a reassessment event, as we have elected to exercise the Lease Extension option even though the Company had previously determined that it was not reasonably certain to do so.

 

The Company has reassessed the discount rate at the remeasurement date, at 14.8% and the Company has remeasured its ROU asset and lease liability on our balance sheet using the discount rate that applies as of the date of the reassessment event to remeasure its Operating lease asset and lease liability. The reassessment is based on the remaining lease term and lease payments. The Company has further concluded that the Lease Extension has no effects on the classification of the Lease. Rent expense for the three months ended September 30, 2020 and 2019 was $71,824 and $65,697, respectively. Rent expense for the nine months ended September 30, 2020 and 2019 was $223,868 and $220,769, respectively.

 

 

Lease Position

 

Operating lease asset and liability for our operating lease were recorded in the condensed consolidated balance sheet as follows:

 

		As of September 30, 2020
Assets
Operating lease asset		$	682,833
Total lease asset		$	682,833
Liabilities
Current liabilities:
Operating lease liability		$	147,166
Long-term liabilities:
Operating lease liability, net of current portion			587,068
Total lease liability		$	734,234

 

Undiscounted Cash Flows

 

Future lease payments included in the measurement of operating lease liability on the condensed consolidated balance sheet as of September 30, 2020, for the following five fiscal years and thereafter as follows:

 

Year ending December 31,			Operating Leases
Remaining 2020			$	49,830
2021				202,310
2022				208,379
2023				214,631
2024				221,069
2025 and thereafter				150,679
Total minimum lease payments				1,046,898
Less effects of discounting				(312,664	)
Present value of future minimum lease payments			$	734,234

 

Cash Flows

 

The table below presents certain information related to the cash flows for the Company’s operating lease for the nine months ended September 30, 2020:

 

		Nine Months Ended September 30, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases		$	55,802

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

General

 

The following discussion and analysis provide information which our management believes to be relevant to an assessment and understanding of our results of operations and financial condition. This discussion should be read together with our financial statements and the notes to the financial statements, which are included in this Quarterly Report on Form 10-Q (the “Report”). This information should also be read in conjunction with the information contained in our Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2020, including the audited consolidated financial statements and notes included therein as of and for the year ended December 31, 2019. The reported results will not necessarily reflect future results of operations or financial condition.

 

Throughout this Quarterly Report on Form 10-Q (the “Report”), the terms “we,” “us,” “our,” “CareView,” or “Company” refers to CareView Communications, Inc., a Nevada corporation, and unless otherwise specified, includes our wholly owned subsidiaries, CareView Communications, Inc., a Texas corporation (“CareView-TX”) and CareView Operations, LLC, a Nevada limited liability company (“CareView Operations”) (collectively known as the “Company’s Subsidiaries”).

 

We maintain a website at www.care-view.com and our Common Stock trades on the OTCQB under the symbol “CRVW.”

 

Company Overview

 

Our mission is to be the leading provider of products and services for the healthcare industry specializing in bedside video monitoring. For over a decade, CareView has pursued innovative ways to increase patient protection by providing advanced solutions that lower operational costs and foster a culture of safety among patients, staff, and hospital leadership. The CareView Patient Safety System, anchored by a patented and proven solution for reducing patient falls and increasing in-room safety, is a modular and scalable design that delivers operational savings in any application. Our products are the next generation of patient care monitoring that allow real-time bedside and point-of-care video monitoring. Reported results from CareView-driven facilities prove that our products reduce falls, reduce the cost of sitter fees, and increase patient satisfaction.

 

COVID-19 Outbreak

 

In December 2019, a novel strain of coronavirus (COVID-19) was identified in Wuhan, China, and has subsequently spread to other regions of the world, and has resulted in increased travel restrictions, business disruptions and emergency quarantine measures across the world including the United States.

 

The Company has considered the effects of COVID-19 in the preparation of the financial statements as of and for the period ended September 30, 2020.   We have been able to continue providing services to our current customer base and have not experienced a slowdown in collections. However, the continued shelter-in-place orders have limited our ability to install currently contracted units as well as make sales visits to existing and potential customers and market our new Gen5 product.

