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Careview Communications Inc (CRVW) SEC Filing 10-K Annual report for the fiscal year ending Saturday, December 31, 2016

Careview Communications Inc

CIK: 1377149 Ticker: CRVW
Document and Entity Information - USD ($)
12 Months Ended
Dec. 31, 2016
Mar. 31, 2017
Jun. 30, 2016
Document And Entity Information   
Entity Registrant NameCareView Communications Inc  
Entity Central Index Key0001377149  
Document Type10-K  
Trading SymbolCRVW  
Document Period End DateDec. 31, 2016  
Amendment Flagfalse  
Current Fiscal Year End Date--12-31  
Entity a Well-known Seasoned IssuerNo  
Entity a Voluntary FilerNo  
Entity's Reporting Status CurrentYes  
Entity Filer CategorySmaller Reporting Company  
Entity Public Float  $ 14,803,396
Entity Common Stock, Held by non-affiliates  105,738,541
Entity Common Stock, Shares Outstanding 139,380,748 
Document Fiscal Period FocusFY  
Document Fiscal Year Focus2016  

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended: December 31, 2016

 

TRANSITION REPORT UNDER 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)

 

Registrant’s telephone number, including area code: (972) 943-6050

 

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

 

Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, Par Value $0.001
(Title of class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes   No 

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes   No 

 

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 Website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

 

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  ☒
  (Do not check if smaller reporting company.)    

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes   No 

 

The aggregate market value of the voting common stock held by non-affiliates of the registrant (105,738,541 shares) based on the closing price of the registrant’s common stock as reported on OTCQB on June 30, 2016, which was the last business day of the registrant’s most recently completed second fiscal quarter, was $14,803,396. For purposes of this computation, all officers, directors, and 10% beneficial owners of the registrant are deemed to be affiliates.

 

The number of shares outstanding of the registrant’s common stock as of March 31, 2016 was 139,380,748.

 

DOCUMENTS INCORPORATED BY REFERENCE:

 

None.

 

 

 

   
 

 

Table of Contents

 

ITEM 1. BUSINESS. 3
     
ITEM 1A. RISK FACTORS. 17
     
ITEM 1B. UNRESOLVED STAFF COMMENTS. 17
     
ITEM 2. PROPERTIES. 17
     
ITEM 3. LEGAL PROCEEDINGS. 18
     
ITEM 4. MINE SAFETY DISCLOSURES. 18
     
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. 18
     
ITEM 6. SELECTED FINANCIAL DATA. 19
     
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 20
     
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 27
     
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. 27
     
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. 27
     
ITEM 9A. CONTROLS AND PROCEDURES. 27
     
ITEM 9B. OTHER INFORMATION. 28
     
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE. 29
     
ITEM 11. EXECUTIVE COMPENSATION. 39
     
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. 42
     
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. 44
     
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. 44
     
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. 45

 

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Statement Regarding Forward-Looking Information

 

This Annual Report on Form 10-K contains forward-looking statements. For example, statements regarding our financial position, business strategy, product development, and other plans and objectives for future operations, and assumptions and predictions about future product demand, research and development, marketing, expenses and revenue are all forward-looking statements. These statements may be found in the items of this Annual Report entitled “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as in this Annual Report generally. These statements are generally accompanied by words such as “intend,” “anticipate,” “believe,” “estimate,” “potential(ly),” “plan,” “may,” “will,” “continue,” “forecast,” “predict,” “could,” “would,” “should,” “expect,” or the negative of such terms or other comparable terminology.

 

INTRODUCTORY COMMENT

 

Throughout this Annual Report on Form 10-K (the “Report”), the terms “we,” “us,” “our,” “CareView,” or “our 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”) and its LLCs, CareView-Hillcrest and CareView-Saline, determined to be variable interest entities (“VIEs”) in which the Company exercises control and is deemed the Primary Beneficiary (collectively known as the “Company’s LLCs”).

 

PART I

 

ITEM 1. BUSINESS.

 

Our Business

 

Our mission is to be the leading provider of products and on-demand application services for the healthcare industry, specializing in bedside video monitoring, software tools to improve hospital communications and operations, and patient education and entertainment packages. Our proprietary, high-speed data network system is the next generation of patient care monitoring that allows real-time bedside and point-of-care video monitoring designed to improve patient safety and overall hospital costs. The entertainment packages and patient education enhance the patient’s quality of stay. Reported results from CareView-driven facilities prove that our products reduce falls, reduce the cost of sitter fees, increase patient satisfaction and reduce bed turnaround time to increase patient flow. For patients, we have a convenient in-room, entertainment package that includes high-speed Internet, access to first-run on-demand movies and visual connectivity to family and friends from anywhere in the world. For the hospital, we offer tools to provide superior patient care, peace of mind and customer service satisfaction.

 

Our CareView System® suite of video monitoring, guest services and related applications connect patients, families and healthcare providers. Through the use of telecommunications technology and the Internet, our evolving products and on-demand services greatly increase the access to quality medical care and education for patients/consumers and healthcare professionals. We understand the importance of providing high quality patient care in a safe environment and believe in partnering with hospitals to improve the quality of patient care and safety by providing a system that monitors continuously. We are committed to providing an affordable video monitoring tool to improve the practice of nursing, create a better work environment and make the patient’s hospital stay more informative and satisfying. Our suite of products and services can simplify and streamline the task of preventing and managing patients’ falls, enhance patient safety, improve quality of care and reduce costs associated with bringing information technology directly to patients, families and healthcare providers. Our products and services can be used in all types of hospitals, nursing homes, adult living centers and selected outpatient care facilities domestically and internationally.

 

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CareView’s secure video monitoring system connects the patient room to a touch-screen monitor at the nursing station or a mobile handheld device, allowing the nursing staff to maintain a level of visual contact with each patient. This configuration enhances the use of the nurse call system, reduces unnecessary steps to and from patient rooms, and facilitates a host of modules for patient safety and workflow improvements. The CareView System suite can be easily configured to meet the individual privacy and security requirements of any hospital or nursing facility. The Health Insurance Portability and Accountability Act of 1996 (“HIPAA’) compliant, patient approved video record can be included as part of the patient’s medical record and serves as additional documentation of bedside care, procedures performed, patient and hospital ancillary activities, safety or care incidents, support to necessitate additional clinical services, and, if necessary, as evidence. Additional HIPAA-compliance features allow privacy options to be enabled at any time by the patient, nurse or physician.

 

In addition to patient safety and security, we also provides a suite of services to increase patient satisfaction scores and enhance the overall image of the hospital including first-run on-demand movies, Internet access via the patient’s television, and video visits with family and friends from most places throughout the world. Through continued investment in patient care technology, our products and services help hospitals and assisted living facilities build a safe, high quality healthcare delivery system that best serves the patient, while striving for the highest level of satisfaction and comfort.

 

Our Products and Services

 

We offer a variety of products and services designed to meet individual hospital needs to enhance quality patient care and safety. Our services are offered with no capital expenditure by the hospital and do not require extensive integration with the facility’s management information system. For healthcare facilities looking for an effective, affordable and innovative way to improve performance throughout the facility, our products are the answer. CareView-driven facilities have shown documented success in reducing patient falls and sitter costs, improving overall patient satisfaction, streamlining and documenting patient education at the bedside, and improving patient flow and overcrowding. These successes protect the facilities’ reimbursement from loss due to never events and poor patient satisfaction.

 

The CareView System offers the following service packages:

 

PRIMARY PACKAGE

 

1. NurseView®. The NurseView module allows authorized users to view monitored rooms from the nurse’s station. All privacy and access options are determined and configured by the hospital.
2. PhysicianView®. The PhysicianView module enables the admitting physicians and non-physician staff members to view their patients from any personal computer. All privacy and access options are determined by the hospital.
3. Virtual Bed Rails®. The Virtual Bed Rails fall prevention module allows the hospital to activate a safety feature that will notify the nursing station or the caregiver’s mobile device when a patient breaches a defined area in the patient room.
4. Virtual Chair Rails®. The Virtual Chair Rails fall prevention module allows the hospital to activate a safety feature that will notify the nursing station or the caregiver’s mobile device when a patient breaches a defined area in the patient room.
5. Fall Management Program™. The Fall Management Program allows the hospital to separately file, identify and research the activity of patients for whom the Virtual Bed Rails or Virtual Chair Rails fall prevention modules were engaged.
6. Sitter Management Program. The CareView Sitter Management Program allows authorized users to monitor an unlimited number of patient rooms from one nursing station or mobile device.
7. Rounding. We offer a timed rounding module to help nursing staff monitor patients.
8. SecureView®. The SecureView module monitors and records bedside activity in the patient’s room. All privacy and access options are determined and configured by the hospital.

 

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ADDITIONAL CAREVIEW PRODUCTS

 

1. BedView®. The BedView module allows authorized users to monitor the status and availability of facility beds remotely.
2. Patient Education. We provide a delivery mechanism for patient education materials.
3. FacilityView®. The FacilityView module monitors and records activity in any area that the hospital would desire security cameras to be placed. All privacy and access options are determined and configured by the hospital.
4. Nurse Alerts and Reminders. The CareView System monitoring system can be configured to provide nursing alerts and reminders.
5. Ulcer Management. The CareView System can be configured to ensure that patients who are at risk for developing pressure ulcers are turned from position to position.
6. CareView Connect™. This communications device and mobile monitoring system allows all CareView modules to be utilized with handheld mobile devices. CareView Connect can be used to deliver voice communication between mobile devices, patient rooms, and the hospital’s phone infrastructure.
7. CareView Connect App. The CareView Connect App (the “App”) can be used by the customer on an Apple or android mobile device used in connection with the CareView System. The App will display video feeds from NurseView as well as give caregivers the ability to receive and resolve Virtual Bed Rail and Virtual Chair Rail alarms.
8. NICUView®. The NICUView module provides a live, continual feed from the Neo-Natal Intensive Care Unit (“NICU”) to allow parents who have been discharged from the hospital, or friends and family, to view the newborn and obtain clinical information from home.
9. Patient Feedback Applications. CareView provides a delivery mechanism for patient feedback applications.
10. The CareView Broadcast System. We provide the hospitals with the capability to broadcast to each room a variety of educational, informational and service communications to patients and guests alike. We do not provide educational content. The hospitals are allowed to access the system for:
a. Welcome message – a pre-recorded message welcoming the patient to the facility.
b. Pre-procedure Education – to inform and educate the patient regarding a procedure to be performed (i.e. angioplasty, hip replacement, spine surgery, etc.).
c. Patient Condition Education – to inform and educate the patient regarding a condition they have and suggested lifestyle improvements to live with those conditions (i.e. high blood pressure, diabetes, etc.).
d. SerenityView - to select scenes and sounds to create a relaxing atmosphere for patients during their stay.