 

The full impact of the COVID-19 outbreak continues to evolve. As such, it is uncertain as to the full magnitude that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations. Management is actively monitoring the global situation on its financial condition, liquidity, operations, industry, and workforce. Although the Company cannot estimate the length or gravity of the impact of the COVID-19 outbreak at this time, if the pandemic continues, it may have an adverse effect on the Company’s results of future operations, financial position, and liquidity in fiscal year 2020.

 

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act (the “Act”) was enacted. The CARES Act is an approximately $2 trillion emergency economic stimulus package in response to the Coronavirus outbreak, which among other things contains numerous income tax provisions. Some of these tax provisions are expected to be effective retroactively for years ending before the date of enactment. The Company applied for, and received, funds under the Paycheck Protection Program in the amount of $781,800. The application for these funds requires the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support operations of the Company. This certification further requires the Company to consider our current business activity and our ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. The receipt of these funds, and the forgiveness of the loan attendant to these funds, is dependent on the Company having initially qualified for the loan and qualifying for the forgiveness of such loan based on our future adherence to the forgiveness criteria.

 

 

As of the date of this Quarterly Report, the Company has applied for forgiveness of the Paycheck Protection Program loan and the lender has requested full forgiveness of the loan and payment from the Small Business Administration (SBA). The loan forgiveness application is currently under review by the SBA. 

 

CareView Patient Safety System

 

Our CareView Patient Safety System provides innovative ways to increase patient protection, provides advanced solutions that lower operational costs, and fosters a culture of safety among patients, staff, and hospital leadership. We understand the importance of providing high quality patient care in a safe environment and believe in partnering with hospitals to improve the quality of patient care and safety by providing a system that monitors continuously. We are committed to providing an affordable video monitoring tool to improve the practice of nursing, create a better work environment and make the patient’s hospital stay more satisfying. Our suite of products and services can simplify and streamline the task of preventing and managing patients’ falls, enhance patient safety, improve quality of care, and reduce costs. Our products and services can be used in all types of hospitals, nursing homes, adult living centers and selected outpatient care facilities domestically and internationally.

 

The CareView Patient Safety System includes CareView’s new SitterView® Monitoring System, providing a clear picture of up to 40 patients at once, allowing staff to intervene and document patient risks more quickly. SitterView® features intuitive decision support pathway, guiding staff alarm response and pan-tilt-zoom functionality, allowing staff to home in on areas of interest. CareView’s new Analytics Dashboard provides real-time metrics on utilization, compliance, and outcome data by day, week, month, and quarter. Outcomes are automatically compared to organizational goals to evaluate real-time ROI.

 

CareView’s next generation of in-room camera; the CareView Controller features an HD camera, high-fidelity 2-way audio, and an LCD display, harnessing increased performance to deliver the ultimate in capability, flexibility, and affordability for all types of hospitals. Building on top of CareView’s patented Virtual Bed Rails® and Virtual Chair Rails® predictive technology, the CareView Controller uses machine learning to differentiate between normal patient movements and behaviors of a patient at risk. This technology results in less false alarms, faster staff intervention, and a significant reduction in patient falls.

 

The CareView Controller is available in multiple configurations for permanent or temporary situations, the CareView Mobile, Portable, and Fixed Controller. For situations that demand that the camera come to the patient, the CareView Mobile Controller on wheels comes with an uninterrupted external power supply for situations where power may not be readily available and can operate on the facility’s wireless network. For monitoring patients within a general care unit, the CareView Portable Controller can be easily removed from mounts and moved where the workflow dictates, making this application perfect for general use. For high-risk patient rooms where behavior and self-harm may be a factor, or where a patient must be continuously monitored, the CareView fixed Controller can be installed seamlessly in the ceiling tiles leaving no exposed wiring making it ligature resistant.

 

The CareView Patient Safety System can be easily configured to meet the individual privacy and security requirements of any hospital or nursing facility. CareView is (“HIPAA’) compliant and HITRUST certified. Additional HIPAA-compliant features allow privacy options to be enabled at any time by the patient, nurse, or physician.

 

 

CareView Patient Safety System Products and Services Agreement with Healthcare Facilities

 

Currently, we offer our products and services through a subscription-based model with healthcare facilities through a Products and Services Agreement (the “P&S Agreement(s)”). During the term of the P&S Agreement, we provide continuous monitoring of the CareView Patient Safety System’s products and services deployed to a healthcare facility and maintain and service all equipment installed by us. Terms of each P&S Agreement require the healthcare facility to pay us a monthly subscription fee based on the number of selected, installed, and activated services. None of the services provided through the Primary Package are paid or reimbursed by any third-party provider including insurance companies, Medicare, or Medicaid. We also enter into corporate-wide agreements with healthcare companies (the “Master Agreement(s)”), wherein the healthcare facilities that are a part of these healthcare companies enter into individual facility level agreements that are substantially similar to our P&S Agreements.

 

Master Agreements and P&S Agreements are currently negotiated for a period of five years with a minimum of two or three years; however, older P&S Agreements were negotiated for a five-year period with a provision for automatic renewal. P&S Agreements specific to pilot programs (“P&S Pilot Agreements”) contain pricing terms substantially similar to P&S Agreements, are generally three or six-months in length and can be extended on a month-to-month basis as required. We own all rights, title, and interest in and to the equipment we install at each location and agree to maintain and repair it; although, we may charge for repairs or replacements due to damage or misuse. We are not responsible for maintaining data arising from use of the CareView Patient Safety System or for transmission errors, corruption or compromise of data carried over local or interchange telecommunication carriers. We grant each healthcare facility a limited, revocable, non-transferable and non-exclusive license to use the software, network facilities, content and documentation on and in the CareView Patient Safety System to the extent, and only to the extent, necessary to access, explore and otherwise use the CareView Patient Safety System in real time. Such non-exclusive license expires upon termination of the P&S Agreement.

 

We use specific terminology in an effort to better define and track the staging and billing of the individual components of the CareView Patient Safety System. The CareView Patient Safety System includes three components which are separately billed; the CareView Controller (previously known as RCP), the CareView SitterView Monitor, and the CareView Application Server (each component referred to as a “unit”). The term “bed” refers to each healthcare facility bed as part of the overall potential volume that a healthcare facility represents. For example, if a healthcare facility has 200 beds, the aggregate of those beds is the overall potential volume of that healthcare facility. The term “bed” is often used interchangeably with “CareView Controller” as this component of the CareView Patient Safety System consistently resides within each room where the “bed” is located. On average, there are six SitterView Monitors for each 100 beds. The term “deployed” means that the units have been delivered to the healthcare facility but have not yet been installed at their respective locations within the facility. The term “installed” means that the units have been mounted and are operational. The term “billable” refers to the aggregate of all units on which we charge fees. Units become billable once they are installed and the required personnel have been trained in their use. Units are only deployed upon the execution of a P&S Agreement or P&S Pilot Agreement.

 

With the introduction of our updated technology, CareView has also aligned its contracting model to meet the preferred acquisition model in the hospital industry. CareView now sells its proprietary equipment to facilities in lieu of lending the equipment as was done under the previous contract model. In doing so, the facility is billed for the hardware on acceptance of the contract. After CareView’s equipment is delivered to the facility, CareView begins the process of installing and securely integrating the equipment and software. Upon completion of installation, training, and “go-live”, CareView bills the facility for the installation, training, and an annual software license fee. CareView will continue to bill the facility an annual software license fee until end of the contract. The shift in our new contracting model will have an immediate impact on the company’s operations resulting in greater cash flow within 30 of contract signing. In addition, the new contracting model will provide higher current revenue and recurring revenue.

 

 

CareView continues its dedication to provide service and support on a 24x7x365 basis for every customer under the prior and updated revenue models.

 

CareView Connect

 

Our mission is to be the leading provider of resident monitoring products and services for the long-term care industry. We took what we learned in our medical facility business and applied it to developing a product to serve the long-term care market. With CareView Connect^TM Quality of Life System (“CareView Connect”), CareView has again positioned itself as a technology leader with its innovative suite of products specifically designed for all aspects of the long-term care market, including: Nursing Care, Home Care, Assisted Living and Independent Living.