 

GUEST SERVICES PACKAGE

 

1. PatientView®. The PatientView module enables patients to allow family members and friends to monitor and videoconference with them in their private rooms. All privacy and access options are determined and configured by the hospital.
2. NetView®. The NetView module allows the patient access to the internet using the wireless keyboard and the television in the room or personal laptop computers.
3. MovieView®. The MovieView module provides the connectivity to allow the patient, family and/or friends access to a wide selection of movies for their viewing pleasure while they are in their hospital room. We do not provide the movies or other content.
4. BabyView®. The BabyView module allows mothers to view their newborn child from their hospital bed in the nursery or NICU.

 

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Pricing Structure and Revenue Streams

 

The CareView System suite is provided and installed in healthcare facilities at no charge to the facility after which we generate revenue from subscriptions to its services. We work with each hospital on pricing to offer an affordable package based on the demographics of the hospital’s patients. The pricing structure with each hospital is negotiated separately and may vary depending on the hospital’s desire to include premium services at no charge to the patient. Typically, we offer the Primary Package at a price per bed with varying price structures based on number of beds in each facility. The Guest Services Package is generally offered to the patient as a complimentary service of the hospital; however, hospitals have the option to charge their patients for these services. The hospital may elect to charge a package price for all services for any combination of days, including a package for the patient’s entire stay. Each facility may decide to bundle products for specialty pricing to the patients or may offer any or all services at no charge to the patient. All of our revenue generated during the years ended December 31, 2016 and 2015 was derived from the sale of the Primary Package, Additional CareView Products, Guest Services Package and related services to hospitals.

 

Products in Development

 

1. Resident Safety System. We are finalizing development on a new platform targeted at long-term care residents. The system uses multiple sensors, including accelerometers and motion detectors, to convey information about patient safety without the use of cameras. The system provides a portal for caregivers and family to check in on the resident. We expect the Resident Safety System to be deliverable in second quarter of 2017.

 

2. Pan-Tilt-Zoom Module. We are finalizing development of pan-tilt-zoom functionality, which allows nursing staff and doctors to focus on specific areas of interest in the room. We expect the Pan-Tilt-Zoom Module to be deliverable in first quarter of 2017

 

3. Audio Redirection Module. We are currently developing a module that allows staff to send pre-recorded messages targeted at patient safety. This module provides pre-recorded messages available in multiple languages in order to improve communication. We expect the Audio Redirection Module to be deliverable in second quarter of 2017.

 

4. Alternative Sensors. Based on our research and development efforts, we see value in using alternative sensors, such as thermal cameras, to improve automated monitoring of patient safety, as well as other services. We expect the alternative sensors to be deliverable in 2017.

 

5. Improving Detection Algorithms. We are continuing to develop and hone new techniques and algorithms geared towards improving system functionality in the Virtual Rails product. Advances include techniques based on machine learning and statistical probability.

 

6. Improving Asset Management and Tracking Module. We are continuing to develop the Asset Management and Tracking Module, based on new technology that provides improved precision, better performance, and is more accessible.

 

7. Business Intelligence Module. We are continuing to develop the Business Intelligence module. This module collects data and identifies trends in patient safety and staff performance, as well as and industry trends.

 

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Products and Services Agreement with Healthcare Facilities

 

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

 

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

 

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

 

Update on Significant Customer Agreements

 

HealthTrust

 

On December 14, 2016, the Company entered into a Group Purchasing Agreement with HealthTrust Purchasing Group, L.P. (“HealthTrust”) (the “HealthTrust GPO Agreement”), the nation’s only committed-model Group Purchasing Organization (“GPO”) headquartered in Nashville, Tennessee. HealthTrust serves approximately 1,600 acute care facilities and members in more than 26,000 other locations, including ambulatory surgery centers, physician practices, long-term care and alternate care sites.

 

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The agreement was effective on January 1, 2017 and all CareView System components and modules are available for purchase by HealthTrust’s exclusive membership including 1,600 acute care facilities and more than 26,000 health facility locations. HealthTrust members may order CareView’s products and services included in the agreement directly from CareView.

 

Hospital Corporation of America

 

West Florida Division

 

On April 26, 2016, we entered into a Master Agreement with the West Florida Division of Health Corporation of America (“HCA”), the nation’s leading provider of healthcare services. The West Florida Division has approximately 3,300 beds. The three-year divisional Master Agreement follows the successful P&S Pilot Agreement with HCA’s Blake Medical Center. Currently, we are billing 605 units monthly. We anticipate achieving a 50% penetration in the division.

 

Mountain Division

 

On December 20, 2016 we entered into a P&S Agreement with HCA Mountain Division pursuant to the HealthTrust GPO Agreement. Under this agreement, our products and services will be available to all 12 facilities in the division, totaling approximately 1,600 staffed beds.

 

Capital Division

 

On January 1, 2017, we entered into a P&S Agreement with HCA Capital Division pursuant to the HealthTrust GPO Agreement. Under this agreement, our products and services will be available to two facilities in the division, totaling 80 staffed beds. There are 14 facilities in the division totaling approximately 3,200 beds.

 

East Florida Division

 

On January 25, 2017, we entered into a P&S Agreement with HCA East Florida Division pursuant to the HealthTrust GPO Agreement. Under this agreement, our products and services will be available to all 13 facilities in the division, totaling approximately 3,600 staffed beds. We anticipate an initial roll-out to at least four facilities.

 

Research Medical Center

 

In February 2015, we executed a six-month P&S Pilot Agreement for 280 beds with Hospital Corporation of America (“HCA”) to install the CareView System in their Research Medical Center facility located in Kansas City, Missouri. Currently we are billing 282 units monthly under the P&S Pilot Agreement and are continuing to work with Research Medical Center and anticipate moving them onto P&S Agreement under the HealthTrust GPO by the end of March 2017.

 

Community Health Systems, Inc.

 

On April 1, 2015, we closed a Master Agreement with Community Health Systems, Inc. (“CHS”). Under the terms of the Master Agreement, currently, we are billing 1,223 units monthly. In early 2016, Mat-Su Regional Medical Center, a legacy CHS facility completed policy revision for patient video monitoring for CHS. With the policy revision complete, we have approval to contact all CHS facilities. We have had meeting with CHS market leaders and their Chief Nursing Officer and have their support, which could result in a potential roll-out of approximately 15,000 additional beds out of their estimated 27,000 staffed beds.

 

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The Community Medical Centers HealthCare Network-Central California

 

On July 7, 2016, we signed a P&S Pilot Agreement with Clovis Community Medical Center, owned by The Community Medical Centers HealthCare Network-Central California (“Community Medical HealthCare”), which owns approximately 1,120 beds. We have begun the initial rollout of 60 units at Clovis Community Medical Center and 73 units at Community Regional Medical Center. We anticipate that these facilities will become billable by the end of March 2017. Community Medical HealthCare plans on expanding the CareView System rollout over time.

 

Tenet Healthsystem Medical, Inc.

 

In February 2014, we entered into a Master Agreement with Tenet Healthsystem Medical, Inc. (“Tenet”). The terms of the Master Agreement provide for the execution of a facilities level agreement with each hospital. We are currently billing 1,354 units monthly and anticipate adding approximately additional beds in their California facilities during 2017.

 

Kaiser Permanente

 

We currently are billing 416 units monthly in seven Kaiser Permanente (“Kaiser”) facilities. In April and May 2014, we executed P&S Pilot Agreements with Kaiser’s Baldwin Park and Panorama City facilities, respectively. This is in addition to our P&S Pilot Agreement with Kaiser Orange County covering its facilities in Anaheim and Irvine, California which was executed in October 2013. The P&S Pilot Agreements for these four facilities provide for a monthly renewal until termination or replacement by a Master Agreement or individual P&S Agreements. We have finalizes a P&S Agreement with the Irvine facility and we are now in the process of finalizing a conversion from a P&S Pilot Agreement to a P&S Agreement with the Anaheim facility. Both of these facilities are in the process of determining their needs as it relates to adding additional units.

 

On August 2, 2015, we signed a P&S Agreement with Kaiser’s San Diego Medical Center. We currently have 28 installed units at this facility. This is a newly constructed hospital with a scheduled opening in April 2017. We anticipate adding additional beds once use and need has been determined.

 

In early 2016 we commenced discussions with Kaiser Northwest Region for deployment of the CareView System in Kaiser Hospital in Oregon. On August 10, 2016, we signed a P&S Pilot Agreement with the Northwest Division of Kaiser Permanente. Execution of this agreement signals our expanded growth within the Kaiser system. The agreement calls for the installation, currently in process, of 140 units at two facilities in the division; the Westside Medical Center and the Sunnyside Medical Center. We anticipate that installation and training will be completed sometime in our second quarter of 2017.

 

After a successful pilot, in February 2016 we executed a P&S Agreement with Kaiser’s Los Angeles Medical Center for a total of 136 units. We are also in pilot discussions with the Kaiser facilities in the San Diego area for installation in San Diego Medical Center/Kaiser Foundation Hospital and future installation in the currently under construction Medical Center in Central San Diego. While we are continuing our sales efforts at the hospital and regional level, there are still discussions regarding a possible Master Agreement. Notwithstanding those discussions we will continue to sell into other Kaiser Regions and look to convert our P&S Pilot Agreements into P&S Agreements that can be replaced by a Master Agreement if and when one is finalized.

 

Parkland

 

On October 31, 2014, we signed a P&S Pilot Agreement with Dallas County Hospital District d/b/a Parkland Health & Hospital System (“Parkland”) to install 100 units with the CareView System. In June 2015 we signed a P&S Agreement with Parkland and are currently billing 425 units.

 

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Geisinger Health System

 

In 2015 we signed a P&S Pilot Agreement with Geisinger Medical Center (“GMC”). Currently there are 144 monthly billable units at GMC. The results of the pilot were favorable and we have finalized the terms of a Master Agreement with GMC. There are approximately 1,800 beds within GMC. Upon completion of the Master Agreement, we anticipate rolling out product and services to all owned and affiliated facilities. Currently we are in discussions with two GMC facilities who have expressed interest in installing the CareView System. We anticipate finalizing agreements with these facilities within 90 days of the date of this filing. We will also continue our sales efforts to the balance of GMC.

 

Baptist Health South Florida

 

Baptist Health South Florida is a system comprised of 6 hospitals with 1,700 beds in the Miami area. They entered into a P&S Pilot Agreement in January 2016 to cover 99 beds. We are currently billing 104 units monthly. After a successful pilot Baptist has decided to move forward with a Master Agreement. Final negotiations on the agreement is currently in progress. The Company anticipates that the final roll-out will be approximately 600 beds.

 

Adventist Health

 

We have a P&S Pilot Agreement with White Memorial Hospital (“White Memorial”) which is part of the Adventist Health. There are a total of 16 facilities in the Adventist Health network. The P&S Pilot Agreement for White Memorial was executed in November 2015. We are currently billing 54 units monthly. The hospital has asked to expand the installation at its facility. We are working on collecting data in anticipation of setting up a meeting to discuss a Master Agreement and system-wide roll-out. We anticipate converting White Memorial from a P&S Pilot Agreement to a P&S Agreement within 30 days of the date of this filing. We also anticipate growth within the rest of the Adventist Health Network.

 

Baylor Scott & White Health

 

Under the terms of a P&S Agreement with Baylor Scott & White Medical Center Frisco, we are currently billing 156 units monthly. We are now working on finalizing a Master Agreement with Baylor Scott & White Health (“BSW”) corporate. We have had meetings with the following BSW facilities as we move toward a corporate roll-out, which include: BSW Temple, BSW All-Saints, BSW Hillcrest, BSW Round Rock, BSW Waxahachie, and BSW White Rock. These facilities are gathering data so we can generate proposals.

 

We also presented to Baylor Rehab Institute which is a joint venture (“JV”) between BSW and Select Healthcare, BIR, JV LLC (“BIR”). We anticipate finalizing a contract with BIR for installation at its three inpatient facilities in the Dallas area by the end of March 2017. Once the contact is finalized, we will commence to install and train at these facilities with the goal of going live during our second quarter 2017.

 

VA Central Arkansas Veterans Healthcare System

 

The Company accomplished its first contract with a VA facility, specifically the Central Arkansas Veterans Healthcare System. The CareView System is in the process of being installed in the John L. McClellan Memorial Veterans Hospital in Little Rock, with an installation target of March 2017.

 

This agreement is pursuant to the Company’s General Service Administration (“GSA”) Multiple Award Schedule (“MSA”) contract. The GSA MSA contract allows us to sell the CareView System at a negotiated rate to the approximate 169 VA facilities with over 39,000 licensed beds and the approximate 42 DOD hospitals with over 2,600 licensed beds. The GSA’s MSA is one of the most widely accepted government contract vehicles available to agency procurement officers. GSA’s application process requires potential vendors to be recognized as highly credible and well established. We are hopeful that once installation and training is complete, the other VA hospitals will also want to participate. Our products and services represent an enormous opportunity to improve the health and safety of our Nation’s veterans.

 

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Strategic Expansion into Nursing Homes, Skilled Nursing and Assisted Living Center Markets

 

We always intended to expand into the skilled nursing and assisted living center markets. With the adoption of our technology, the traction of our products in the healthcare facility space and the combined interest from new and existing customers, our management believes that it is time to pursue this market.

 

The skilled nursing home market consists of approximately 2,000,000 beds, which is double the size of the current hospital/healthcare facility bed market. The assisted living center market is even larger at approximately 3,000,000 beds. Our products flow naturally into the nursing home space as it is substantially the same setting as hospital rooms. To service this intended expansion, we have hired sales staff to pursue new business in these markets and we anticipate that we will sign new contracts in these markets before the end of 2017.

 

Summary of Product and Service Usage

 

The following table shows the number of healthcare facilities using our products and services including the number of deployed units, installed units and billable units as of February 28, 2017. The table also shows the number of pilot programs in place and hospital proposals pending approval, estimated bed count if the pilot programs and pending proposals result in executed contracts, and the estimated total number of licensed beds available under the pilot programs and hospital proposals. There are no assurances that the pilot programs will be extended or the pending proposals will be approved to ultimately result in the number of estimated beds. Further, there are no assurances that we will have access to the total number of licensed beds in each healthcare facility.

 

Installed
Hospitals
Installed
Units
Billable
Units
Total
Staffed Beds
in
Contracted/
Pilot
Hospitals
Potential
Units
Available
Under
Current
Contract/
Pilot
Contracts(*)
Units in
Negotiation
Prior to
Contract/
Pilot
117 9,256 7,816 112,952 46,196 63,391

 

 

(*) This number represents management’s best estimate of the number of units available to us in hospitals that are currently under contract. We assume that in any given acute care facility, our products and services are appropriate for deployment in approximately 70% of the total staffed beds. If we have specific information from a current contracted or pilot hospital that the number of potential units in that hospital is either higher or lower than 70%, specific number has been used in the aggregate estimate.

 

We experienced significant turnover in our installed base during 2016. While we added 1,262 units we removed 1,132 units resulting in an increase of 130 units. For the twelve month period from February 29, 2016 to February 28, 2017, we added 1,417 units and removed 1,382 units resulting in an increase of 45 units. The reason for the de-installations was due in large part to sales of individual hospitals by our existing customers. There is language in our P&S Agreement that allows the P&S Agreement to be cancelled in the event that a facility is divested. This allows the acquiring company to cut costs which is something that many acquirers seek to do. However, that is not always the case and while Management anticipates that we will continue to see some removals as individual hospitals are sold we do not expect to continue to lose units at such a high rate. The Company has successfully sold our technology to acquiring companies which has presented opportunities to sell into new hospital systems. Additionally, many of our existing customers are also members of HealthTrust GPO, and as those customers migrate over to the HealthTrust GPO Agreement, they will be renewed into a 36 month P&S Agreement.

 

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Availability of Suppliers

 

We are not dependent on, nor do we expect to become dependent on, any one or a limited number of suppliers. We purchase parts and components to assemble our equipment and products. We do not manufacture or fabricate our own products or systems, but rely on sub-suppliers and third party vendors to procure and/or fabricate components based on our designs, engineering and specifications. Along with our employee installers, we enter into subcontracts for field installation of our products which we supervise. We manage all technical, physical and commercial aspects of the performance of our contracts with sub-suppliers and third party vendors. To date, we have experienced no difficulties in obtaining fabricated components, materials and parts or in identifying qualified subcontractors for installation work.

 

Sales, Marketing and Customer Service

 

We do not consider our business to be seasonal, however the availability of hospital staff is typically less available in December which impacts our ability to sale/install our CareView System. We generate sales leads through a variety of means including direct one-to-one marketing, email and web campaigns, customer and industry referrals, strategic partnerships, and trade shows and events. Our sales team consists of highly trained professionals with many years of experience in the healthcare market.

 

Our initial focus has been to pursue large for-profit hospital management companies that own multiple facilities and large not-for-profit integrated delivery networks in major metropolitan areas. Our sales staff approaches decision makers for hospitals, integrated delivery networks, and major owners and operators of hospitals to demonstrate the CareView product line. In 2013, we expanded our sales process to include an inside sales team and have expanded our capabilities of providing web-based demonstrations and presentations. In addition, we have begun to rely more heavily on arranging reference calls and site visits between our current customers and our prospects. These efforts have provided a higher volume of qualified sales leads and have resulted in more substantive conversations with a larger number of prospects.

 

We ensure high levels of customer service through our account representatives and through our technical support processes. We attempt to position our account representatives geographically close to our customer hospitals to allow them to make regular visits to proactively train staff and address any issues. We offer 24/7 monitoring and phone support through our technical support team which allows us to quickly identify and resolve any technical issues. From time to time we are called upon to service the installed hardware at customer facilities. To facilitate expedient service, our account representatives typically maintain a small supply of RCPs should they need repair or replacement. Historically, our RCPs and Nursing Station units have required little, if any, servicing. We believe that we handle requests quickly and efficiently, and that overall, our customers are satisfied with our level of service.

 

Intellectual Property

 

Our success depends, in part, on our ability to obtain patents, maintain trade secret protection and operate without infringing the proprietary rights of others. Our intellectual property portfolio is one of the means by which we attempt to protect our competitive position. We rely primarily on a combination of know-how, trade secrets, patents, trademarks and contractual restrictions to protect our products and to maintain our competitive position. We are constantly seeking ways to protect our intellectual property through registrations in relevant jurisdictions.

 

We have received patents from the U.S. Patent and Trademark Office and have numerous patents pending. We intend to file additional patent applications when appropriate; however, we may not file any such applications or, if filed, the patents may not be issued. We also have numerous registered trademarks.