 

With this mission in mind, in the second quarter of 2018, the Company introduced a new sensor product that will have application in both the assisted living center market and the home health market. CareView Connect leverages both passive and active sensors to track the activities of daily life. CareView Connect provides peace of mind by using data from the resident’s activity, existing conditions, and environment to notify a caregiver of potential emergencies and identify the need for dignified support. CareView Connect consists of a small emergency assist button, two motion sensors, one sleep sensor, and one event sensor. Resident activity levels, medication administration, sleep patterns, and requests for assistance can all be monitored depending on which options are selected.

 

The skilled nursing home market consists of approximately 2,000,000 beds, which is double the size of the current hospital/healthcare facility bed market. The assisted living center market is even larger at approximately 3,000,000 beds. Our products flow naturally into the nursing home space as it is substantially the same setting as hospital rooms.

 

Our Products and Services

 

CareView Connect is a platform consisting of several products and applications targeted at improving level of care and efficiency. CareView is building a cohesive and tightly integrated solution that solves several problems that long-term care facilities face. We offer an array of wearable and stationary buttons that allow a resident to summon help either for an emergency or assistance, which can be anything from toileting help to assistance putting on their shoes. We offer a mobile app capable of delivering an alert to the caregiver and allows them document information around that alert. This allows for workflows and reports around the alerts, i.e. how long before the alert was handled, what was the cause of the alert, and if it was not acknowledged in a timely manner then the alert is escalated to another individual or group. This ensures that every alert is responded to timely and is verifiable. In addition, the caregiver usually is carrying out a litany of daily activities directed at each facility resident.

 

Alert Management and Monitoring System

 

CareView Connect provides a suite of hardware and software that facilitate a data-driven solution for alert management and monitoring. CareView Connect’s solution provides additional context, including location of the resident, which improves response time by the staff. The alert system includes a documentation platform that allows the facility’s staff to classify reason for alerts and provides metrics around response time. CareView Connect’s solution involves several passive sensors that monitor the resident.

 

Caregiver Platform

 

The caregiver platform includes a “Leave of Absence” component, which allows the facility to document when the resident is outside of their room for a duration of time. This information is incorporated with known data from the workflows and sensors to improve awareness. The Caregiver Connect mobile application provides a convenient and intuitive interface to the CareView Connect platform. The caregiver can use the mobile app to capture important information and interface with critical workflows, such as acknowledging and documenting alert presses by the resident. CareView Connect also provides a product focused on capturing and measuring the mental state and pain experienced by the resident. “How are you feeling today?” provides a convenient way to capture information about the mental state of the resident using emojis. Similarly, “What is your pain today?” allows the staff to categorize and document pain. Connect Resident is a tablet application intended for the resident’s direct use. This product currently supports video conferencing with a remote caregiver, becoming a communications conduit for tele-health. Connect Resident also supports “How are you feeling today?”, which allows the resident to submit this information directly.

 

 

Quality of Life Metrics

 

CareView is developing its own algorithm for measuring quality of life based on “best of breed” research and leveraging the data collected by the platform. CareView Connect’s Quality of Life Metrics focuses on several categories, including Physical Activity, Bodily Pain, General Health, Vitality, Social Interaction, Mental Health, and Sleep Quality. Leveraging this data, the facility and their staff have improved visibility into the health and well-being of their residents. By applying machine learning and predictive analytics, subtle patterns and trends that may not otherwise be visible become actionable. The facility can use this information to present a more compassionate and capable level of care, differentiating the facility from their competition. The Quality of Life Metrics information can be made available to the family and loved ones, opening a new channel of remote awareness and care. Because the information is collected automatically, the family gains awareness on issues of which their loved ones may normally be unaware. The Connect Family mobile application allows family members to monitor their loved one and receive alerts and notifications based on their preferences.

 

CareView is working to integrate additional sensors into the platform, including a ballistocardiogram (BCG) sensor, which allows for improved monitoring and metrics around sleep quality, such as heart and respiration rate. Additional sensors include medical devices, such as scales, pulse oximeters, blood glucose meters, and blood pressure monitors.