 

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We intend to aggressively prosecute, enforce and defend our patents, trademarks and proprietary technology. The loss, by expiration or otherwise, of any one patents may have a material effect on our business. Defense and enforcement of our intellectual property rights can be expensive and time consuming, even if the outcome is favorable to us. It is possible that the patents issued to or licensed to us will be successfully challenged, that a court may find that we are infringing validly issued patents of third parties, or that we may have to alter or discontinue the development of our products or pay licensing fees to take into account patent rights of third parties.

 

Joint Venture with Rockwell Holdings

 

On November 16, 2009, we entered into a Master Investment Agreement (the “Rockwell Agreement”) with Rockwell Holdings I, LLC, a Wisconsin limited liability company (“Rockwell”), wherein two Wisconsin limited liability companies were formed, CareView-Hillcrest, LLC (“CareView-Hillcrest”) and CareView-Saline, LLC (“CareView-Saline”) (together known as the “Project LLCs”). Under the terms of the Rockwell Agreement, CareView and Rockwell each own 50% of the Project LLCs with Rockwell providing the financing and CareView providing the technology and expertise to fully implement the CareView System in Hillcrest Medical Center in Tulsa, Oklahoma and Saline Memorial Hospital in Benton, Arkansas. Rockwell provided $1,151,205 as the initial funding, $575,603 was provided under promissory notes (the “Project Notes”) and $575,602 was provided under an investment interest (“Rockwell’s Preferential Return”). We classified Rockwell’s Preferential Return as a liability since it represents an unconditional obligation by us and is recorded in mandatorily redeemable equity in joint venture on the accompanying consolidated financial statements. The Project Notes and Rockwell’s Preferential Returns both earn interest at the rate of ten percent (10%) and are secured by a security interest in all of the equipment in the Project Hospitals, intellectual property rights, and the Project Hospital Contract. Pursuant to the terms of the Operating Agreements of each of the Project LLCs, we are the managing member. We consolidate the Project LLCs as we have the power to direct the activities and an obligation to absorb losses. As additional consideration to Rockwell for providing the financing, the Company granted Rockwell a warrant to purchase 1,151,206 shares of the Company’s common stock valued at $1,124,728 (the “Project Warrant”). The Project Warrant was valued using the Black-Scholes-Merton option pricing model on the date of the Master Investment Agreement. The Project Warrant is classified as equity and is included in additional paid-in-capital on the accompanying consolidated financial statements. We allocated the proceeds to the Project Warrant, the Project Notes and Preferential Returns based on the relative fair value. The originally recorded debt discount of $636,752 was amortized over the expected life of the debt and was fully amortized at December 31, 2015. In October 2015, the expiration date of the Project Warrant was extended from November 16, 2015 to November 16, 2017.

 

In accordance with GAAP, we determined the Project LLCs are VIEs based on the fact that the total equity investment at risk was not sufficient to finance the entities activities without additional financial support. We consolidate the Project LLCs as we have the power to direct the activities and an obligation to absorb losses of the VIEs. We have no contractual liability to Rockwell with respect to the repayment obligations of the Project LLCs.

 

Hillcrest notified us of its desire to terminate its hospital agreement effective January 27, 2012. This termination resulted in the loss of monthly revenue totaling approximately $20,000, which revenue was used to make payments on our indebtedness to Rockwell. To date, we have incurred system removal costs of approximately $3,000 for removing our equipment from the hospital premises. We currently have approximately 100 units remaining on site at Hillcrest. Included in other current liabilities in the accompanying consolidated financial statements is an allowance for system removal totaling $10,250 to reserve for the removal of the remaining units.

 

As of December 31, 2016 and 2015, the Project LLCs’ indebtedness to Rockwell, including principal and interest totaled approximately $ 1,207,000 and $1,139,000, respectively. The Project Notes matured on May 25, 2013 and have been extended from time to time by mutual agreement of the parties to its current maturity date of June 30, 2017. The Project Warrant’s original expiration date of November 16, 2014 was extended by mutual agreement of the parties in August 2013, resulting in a $25,327 increase in fair value, and in October 2015, resulting in a $102,457 increase in fair value included in general and administration expense in the accompanying consolidated financial statements, to the current expiration date of November 16, 2017 (all other provisions of the Project Warrant remained unchanged).

 

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The Rockwell Agreement provides that we have the option to purchase Rockwell’s interest in the Project LLCs and on January 31, 2017, 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 $1,213,785 (by the payment of $100,000 on January 31, 2017 and the issuance of a promissory note, bearing interest at 5% per annum, dated January 31, 2017, to Rockwell for $1,113,786 (the “CareView Note”). Pursuant to the terms of the CareView Note, we will make quarterly principal payments of $100,000, with each payment being made on the last day of each fiscal quarter beginning with the first payment date of March 31, 2017 and continuing on the last business day of each subsequent calendar quarter through September 30, 2019. The final payment due on December 31, 2019 shall be a balloon payment of $13,785.84 representing the remaining principal balance plus all accrued and unpaid interest. Upon receipt of the $100,000 and the CareView Note, Rockwell transferred its interest in the Project LLCs to us through the execution of an Interest Transfer Agreement dated January 31, 2017, with an interest transfer date of January 1, 2017. In addition to the CareView Note, CareView agreed to amend the Project Warrant for the sole purpose of extending the expiration date for an additional five (5) years from its current expiration date (the “Amended Warrant”).

 

Installation and Technical Support

 

Along with our employee installers and technical support staff, we provide installation and technical support for our customers through third-party providers located across the United States that we contract on a per-job basis.

 

Competition

 

We offer products in four distinct categories: clinical video monitoring and fall prevention, patient education and entertainment, patient flow, and mobile communications. We have competitors in each of these product areas; however, we believe that we offer the only integrated suite of products that combines all of these areas into one cost-effective platform. Some of our competitors may be larger, may have greater financial resources, and may have a longer history than us. We compete with them based on price, engineering and technological expertise, knowledge, and the quality of our products, systems and services. Additionally, we believe that the successful performance of our installed products and systems is a key factor in retaining current business and gaining new business as customers typically prefer to make significant purchases from a company with a solid performance history.

 

Clinical Video Monitoring and Fall Prevention: Cisco Systems, Inc., Avasure (a division of AvaSure Holdings, Inc.), Royal Philips Electronics and Cerner Corporation all provide clinical video monitoring tools. Cisco offers Virtual Patient Observation, a video monitoring tool aimed at reducing sitter costs and preventing patient falls. AvaSure offers a similar application using cameras mounted on a rolling camera stand, aimed at preventing patient falls. Philips offers the eICU product, which primarily targets a high-definition monitoring of patients in intensive-care applications and also provides telephonic consults. Cerner offers the Cerner Patient Observer product, which uses depth sensors aimed at preventing patient falls.

 

Alternative fall prevention mechanisms include physical sensors manufactured by Stanley and Posey, and beds which include fall alarms manufactured by Stryker and Hill-Rom. Customers may consider these physical fall prevention mechanisms to be alternatives to a video-based fall prevention system such as the one we offer.

 

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Patient Education and Entertainment: There are many vendors who offer patient entertainment products, and most of them also provide a portal for accessing patient educational content either authored by themselves or by third parties. Our major competitors include The GetWellNetwork (privately held by Welsh, Carson, Anderson and Stowe), Skylight Healthcare Systems, and Sonifi Solutions, Inc., all of which offer interactive patient communications systems.

 

Patient Flow: These systems may be called patient flow, census, bed tracking, patient tracking, or “bed board” applications. Our major competitors include companies that offer focused solutions such as TeleTracking Technologies, Inc., Aionex, Inc., and BedWatch, Inc. Additionally some Electronic Medical Record vendors offer similar products which may compete with our patient flow product.

 

Mobile Communications: Some competitors offer mobile communications on smart phones or voice-activated pendants which operate over the hospitals Wi-Fi system, including Vocera, Inc., and Voalte, Inc. Other competitors offer special-purpose phones that operate on the cellular network or other wireless technology, and provide notifications to caregivers within the hospital.

 

In addition to favorable economics and enhanced patient care, safety and satisfaction, we also compete on the basis of quality of services provided. Our management believes that our GuestView patient services suite will provide revenue protection for our contracted hospitals under the Value Based Purchasing initiative which is part of the Patient Protection and Affordable Care Act, prompting hospitals to focus on Patient Satisfaction and Hospital Consumer Assessment of Healthcare Providers and Systems to (i) prompt each healthcare facility to promote patients’ use of NetView, MovieView, and PatientView, and (ii) encourage the hospital to expand its use of pre-procedure and condition videos, welcome videos, and other ancillary services.

 

We believe we also compete based on the success of our products and services which provide our customers with:

 

significant and tangible cost savings,
reductions in patient falls and pressure ulcers,
improved documentation, quality and timeliness of patient care,
enhanced safety and security for patients and facilities,
support for new technologies,
business growth,
return on investment, and
enhanced patient satisfaction.

 

We are currently unable to predict what competitive impact any regulatory development and advances in technology will have on our future business and results of operations. We believe our success depends upon our ability to maintain and enhance the performance, content and reliability of our products in response to the evolving demands of the industry and any competitive products that may emerge. We cannot give assurances that we will be able to do so successfully or that any enhancements or new products that we introduce will gain acceptance in the marketplace. If we are not successful or if our products are not accepted, we could lose potential customers to our competitors.

 

Domain Names

 

The Company’s maintains a website at www.care-view.com.

 

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Major Customers

 

We derive all of our revenues from hospitals. For the years ended December 31, 2016 and 2015, 93 and 96 hospitals, respectively, accounted for all of our revenue. During 2016, IASIS Healthcare Corporation (“IASIS”), CHS and Tenet, accounted for 17 %, 23% and 18% of our net revenues, respectively. During 2015, IASIS Healthcare Corporation (“IASIS”), CHS and Tenet, accounted for 30%, 20% and 15% of our net revenues, respectively.