 

Pricing Structure and Revenue Streams

 

The CareView Connect suite of products and services offers multiple pricing models. We work with each facility on pricing to offer an affordable package based on the demographics of the residents of the facility. The pricing structure with each facility is negotiated separately. Typically, we offer the CareView Connect basic package at a price per monitored room with varying price structures based on number of sensors and number of residents in each facility.

 

General Service Administration Multiple Award Schedule

 

Pursuant to the terms of the Company’s General Service Administration (“GSA”) Multiple Award Schedule contract (“MAS”) the MAS allows us to sell the CareView Patient Safety System at a negotiated rate to the approximate 169 VA facilities with over 39,000 licensed beds and the approximate 42 DOD hospitals with over 2,600 licensed beds. The updated contracting model was added to the Multiple Award Schedule contract (“MAS”) which allows us to sell the proprietary hardware and license the software on an annualized basis on November 13, 2020. The MAS is one of the most widely accepted government contract vehicles available to agency procurement officers. GSA’s application process requires potential vendors to be recognized as highly credible and well established. CareView is a sole source provider. Our products and services represent an enormous opportunity to improve the health and safety of our Nation’s veterans.

 

 

Group Purchasing Agreement with HealthTrust Purchasing Group, LP

 

On December 14, 2016, the Company entered into a Group Purchasing Agreement with HealthTrust Purchasing Group, L.P. (“HealthTrust”) (the “HealthTrust GPO Agreement”), the nation’s only committed-model Group Purchasing Organization (“GPO”) headquartered in Nashville, Tennessee. HealthTrust serves approximately 1,600 acute care facilities and members in more than 26,000 other locations, including ambulatory surgery centers, physician practices, long-term care, and alternate care sites. The agreement was effective on January 1, 2017 and all CareView Patient Safety System components and modules are available for purchase by HealthTrust’s exclusive membership. HealthTrust members may order CareView’s products and services included in the agreement directly from CareView.

 

On October 1, 2018, the Company added CareView Connect to the HealthTrust GPO Agreement.

 

On November 1, 2020, the updated contracting model has been added to the HealthTrust GPO Agreement which allows us to sell the proprietary hardware and license the software on an annualized basis.

 

Summary of Product and Service Usage

 

The following table shows the number of healthcare facilities using our subscription-based products and services including the number of installed hospitals, installed Bed Equivalent Units (“BEUs”) and billable BEUs as of September 30, 2020. BEUs are calculated by dividing the monthly revenue derived from healthcare facility’s P&S or P&S Pilot Agreement by the unit price charge for a CareView Controller.

 

Installed Hospitals	Installed BEUs	Billable BEUs
91	8,899	8,917

  

In addition to the subscription-based contract model, CareView also offers a sale-based contract model, whereby, the Gen5 equipment is sold. As of September 30, 2020, CareView had 924 Gen5 RCP units in negotiation with a potential of 2,800 RCP units.

 

Results of Operations

 

Three months ended September 30, 2020 compared to three months ended September 30, 2019

 

		Three months ended September 30,
		2020				2019				Change
						(000’s)
Revenue		$	1,566			$	1,622			$	(56	)
Operating expenses			2,262				2,017				245
Operating loss			(696	)			(395	)			(301	)
Other, net			(2,631	)			(2,769	)			139
Net loss		$	(3,327	)		$	(3,164	)		$	(162	)

 

Revenue

 

Revenue decreased approximately $56,000 for the three months ended September 30, 2020 as compared to the same period in 2019. Hospitals with billable BEUs decreased to 91 on September 30, 2020 from 105 on September 30, 2019. The decrease in revenue is primarily related to lower GSA revenue during the three months ended September 30, 2020. Of the 91 hospitals with billable BEUs on September 30, 2020, one hospital group accounted for 19.8% of the total. Billable BEUs for all hospitals totaled 8,917 on September 30, 2020 as compared to 9,741 on September 30, 2019.

 

 

Operating Expenses

 

Our principal operating costs include the following items as a percentage of total operating expense.

 

		Three Months Ended September 30,
		2020				2019
Human resource costs, including benefits and non-cash compensation			55	%			59	%
Professional and consulting costs			10	%			4	%
Other product deployment costs, excluding human resources and travel and entertainment costs			8	%			4	%
Other expenses			16	%			16	%
Depreciation and amortization			8	%			9	%
Travel and entertainment expense			3	%			8	%

 

Operating expenses increased by less than 12.1% as a result of the following items:

 

		(000’s)
Increase:
Human resource costs, including benefits and non-cash compensation		$	44
Professional and consulting costs			142
Other product deployment costs, excluding human resources and travel and entertainment expense			102
Other expenses			46
Decrease:
Depreciation and amortization			(0	)
Travel and entertainment expense			(88	)
		$	246

 

Human resource related costs (including salaries and benefits and non-cash compensation) increased approximately $44,000 primarily as a result of additional sales and marketing and research and development staffing during the three months ended September 30, 2020 as compared to the three months ended September 30, 2019. While we had 58 employees at September 30, 2020 as compared to 56 for the comparable date for the prior year, on average we employed 56 employees over the course of current period as compared to 55 for the comparable prior year period. Professional and consulting fees increased approximately $142,000, primarily as a result of increased legal and consulting fees. Other product development costs increased approximately $102,000 primarily as a result of increases in product deployment and installation costs and related non-capital equipment costs. For the comparable periods, other expenses increased approximately $46,000, primarily a result of an increase in insurance costs. Depreciation and amortization expense did not materially change. Travel and entertainment expense decreased approximately $88,000 as a result of less product installations and COVID-19 related slowdown during the three-month period ended September 30, 2020 compared to the same period in 2019.

 

Other, net

 

Other non-operating income and expense decreased by approximately $138,000, or 5%, for the three months ended September 30, 2020 in comparison to the same period in 2019, primarily as a result of an increase in other revenue of $26,000 for the reimbursement of destroyed leased equipment and decrease in debt cost of $201,000 offset by increase in interest expense of $87,000 during the three months ended September, 30, 2020.

 

 

Net Loss

 

As a result of the factors above, our third quarter 2020 net loss of approximately $3,328,000 increased approximately $164,000, or 5%, as compared to approximately $3,164,000 net loss for the third quarter of 2019.

 

Nine months ended September 30, 2020 compared to nine months ended September 30, 2019

 

		Nine months ended September 30,
		2020				2019				Change
		(000’s)
Revenue		$	4,957			$	4,641			$	316
Operating expenses			6,422				6,060				362
Operating loss			(1,465	)			(1,419	)			(46	)
Other, net			(7,881	)			(8,229	)			348
Net loss		$	(9,346	)		$	(9,648	)		$	302

 

Revenue

 

Revenue increased approximately $316,000 for the nine months ended September 30, 2020 as compared to the same period in 2019. Hospitals with billable BEUs decreased to 91 on September 30, 2020 from 105 on September 30, 2019. The increase in revenue is a result of installation of contracted hospitals as well as organic growth within our existing customer base. Of the 91 hospitals with billable BEUs on September 30, 2020, one hospital group accounted for 19.8% of the total. Billable BEUs for all hospitals totaled 8,917 on September 30, 2020 as compared to 9,741 on September 30, 2019.

 

Operating Expenses

 

Our principal operating costs include the following items as a percentage of total operating expense.

 

		Nine Months Ended September 30,
		2020				2019
Human resource costs, including benefits and non-cash compensation			54	%			57	%
Professional and consulting costs			10	%			7	%
Other product deployment costs, excluding human resources and travel and entertainment costs			7	%			4	%
Other expenses			17	%			15	%
Depreciation and amortization			8	%			9	%
Travel and entertainment expense			4	%			8	%

 

Operating expenses increased by 7% as a result of the following items:

 

		(000’s)
Increase:
Human resource costs, including benefits and non-cash compensation		$	36
Professional and consulting costs			230
Other product deployment costs, excluding human resources and travel and entertainment expense			212
Other expenses			132
Decrease:
Depreciation and amortization			(10	)
Travel and entertainment expense			(239	)
		$	361

 

 