 

Backlog

 

Our estimated backlog is driven by signed Master and P&S Agreements. Each Master and P&S Agreement establishes the rates that we will charge for the use of our products and services as well as an approximate number of billable units that will be installed. Our RCPs, Nursing Stations and mobile devices are billed on a per unit basis. Most Master and P&S Agreements are for five years but include options to cancel after a minimum of two or three years. Backlog, which covers the non-cancellable period, as of December 31, 2016 is approximately $10,525,000, of which approximately $5,410,000 is expected to be billed during 2017. Most of the current backlog will have future value as the Master and P&S Agreements continue beyond the minimum two or three years and the Master and P&S Agreements move toward expiration and potential renewal. The amount of the non-cancellable backlog to be billed beyond December 31, 2017 is approximately $5,115,000.

 

Research and Development Activities

 

The cost of our research and development activities for the years ended December 31, 2016 and 2015 totaled approximately $1,253,000 and $1,086,000, respectively. None of the cost of such activities was borne directly by our customers. To date, we have not performed any customer-sponsored research and development activities relating to any new products or services.

 

Governmental Approval

 

Neither our Company nor our products are subject to government approval beyond required Federal Communication Commission (“FCC”) certifications. Certain medical devices and applications may be subject to Section 510(k) of the Food, Drug, and Cosmetics Act, which regulates the ability of medical device manufacturers to market their devices. CareView has reviewed the requirements for registration, and at the current time, we do not believe that our suite of applications is subject to 510(k) regulation. Although the parameters of our CareView System products and services complies with HIPAA as far as use by health care providers, CareView itself, as the manufacturer and installer of the units, is not subject to HIPAA regulations. We do not know of any other privacy laws that affect our business as we are not in control of nor do we keep patient medical records in our possession. We are unaware of any probable government regulations that may affect our business in the future. We have received Underwriters Laboratories (“UL”) and FCC approval on our products. Additionally, the Center for Medicare and Medicaid Services does not pay or reimburse any party for use of our products and services.

 

Environmental Laws

 

Our Company and our products are not affected by any federal, state, or local environmental laws; therefore, we have reserved no funds for compliance purposes.

 

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Employees

 

As of March 2, 2017, we employed 79 persons on a full-time basis, two of whom are executive officers. None of our employees are covered by collective bargaining agreements and we have never experienced a major work stoppage, strike or dispute. We consider our relationship with our employees to be outstanding.

 

Financial Information about Segments and Geographic Areas

 

Our business consists of a single segment of products and services all of which are sold and provided within the United States.

 

Reports to Security Holders

 

We are subject to the requirements of Section 13(a) under the Exchange Act which requires us to file annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and we are required to comply with all other obligations of the Exchange Act applicable to issuers filing registration statements pursuant to Section 12(g) of the Exchange Act. You may read and copy any materials we file with the Securities and Exchange Commission (the “SEC”) at the SEC’s Public Reference Room at 100 F Street NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information filed electronically with the SEC at http://www/sec.gov.

 

You may obtain a copy, free of charge, of our annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with the SEC. You may obtain these reports by making a request in writing addressed to: Steven G. Johnson, Chief Executive Officer, CareView Communications, Inc., 405 State Highway 121, Suite B-240, Lewisville, TX 75067 or by downloading these reports and further information about our company on our website at http://www.care-view.com.

 

We have adopted a Code of Business Conduct and Ethics for all of our officers and directors and a Code of Ethics for Financial Executives. These codes are available for download on our website or may be obtained free of charge by making a request in writing to Steven G. Johnson, as indicated hereinabove.

 

ITEM 1A. RISK FACTORS.

 

We are a smaller reporting company, and as such, are not required to provide information pursuant to this item.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS.

 

N/A.

 

ITEM 2. PROPERTIES.

 

We lease approximately 16,610 square feet of office and warehouse space at 405 State Highway 121, Suite B-240, Lewisville, TX 75067. On December 8, 2014, we entered into a Lease Extension Agreement (the “Lease Extension”), wherein we extended the Lease through June 30, 2020. The Lease Extension contains a renewal provision under which we may renew the Lease for an additional five-year period under the same terms and conditions. The current base lease rate through June 30, 2017 is $16,613 monthly. The average base lease rate for the Lease Extension is $15,465. We believe that these premises are adequate and sufficient for our current needs.

 

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ITEM 3. LEGAL PROCEEDINGS.

 

None.

 

ITEM  4. MINE SAFETY DISCLOSURE.          N/A.

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

Market Information

 

Our Common Stock is traded on the OTCQB as provide by OTC Market Group, Inc. (“OTCQB”) under the symbol “CRVW.” The following table shows the high and low sales prices of our Common Stock for each full quarterly period within the two most recent fiscal years. The below market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions.

 

Quarter Ended   High     Low  
Fiscal Year 2016            
Fourth Quarter   $ 0.10     $ 0.04  
Third Quarter   $ 0.18     $ 0.07  
Second Quarter   $ 0.26     $ 0.14  
First Quarter   $ 0.38     $ 0.22  
                 
Fiscal Year 2015                
Fourth Quarter   $ 0.35     $ 0.24  
Third Quarter   $ 0.40     $ 0.31  
Second Quarter   $ 0.46     $ 0.31  
First Quarter   $ 0.53     $ 0.33  

 

Holders

 

Records of our stock transfer agent indicate that as of March 15, 2017, we had approximately 100 record holders of our Common Stock. The number of registered shareholders excludes any estimate by us of the number of beneficial owners of shares of our Common Stock held in “street name.” We estimate that there are approximately 1,025 beneficial shareholders who hold their shares in street name. As of the date of this Report, we had 139,380,748 shares of Common Stock issued and outstanding.

 

Dividends

 

Historically, we have not paid dividends on our Common Stock and we currently do not intend to pay any dividends on our Common Stock in the foreseeable future. We currently plan to retain any earnings to finance the growth of our business rather than to pay cash dividends.

 

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Securities Authorized for Issuance under Equity Compensation Plans

 

As of December 31, 2016, the following table shows the number of securities to be issued upon exercise of outstanding stock options under equity compensation plans approved by our shareholders, which plans do not provide for the issuance of warrants or other rights.

 

Plan Category   Number of Securities to be issued upon exercise of outstanding
options
(a)
    Weighted-
average
exercise price
of outstanding options
(b)
    Number of securities
remaining
available for
future issuance under equity compensation
plans (excluding securities
reflected in
column (a)
(c)
 
Equity compensation plan approved by security holders: 2007 Plan     318,684     $ 0.52        
Equity compensation plan approved by security holders: 2009 Plan     6,518,260     $ 0.61        
Equity compensation plan not approved by security holders: 2015 Plan     4,829,000     $ 0.28        
Equity compensation plan not approved by security holders: 2016 Plan     4,245,031     $ 0.10       15,754,969  
Total     15,910,975     $ 0.37       15,754,969  

 

Recent Sales of Unregistered Securities

 

None.

 

Cancellation and Expiration of Options

 

During the year ended December 31, 2016, options to purchase an aggregate of 141,003 shares of our Common Stock were cancelled due to resignation and termination of employees. In addition, during the same time period, options to purchase an aggregate of 206,664 shares of our Common Stock expired.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

None.

 

ITEM 6. SELECTED FINANCIAL DATA.

 

We are a smaller reporting company as defined by Rule 229.10(f)(1) and are not required to provide information under this item.

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

You should read the following discussion and analysis in conjunction with the information set forth under our consolidated financial statements and the notes to those financial statements included elsewhere in this Annual Report. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those contained in or implied by any forward-looking statements.

 

Company Overview

 

Our mission is to be the leading provider of products and on-demand application services for the healthcare industry, specializing in bedside video monitoring, software tools to improve hospital communications and operations, and patient education and entertainment packages. Our CareView System suite of video monitoring, guest services and related applications connect patients, families and healthcare providers. Through the use of telecommunications technology and the Internet, our evolving products and on-demand services greatly increase the access to quality medical care and education for patients/consumers and healthcare professionals. We understand the importance of providing high quality patient care in a safe environment and believe in partnering with hospitals to improve the quality of patient care and safety by providing a system that monitors and records continuously. We are committed to providing an affordable video monitoring tool to improve the practice of nursing, create a better work environment and make the patient’s hospital stay more informative and satisfying. Our suite of products and services can simplify and streamline the task of preventing and managing patients’ falls, enhance patient safety, improve quality of care and reduce costs associated with bringing information technology directly to patients, families and healthcare providers. Our products and services can be used in all types of hospitals, nursing homes, adult living centers and selected outpatient care facilities domestically and internationally.

 

Liquidity and Capital Resources

 

Our cash position at December 31, 2016 was approximately $10,088,000. We also have $3,250,000 recorded as restricted cash related to a debt covenant in our credit agreement with PDL BioPharma, Inc. as discussed below.

 

Pursuant to the terms of a Note and Warrant Purchase Agreement dated April 21, 2011 (as subsequently amended) with HealthCor Partners Fund, LP and HealthCor Hybrid Offshore Master Fund, LP (“HealthCor”) we are required to maintain a minimum cash balance $2,000,000 (see NOTE 11 in the accompanying consolidated financial statements for further details), and we are in compliance with the minimum cash balance as of the date of this filing.

 

Our continued successful operation is dependent upon us achieving positive cash flow through operations while maintaining adequate liquidity. We expect that the cash on hand, as well as our existing and projected cash flow from billable contracts, will enable us to continue to operate for the next twelve month period. We believe that our sales and marketing plan to attract new business and our ongoing deployment and installation of units under existing hospital agreements, will meet our near-term cash needs and will help us achieve future operating profitability.

 

At present, we have sufficient inventory to install and service a select number of large customers, but eventually we will need to address additional capital requirements. To that end, on June 26, 2015, we entered into a Credit Agreement with PDL Biopharma, Inc., as administrative agent and lender (“the Lender”), (the “PDL Credit Agreement”) pursuant to which the Lender made available to us up to $40 million in two tranches of $20 million each, with each tranche contingent upon us meeting certain milestones. On October 7, 2015, pursuant to the First Amendment to the PDL Credit Agreement (the “First Amendment”) the Lender made the first tranche of $20 million available and funded us $19,533,992, net of fees. As of September 30, 2016, we are including $20 million in long-term liabilities on the accompanying condensed consolidated financial statements. Pursuant to the terms of the PDL Credit Agreement, we are required to maintain a minimum cash balance $3,250,000, and we are in compliance with the minimum cash balance as of the date of this filing (see NOTE 12 in the accompanying consolidated financial statements for further details). No funds under the second tranche of the PDL Credit Agreement were available to us as of December 31, 2016.

 

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As of December 31, 2016, our working capital was approximately $9,384,000, our accumulated deficit was approximately $126,408,000, and our stockholders’ deficit was approximately $42,704,000. Operating loss was approximately $6,309,000 and $6,861,000 for the years ended December 31, 2016 and 2015, respectively. Our net loss attributable to CareView was approximately $18,613,000 and $16,285,000 for the years ended December 31, 2016 and 2015, respectively.

 

The following is a summary of cash flow activity for the years ended December 31, 2016 and 2015.

 

    2016     2015  
      (000’s)  
Net cash flows used in operating activities   $ (6,069 )   $ (5,341 )
Net cash flows used in investing activities     (1,517 )     (4,613 )
Net cash (used in) provided by financing activities     (5 )     25,087  
                 
Increase (decrease) in cash     (7,591 )     15,133  
Cash at beginning of period     17,679       2,546  
                 
Cash at end of period   $ 10,088     $ 17,679  

 

The increase in cash flows used in operating activities of approximately $729,000 is primarily a result of an increase in revenue of approximately $835,000 partially offset by an increase in operating expenses. The decrease in cash flows used in investing activities of approximately $3,096,000 is primarily a result of the 2015 addition of $3,250,000 of restricted cash as stipulated in our credit agreement with PDL Pharma, Inc., along with the purchases and installation of CareView Systems and costs associated with patents and trademarks. The decrease in cash provided by financing activities of approximately $25,092,000 reflects the 2015 $20,000,000 loan from PDL BioPharma, Inc. (see NOTE 12 in the accompanying consolidated financial statements for further details) and the 2015 $6,000,000 from HealthCor Partners Fund LP and certain other investors (see NOTE 11 in the accompanying consolidated financial statements for further details).

 

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Results of Operations

 

Year ended December 31, 2016 compared to year ended December 31, 2015

 

    Year Ended December 31,      
    2016     2015     Change  
      (000’s)          
Revenue, net   $ 5,974     $ 5,139     $ 835  
Operating expenses:                        
Network operations     4,679       4,598       81  
General and administration     3,758       3,744       14  
Sales and marketing     777       845       (68 )
Research and development     1,253       1,086       167  
Depreciation and amortization     1,816       1,727       89  
Operating expenses     12,283       12,000       283  
Operating loss   $ (6,309 )   $ (6,861 )   $ (552 )

 

Revenue, net

 

Revenue increased approximately $835,000 for the year ended December 31, 2016 as compared to the year ended December 31, 2015. Hospitals with billable units decreased to 93 for the year ended December 31, 2016 as compared to 96 for the comparable period for the prior year. Of the 93 hospitals with billable units on December 31, 2016, two hospitals groups accounted for 16 and 25 of the total, respectively. Billable units (RCPs and Nurse Stations) for all hospitals totaled 7,762 (7,276 and 486, respectively) on December 31, 2016 as compared to 8,136 (7,573 and 563, respectively) on December 31, 2015.

 

Operating Expenses

 

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

 

    Year Ended
December 31,
 
    2016     2015  
Human resource costs, including benefits     45 %     40 %
Depreciation and amortization expense     15 %     14 %
Travel and entertainment     10 %     11 %
Other product deployment costs, excluding human resources and travel and entertainment expense     9 %     10 %
Non-cash expense related to option grants     6 %     8 %
Other expenses     6 %     8 %
Professional fees and consulting expenses     5 %     5 %
Research and development costs     2 %     2 %
Other sales and marketing costs, excluding human resources costs, travel and entertainment expense, and consulting expenses     2 %     2 %

 

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Operating expenses increased by approximately $283,000 (2%) as a result of the following items:

 

      (000’s)  
Increase:        
Human resource costs, including benefits   $ 735  
Depreciation and amortization     90  
Decrease:        
Other product deployment costs, excluding human resources and travel and entertainment expense     (204 )
Other expenses     (106 )
Other sales and marketing costs, excluding human resources costs, travel and entertainment expense, and consulting expenses     (73 )
Travel and entertainment     (71 )
Non-cash expense related to option grants     (57 )
Professional and consulting expenses     (28 )
Research and development costs     (3 )
    $ 283  

 

Human resource related costs (including salaries and benefits) increased primarily as a result of a higher average head count in 2016 compared to 2015. While we had 78 employees at December 31, 2016 as compared to 75 for the comparable date for the prior year, on average we employed 75 employees over the course of 2016 as compared to 65 for the comparable prior year period.

 

Other product development costs decreased primarily as a result of decreases in product deployment and installation costs and related non-capital equipment costs.

 

Other expenses decreased primarily as a result of decreases in property taxes in 2016 over 2015 and increases in the recovery of sales taxes in 2016 compared to the recovery in 2015.

 

Other sales and marketing expense decreased primarily as a result of reduced attendance at trade shows, seminar and other marketing expense over 2015.

 

Travel and entertainment expense decreased as a result of decreases in product deployment and installation efforts partially offset by increases in meetings with hospital administrators, attendance at trade shows and seminar, and training efforts related to supporting our existing installed base.

 

Critical Accounting Estimates and New Accounting Pronouncements

 

Critical Accounting Estimates

 

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect reported amounts and related disclosures in the financial statements. Management considers an accounting estimate to be critical if:

 

if requires assumptions to be made that were uncertain at the time the estimate was made, and
changes in the estimate or different estimates that could have been selected could have a material impact on our results of operations or financial condition.

 

We base our estimates and judgments on our experience, our current knowledge, our beliefs of what could occur in the future, our observation of trends in the industry, information provided by our customers and information available from other sources. Actual results may differ from these estimates under different assumptions or conditions. We have identified the following accounting policies and estimates as those that we believe are most critical to our financial condition and results of operations and that require management’s most subjective and complex judgments in estimating the effect of inherent uncertainties: share-based compensation expense, income taxes, complex derivative financial instruments and impairment of long-lived assets.

 

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Share-Based Compensation Expense. We calculate share-based compensation expense for option awards and certain warrant issuances (“Share-based Award(s)”) based on the estimated grant/issue date fair value using the Black-Scholes-Merton option pricing model (“Black-Sholes Model”), and recognize the expense on a straight-line basis over the vesting period, net of estimated forfeitures. We have not included an estimate for forfeitures due to our limited history and we revise based on actual forfeitures each period. 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 vesting period of the Share-based Award in determining the fair value of Share-based Awards. Although we believe our assumptions used to calculate share-based compensation expense are reasonable, these assumptions can involve complex judgments about future events, which are open to interpretation and inherent uncertainty. In addition, significant changes to our assumptions could significantly impact the amount of expense recorded in a given period.

 

Income Taxes. As part of the process of preparing our consolidated financial statements, we are required to estimate income taxes in each of the jurisdictions in which we operate. Our provision for income taxes is determined using the asset and liability approach to account for income taxes. A current liability is recorded for the estimated taxes payable for the current year. Deferred tax assets and liabilities are recorded for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates in effect for the year in which the timing differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of changes in tax rates or tax laws are recognized in the provision for income taxes in the period that includes the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount more-likely-than-not to be realized. Changes in valuation allowances will flow through the statement of operations unless related to deferred tax assets that expire unutilized or are modified through translation, in which case both the deferred tax asset and related valuation allowance are similarly adjusted. Where a valuation allowance was established through purchase accounting for acquired deferred tax assets, any future change will be credited or charged to income tax expense.

 

The determination of our provision for income taxes requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. In the ordinary course of our business, there are transactions and calculations for which the ultimate tax determination is uncertain. In spite of our belief that we have appropriate support for all the positions taken on our tax returns, we acknowledge that certain positions may be successfully challenged by the taxing authorities. We determine the tax benefits more likely than not to be recognized with respect to uncertain tax positions. Although we believe our recorded tax assets and liabilities are reasonable, tax laws and regulations are subject to interpretation and inherent uncertainty; therefore, our assessments can involve both a series of complex judgments about future events and rely on estimates and assumptions. Although we believe these estimates and assumptions are reasonable, the final determination could be materially different than that which is reflected in our provision for income taxes and recorded tax assets and liabilities.

 

Complex Derivative Financial Instruments. From time to time we sell common stock and we issue convertible debt, both with common stock purchase warrants, which may include terms requiring conversion price or exercise price adjustments based on subsequent issuance of securities at prices lower than those in the agreements of such securities. In these situations, the instruments may be accounted for as liabilities and recorded at fair value each reporting period. Due to the complexity of the agreement, we used an outside expert to assist in providing the mark to market fair valuation of the liabilities over the reporting periods in which the original agreement was in effect. It was determined that a Binomial Lattice option pricing model using a Monte Carlo simulation would provide the most accuracy given all the potential variables encompassing a future dilutive event. This model incorporated transaction assumptions such as our stock price, contractual terms, maturity, risk free rates, as well as estimates about future financings, volatility, and holder behavior. Although we believe our estimates and assumptions used to calculate the fair valuation liabilities and related expense were reasonable, these assumptions involved complex judgments about future events, which are open to interpretation and inherent uncertainty. In addition, significant changes to our assumptions could significantly impact the amount of expense recorded in a given period.