Human resource related costs (including salaries and benefits and non-cash compensation) increased approximately $38,000 primarily as a result of additional sales and marketing and research and development staffing during the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019. While we had 58 employees at September 30, 2020 as compared to 56 for the comparable date for the prior year, on average we employed 56 employees over the course of current period as compared to 55 for the comparable prior year period. Professional and consulting fees increased approximately $229,000, primarily as a result of increased legal and consulting fees. Other product development costs increased approximately $211,000 primarily as a result of increases in product deployment and installation costs and related non-capital equipment costs. For the comparable periods, other expenses increased approximately $133,000, primarily a result of an increase in sales and marketing costs approximately $60,000 primarily related to Gen5 marketing, an increase in research and development (less non-personnel and travel costs) of approximately $16,000 and website costs, an increase in insurance costs of approximately $55,000, which were offset by a decrease in rent, utilities and maintenance of approximately $8,000. Depreciation and amortization expense decrease by approximately $10,000, primarily as a result of a reduction in depreciation expense as certain deployable assets purchased have become fully depreciated in 2020. Travel and entertainment expense decreased approximately $239,000 as a result of a less product installations and COVID-19 related slowdown during the nine-month period ended September 30, 2020 compared to the same period in 2019.

 

Other, net

 

Other non-operating income and expense decreased by approximately $348,000, or 4%, for the nine months ended September 30, 2020 in comparison to the same period in 2019, primarily as a result of a decrease in other debt cost offset by increase in interest expense.

 

Net Loss

 

As a result of the factors above, our third quarter 2020 net loss of approximately $9,346,000 decreased approximately $300,000, or 3%, as compared to approximately $9,649,000 net loss for the third quarter of 2019.

 

Liquidity and Capital Resources

 

Our cash position on September 30, 2020 was approximately $434,000.

 

We evaluated our ability to continue as a going concern within one year subsequent to the date of the filing of this Form 10-Q (“evaluation period”). U.S. generally accepted accounting principles requires that in making this determination, the Company cannot consider any remedies that are outside the Company’s control and have not been fully implemented. As a result, the Company could not consider future potential fundraising activities. We have evaluated if cash and cash equivalents on hand and cash generated through operating activities would be sufficient to sustain projected operating activities through November 14, 2021. We anticipate that our current resources, along with cash generated from operations, will not be sufficient to meet our cash requirements throughout the evaluation period, including funding anticipated losses and scheduled debt maturities. Our PDL BioPharma, Inc. note payable will mature on November 30, 2020 (see NOTE 9 for details), our Rockwell Holdings I, LLC facility will mature on December 31, 2020 (see NOTE 11 for details), and our HealthCor Partners Fund, LP and HealthCor Hybrid Offshore Master Fund, LP note will mature on April 21, 2021 (see NOTE 10 for details). These notes have been included in current liabilities on our balance sheet, and we do not have sufficient funds to cover the amounts due upon maturity of these notes of approximately $64 million. We additionally continue to generate operating losses. As a result of anticipated losses and scheduled debt maturities in the following twelve months, substantial doubt is deemed to exist about the Company’s ability to continue as a going concern through November 14, 2021.

 

 

Off-Balance Sheet Arrangements

 

As of September 30, 2020, we had no material off-balance sheet arrangements.

 

In the ordinary course of business, we enter into agreements with third parties that include indemnification provisions which, in our judgment, are normal and customary for companies in our industry sector. These agreements are typically with business partners, clinical sites, and suppliers. Pursuant to these agreements, we generally agree to indemnify, hold harmless, and reimburse indemnified parties for losses suffered or incurred by the indemnified parties with respect to our product candidates, use of such product candidates, or other actions taken or omitted by us. The maximum potential amount of future payments we could be required to make under these indemnification provisions is unlimited. We have not incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. As a result, the estimated fair value of liabilities relating to these provisions is minimal. Accordingly, we have no liabilities recorded for these provisions as of September 30, 2020.

 

In the normal course of business, we may be confronted with issues or events that may result in a contingent liability. These generally relate to lawsuits, claims, environmental actions or the actions of various regulatory agencies. We consult with counsel and other appropriate experts to assess the claim. If, in our opinion, we have incurred a probable loss as set forth by accounting principles generally accepted in the U.S., an estimate is made of the loss and the appropriate accounting entries are reflected in our financial statements. After consultation with legal counsel, we do not anticipate that liabilities arising out of currently threatened lawsuits and claims, if any, will have a material adverse effect on our financial position, results of operations or cash flows.