 

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Impairment of Long-Lived Assets. Carrying values of property and equipment and finite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying values may not be recoverable. If impairment indicators are present, we determine whether an impairment loss should be recognized by testing the applicable asset or asset group’s carrying value for recoverability. This assessment requires the exercise of judgment in assessing the future use of and projected value to be derived from the eventual disposal of the assets to be held and used. Assessments also consider changes in asset utilization, including the temporary idling of capacity and the expected timing for placing this capacity back into production. If the carrying value of the assets is not recoverable, then a loss is recorded for the difference between the assets’ fair value and respective carrying value. The fair value of the assets is determined using an “income approach” based upon a forecast of all the expected discounted future net cash flows associated with the subject assets. Some of the more significant estimates and assumptions include: market size and growth, market share, projected selling prices, manufacturing cost and discount rate. Our estimates are based upon historical experience, commercial relationships, market conditions and available external information about future trends.

 

Recently Adopted Accounting Standards

 

In April 2015, FASB, issued ASU No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). ASU 2015-03 requires that debt issuance costs be reported in the balance sheet as a direct deduction from the face amount of the related liability, consistent with the presentation of debt discounts and further requires the amortization of debt issuance cost to be reported as interest expense. Similarly, debt issuance costs and any discount or premium are considered in the aggregate when determining the effective interest rate of the debt. ASU 2015-03 is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. Management opted for early adoption of ASU 2015-03 and there is no material effect on the 2016 or 2015 consolidated financial statements.

 

In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis (“ASU 2015-02”). ASU 2015-02 amends the consolidation guidance for VIEs and general partners’ investments in limited partnerships and modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities. ASU 2015-02 is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. There was no material effect on the 2016 consolidated financial statements upon adoption.

 

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”), to provide guidance on management’s responsibility to perform interim and annual assessments of an entity’s ability to continue as a going concern. ASU 2014-15 also requires certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. ASU 2014-15 applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. The adoption of these amendments did not have a material effect on our consolidated financial statements.

  

Recently Issued Accounting Standards

 

In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-15, Statement of Cash Flows (Topic 230) (“ASU 2016-15”). ASU 2016-15 is intended to reduce the diversity in practice regarding how certain transactions are classified within the statement of cash flows. ASU 2016-15 is effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted with retrospective application. We are currently evaluating the impact of this guidance on our consolidated financial statements and disclosures.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13").  The ASU sets forth an "expected credit loss" impairment model to replace the current "incurred loss" method of recognizing credit losses.  The standard requires measurement and recognition of expected credit losses for most financial assets held.  The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.  Early adoption is permitted for periods beginning after December 15, 2018.  We are currently evaluating the impact of this guidance on our consolidated financial statements and disclosures.

 

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). This guidance simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The guidance is effective for public business entities for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted in any annual or interim period for which financial statements have not been issued or made available for issuance, but all of the guidance must be adopted in the same period. If an entity early adopts the guidance in an interim period, any adjustments must be reflected as of the beginning of the fiscal year that includes that interim period. We will adopt the various amendments in ASU 2016-09 in our consolidated financial statements for the quarterly period ending March 31, 2017 with an effective date of January 1, 2017. We are currently evaluating the impact of this guidance on our consolidated financial statements and disclosures. 

 

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In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”). The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. While we are continuing to assess all potential impacts of the standard, we currently believe, the impact of this standard will be primarily related to the accounting for our operating lease.

 

In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date to fiscal periods beginning after December 15, 2017. Early adoption is permitted for fiscal periods beginning after December 15, 2016. The standard permits the use of either the retrospective or cumulative effect transition method. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 is a comprehensive new revenue recognition model, which requires a company to recognize revenue to depict the transfer of promised goods or services to a customer in an amount that reflects the consideration the company expects to receive in exchange for those goods or services. We are in the initial stages of evaluating the effect of the standard on our consolidated financial statements and continue to evaluate the available transition methods.

 

Recent Events Since December 31, 2016

 

On January 31, 2017, under the terms of the Rockwell Agreement (see NOTES 13 and 15 in the accompanying consolidated financial statements for further details), wherein we have the option to purchase Rockwell’s interest in CareView-Hillcrest and CareView-Saline, we exercised that right by entering into 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 “CareView Note”) and a cash payment of $100,000. Pursuant to the terms of the CareView Note, CareView will make quarterly principal payments of $100,000, with each payment being made on the last day of each fiscal quarter beginning with the first payment date of March 31, 2017 and continuing on the last business day of each subsequent calendar quarter through September 30, 2019. The final payment due on December 31, 2019 shall be a balloon payment of $13,786 representing the remaining principal balance plus all accrued and unpaid interest.

 

Off-Balance Sheet Arrangements

 

As of December 31, 2016, we had no material off-balance sheet arrangements.

 

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Contractual Arrangements

 

Provided in the table below are our known contractual obligations as of December 31, 2016 for the future periods as indicated.

 

Contractual Obligations
(000’s)
 
    As of December 31,  
    Total     2017     2018 and
2019
    2020 and
2021
    Beyond
2021
 
Long-Term Debt   $ 84,417     $ 878     $ 13,334     $ 6,666     $ 63,539  
Operating Lease     658       190       372       96        
 Total   $ 85,075     $ 1,068     $ 13,706     $ 6,762     $ 63,539  

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

We are a smaller reporting company as defined by Rule 229.10(f)(1) and are not required to provide information under this item.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 

Financial statements begin on page F-1 following this Report.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

 

Not Applicable.

 

ITEM 9A. CONTROLS AND PROCEDURES.

 

Evaluation of 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.

 

As of December 31, 2016, management carried out an evaluation, under the supervision and with the participation of our chief executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures. Based upon the evaluation, our chief executive officer and principal financial officer concluded that, as of December 31, 2016, our disclosure controls and procedures were effective at the reasonable assurance level.

 

There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurances of achieving their control objectives.

 

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Management’s Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act, is a process designed by, or under the supervision of, the chief executive officer and chief financial officer, or persons performing similar functions, and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

 

Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

 

Our management, under the supervision and with the participation of our chief executive officer and principal financial officer, conducted an evaluation of the effectiveness of our internal control over financial reporting using the criteria set forth in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework. Based on this evaluation our management concluded that our internal control over financial reporting was effective as of December 31, 2016.

 

Changes in Internal Control Over Financial Reporting

 

There were no material changes in our internal control over financial reporting that occurred during the fourth quarter of 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

ITEM 9B. OTHER INFORMATION.

 

None

 

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PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.

 

Directors, Executive Officers, Promoter and Control Persons

 

The following table sets forth information on our executive officers and directors as of the filing of this Report. All executive officers serve at the discretion of the Board of Directors. The term of office of each of our directors expire at our next Annual Meeting of Shareholders or until their successors are duly elected and qualified. We do not have any promoters or control persons.

 

Name

Age

Position 

Date Elected
Director
Date Appointed
Officer
L. Allen Wheeler 84 Chairman of the Board, Principal Financial Officer, Chief Accounting Officer January 26, 2006 September 6, 2013
Steven G. Johnson 57 Chief Executive Officer, President, Secretary, Treasurer, Director April 11, 2006 April 11, 2006
Sandra K. McRee 61 Chief Operating Officer N/A November 1, 2013
Jeffrey C. Lightcap 58 Director April 21, 2011 N/A
David R. White 69 Director January 1, 2014 N/A
Jason T. Thompson 42 Director January 1, 2014 N/A
Steven B Epstein 73 Director April 1, 2014 N/A
Dr. James R. Higgins 67 Director April 1, 2014 N/A

 

Mr. Lightcap was elected to serve on our Board of Directors pursuant to the terms of the HealthCor Note Purchase Agreement executed on April 21, 2011. Other than Mr. Lightcap, there are no arrangements or understandings between our directors and executive officers and any other person pursuant to which any director or officer was or is to be selected as a director or officer, and there are no arrangements, plans or understandings as to whether non-management shareholders will exercise their voting rights to continue to elect the current board of directors. There are also no arrangements, agreements or understandings to our knowledge between non-management shareholders that may directly or indirectly participate in or influence the management of our affairs.

 

In September 2013, our Chief Financial Officer, Treasurer and Secretary resigned. Until such time as those positions are filled, Steven Johnson, our Chief Executive Officer and President, will also serve as our Secretary and Treasurer. In addition, L. Allan Wheeler, our Chairman of the Board and former chairman of the Audit Committee, will serve as our Principal Financial Officer and Chief Accounting Officer as those positions relate to our annual and quarterly filings with the SEC.

 

Identification of Certain Significant Employees

 

Kyle Johnson, our Director of Engineering, and Matthew E. Jackson, General Counsel, are considered significant employees. An overview of their business experience follows in Business Experience found within this Item 10.

 

Family Relationships

 

There are no family relationships between our officers and members of our Board of Directors.

 

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Business Experience of Directors, Executive Officers and Significant Employees

 

The business experience of each of our directors, executive officers and significant employee follows:

 

Steve G. Johnson – Chief Executive Officer, President, Secretary, Treasurer, Director

 

Steven G. Johnson currently serves as Chief Executive Officer (effective January 1, 2014), President, Secretary, Treasurer and Director. Mr. Johnson also served as Chief Operating Officer until November 1, 2013. In December 2003, he filed for patent protection as the inventor of a Non-Intrusive Data Transmission Network for Use in an Enterprise Facility and Method for Implementing in the United States, which invention was subsequently assigned to CareView and was issued a patent number by the USPTO. The technology underlying this patent is the basis of the CareView System suite. Mr. Johnson is also one of the inventors on three issued patents for a Non-intrusive data transmission network for use in an enterprise facility and method for implementing in the U.S., a System and Method for Documenting Patient Procedures in the U.S., and a System and Method for Using a Video Monitoring System to Prevent and Manage Decubitus Ulcers in Patients in the U.S., and five additional pending patent applications for a System and Method for Predicting Falls in the U.S., a continuation patent for System and Method for Using a Video Monitoring System to Prevent and Manage Decubitus Ulcers, an Electronic Patient Sitter Management System and Method for Implementing in the U.S., a Noise Correcting Patient Fall Risk State System and Method for Predicting Patient Falls in the U.S., and a System and method for monitoring a fall state of a patient and minimizing false alarms in the U.S., all technology currently being deployed or in further development by CareView. Mr. Johnson has over 20 years of experience in the cable and wireless industry.