 

Critical Accounting Estimates

 

Please refer to our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Commission on March 30, 2020 and incorporated herein by reference, for detailed explanations of our critical accounting estimates, which have not changed significantly during the three months ended September 30, 2020.

 

Recently Issued and Newly Adopted Accounting Pronouncements

 

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, 2019. We do not expect that the adoption of any recent accounting pronouncements will have a material impact on our accompanying condensed consolidated financial statements.

 

Recent Events

 

None.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

None.

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

 

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our chief executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

 

Evaluation of Disclosure Controls and Procedures

 

Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”), we carried out an evaluation, with the participation of our management, including Steve G. Johnson, our Chief Executive Officer (“CEO”) and principal executive officer, and Jason T. Thompson, our principal financial officer and chief accounting officer, of the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this Report.

 

Under the supervision and with the participation of our CEO and principal financial and chief accounting officer, our management evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2020. Based on that evaluation, our CEO and principal financial and chief accounting officer concluded that our disclosure controls and procedures were not effective as of September 30, 2020 due to the continuing existence of a material weakness in internal control over financial reporting described below (which we view as an integral part of our disclosure controls and procedures). Based on the performance of additional procedures designed to ensure the reliability of our financial reporting, we believe that the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial position, results of operations and cash flows as of the dates, and for the periods, presented, in conformity with accounting principles generally accepted in the United States (“GAAP”).

 

Material Weakness and Remediation Plan

 

A material weakness is a deficiency, or a combination of deficiencies, in internal controls over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

 

Management has determined that the Company did not maintain effective internal control over financial reporting as of the period ended September 30, 2020 due to the existence of the following material weaknesses:

 

(i) because our accounting manager had responsible for initiating transactions, had custody of assets, recorded transactions, and prepared financial reports. Therefore, it was determined that the Company had inadequate segregation of duties in place related to its financial reporting and other management oversight procedures due to the lack of accounting resources. To remedy this material weakness, the Company is in the process of identifying and employing additional full-time accounting personnel to join the corporate accounting function in order to enhance overall monitoring and accounting oversight within the Company; and

 

(ii) the lack of technical expertise related to identifying and applying GAAP rules specifically related to the evaluation of asset obsolescence, recording of revenues, debt, and other complex financial transaction. To remedy this material weakness, the Company has identified and engaged a third-party subject matter expert to assist with the reporting of these complex transaction.

 

Changes in Internal Controls

 

There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(e) of the Exchange Act during the three months ended September 30, 2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

None.

 

Item 1A. Risk Factors.

 

Our Company is a “smaller reporting company” as defined by Rule 12b-2 of the Exchange Act, and as such, is not required to provide the information required under this Item.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

 

Exhibit No.	Date of Document	Name of Document
10.1	08/06/20	CareView Communications, Inc. 2020 Stock Option Plan*
31.1	11/23/20	Certification of Chief Executive Officer of Periodic Report pursuant to Rule 13a-14a and Rule 14d-14(a)*
31.2	11/23/20	Certification of Chief Financial Officer of Periodic Report pursuant to Rule 13a-14a and Rule 15d-14(a)*
32	11/23/20	Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
101.INS	n/a	XBRL Instance Document*
101.SCH	n/a	XBRL Taxonomy Extension Schema Document*
101.CAL	n/a	XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF	n/a	XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB	n/a	XBRL Taxonomy Extension Label Linkbase Document*
101.PRE	n/a	XBRL Taxonomy Extension Presentation Linkbase Document*

 

*

Filed herewith.

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

November 23, 2020
	CAREVIEW COMMUNICATIONS, INC.
	By:	/s/ Steven G. Johnson
		Steven G. Johnson
		Chief Executive Officer
		Principal Executive Officer
	By:	/s/ Jason T. Thompson
		Jason T. Thompson
		Principal Financial Officer
		Chief Accounting Officer