 

Before joining CareView in 2006, he served as Chief Executive Officer of Cadco Systems, a manufacturer of CATV and telecommunications equipment from 1997. From February 1991 to February 1996, he served as CEO, President and Director of American Wireless Systems, which he restructured and sold to Heartland Wireless Communications. Mr. Johnson also served as founder and President of Hanover Systems, a manufacturer of telecommunications equipment. Mr. Johnson has been actively involved with the wireless cable industry since 1984 and has served on the board of directors of the Wireless Cable Association and its FCC regulatory committee. Mr. Johnson developed various electronic telecommunications equipment for the wireless cable industry including microwave downconverters, wireless cable set top converters, antennas, and transmitters. Mr. Johnson’s accumulated knowledge in the field of technology, coupled with his development of patentable technology, makes him an invaluable member of our management team. Mr. Johnson earned his BA in Economics and Business Administration from Simpson College and currently serves as a Trustee on the Simpson College Board of Trustees. Mr. Johnson is the father of Kyle Johnson, our Director of Engineering.

 

Sandra K. McRee – Chief Operating Officer

 

Sandra K. McRee joined CareView as Chief Operating Officer effective November 1, 2013. Ms. McRee also currently serves as President of McRee Consulting. Ms. McRee most recently served as the Vice Chair of the Board of Directors of IASIS Healthcare Corporation (“IASIS”) from April 2010 until October 2011. Previously, she served as Chief Operating Officer of IASIS from May 2001 until October 2010, and President from May 2004 to April 2010. At IASIS, she was responsible for overseeing all aspects of IASIS’s hospital operations and was responsible for overseeing clinical systems; developing an appropriate mix of quality services, physician relationships, effective staffing and supply utilization; and managing capital investments related to operations. From April 1999 through May 2001, Ms. McRee was Regional Vice President for Province Healthcare Corporation where she oversaw five facilities in Florida, Louisiana and Mississippi. Ms. McRee has more than 35 years of healthcare management experience. Ms. McRee has spent her entire professional career in the healthcare industry. She currently serves on the Board of Directors of Denver School of Nursing. Ms. McRee previously served on the Boards of EDCare, a national emergency room management company owned by Gemini Investors from August 2005 to July 2008, Mid-Western University from July 2000 to August 2004 and All About Women. Ms. McRee is a member of Women Business Leaders of the U.S. HealthCare Industry Foundation, a nonprofit organization that was established in 2001 to address the unique needs of women serving in a senior executive capacity in the U.S. healthcare industry and was a member of the Executive Leadership Team of Go Red for Women.

 

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L. Allen Wheeler – Chairman of the Board, Principal Financial Officer, Chief Accounting Officer

 

Mr. Wheeler has served as a Director of CareView since January 2006 and on January 1, 2014 became our Chairman of the Board. In addition, he currently serves as our Principal Financial Officer and Chief Accounting Officer while we seek a qualified candidate to fill those positions. Mr. Wheeler has been a private investor for over 40 years with interests in nursing homes, banks, cable television, radio stations, real estate and ranching. Currently, Mr. Wheeler owns and operates three Abstract and Title companies in Bryan County, Oklahoma. Mr. Wheeler served on the Board of Directors of Texoma Medical Center from 1994 to 2005 and acted as Chairman of the Board from 2002 to 2005. Mr. Wheeler served as President of the Durant Industrial Authority for numerous years. Mr. Wheeler’s knowledge of the healthcare industry (as it relates to nursing homes), his technical knowledge of the broadcast television industry, and his expertise relative to investments and equity placements, qualifies him as a significant member of our board of directors. Mr. Wheeler earned his B.A. from Southeastern Oklahoma State University. Mr. Wheeler was elected Alumni of the Year of Southeastern Oklahoma State University in 2001.

 

Jeffrey D. Lightcap – Director

 

Mr. Lightcap was elected as a Director of CareView on April 21, 2011. Since October 2006, Mr. Lightcap has served as a Senior Managing Director at HealthCor Partners Management, LP, a growth equity investor in early and near commercial stage healthcare companies in the diagnostic, therapeutic, medtech, and HCIT sectors. From 1997 to mid-2006, Mr. Lightcap served as a Senior Managing Director at JLL Partners, a leading middle-market private equity firm. Prior to JLL Partners, Mr. Lightcap served as a Managing Director at Merrill Lynch & Co., Inc. in charge of leverage buyout coverage for Merrill Lynch’s mergers and acquisitions group. Prior to joining Merrill Lynch, Mr. Lightcap was a Senior Vice President in the mergers and acquisitions group at Kidder, Peabody & Co. and briefly at Salomon Brothers. Mr. Lightcap received a B.E. in Mechanical Engineering from the State University of New York at Stony Brook in 1981 and in 1985 received an MBA from the University of Chicago. Mr. Lightcap currently also serves as Chairman of the Board of Directors at Corindus Vascular Robotics, Inc. (NYSE: CVRS), a robotic medical device company and serves as a director of the following companies: IASIS Healthcare Corporation, a privately-held company that owns and operates community focused hospitals in growing urban and suburban markets; Practice Partners in HealthCare, a privately-held company specializing in management and operation of ambulatory surgical centers; Paradigm Spine, LLC, a leader in the field of non-fusion, spinal implant technology; Heartflow Inc., a company focused on the non-invasive diagnosis of coronary artery disease; and KellBenx, Inc., a prenatal diagnostic technology company. Mr. Lightcap’s experience with fundraising in the private equity market and his leadership skills exhibited throughout his career make him well-qualified to serve as one of the Company’s directors.

 

David R. White – Director

 

David R. White was elected as a director on January 1, 2014. From December 1, 2000 to November 1, 2010, Mr. White served as the Chief Executive Officer of IASIS Healthcare Corporation and he served as the Chief Executive Officer of IASIS Healthcare LLC from December 1, 2000 to October 2010. Mr. White served as the President of IASIS Healthcare Corporation from May 22, 2001 to May 2004 and also served as the President of IASIS Healthcare LLC from May 22, 2001 to May 2004. He served as the President and Chief Executive Officer of LifeTrust, from November 1998 to November 2000. From June 1994 to September 1998, Mr. White served as President of the Atlantic Group at Columbia/HCA, where he was responsible for 45 hospitals located in nine states. He has also served as Regional Vice President of Republic Health Corporation. Previously, Mr. White served as an Executive Vice President and Chief Operating Officer at Community Health Systems, Inc. He was Executive Chairman of Anthelio Healthcare Solutions Inc. from June 2012 to September 2016 and was its Independent Director from July 28, 2011 to September 2016. He has been Chairman of the Board at IASIS Healthcare Corporation since October 1999. He has been a Member of Strategic Advisory Board of Satori World Medical, Inc. since 2011. He was a Director of REACH Health, Inc. from August 30, 2011 to June 2015. He also serves as a director to CareView Communications, Inc. (OTCQB: CRVW), a healthcare technology company. He served as Non-Executive Director at Parkway Holdings Limited from July 15, 2005 to March 8, 2007. Mr. White earned a B.S. in Business Administration from the University of Tennessee in Knoxville, TN in 1970, and an MS in Healthcare Administration from Trinity University in San Antonio, TX in 1973. Mr. White’s lifetime career and knowledge in the healthcare industry makes him well-qualified to serve as a director of the Company.

 

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Jason T. Thompson - Director

 

Jason T. Thompson was elected as a Director of CareView effective as of January 1, 2014. Mr. Thompson is a partner and a member of the transactional group of Michael Best & Friedrich LLP where he focuses on mergers and acquisitions and general corporate matters, having joined Michael Best in September 2006. Mr. Thompson assists his clients with negotiating and structuring many types of transactions and agreements, including those related to corporate reorganizations, buyout transactions and venture capital investment transactions. In addition, he is President of Thompson Family Holdings, LLC, which invests in, and consults for, a number of healthcare companies, having joined Thompson Holdings in 2010. From 1999 to 2004, Mr. Thompson served as Vice President of Development and Planning for Bulk Petroleum Corporation, where he oversaw sales, operations, client maintenance, scheduling accounting and workforce management for its construction projects. Prior to joining Bulk Petroleum, Mr. Thompson was a senior auditor with Arthur Andersen. He is a certified public accountant. Mr. Thompson received a BBA in Accounting from the University of Wisconsin – Madison in 1996 and in 2006, received his JD from the University of Wisconsin, where he was a member of the Wisconsin Law Review. His business, accounting and legal experience makes him well-qualified to serve as one of the Company’s directors.

 

Steven B Epstein - Director

 

Steven B. Epstein was elected as a Director of CareView effective as of April 1, 2014. Mr. Epstein is the founder of Epstein Becker & Green, P.C., a leading law firm in health care law with over 250 lawyers in 12 cities, where he serves as a senior health adviser. Mr. Epstein is a pioneer in the legal specialty known as health care law and provides a wide range of health care organizations and providers with strategic legal guidance responding to the legal challenges and opportunities of the rapidly changing American health care system. Mr. Epstein was instrumental in the acceptance of managed care as the prominent form of health care delivery and has been referred to as the “father of the healthcare [legal] industry”, as stated in Chambers USA. Mr. Epstein received his Bachelors of Arts from Tufts University in 1965, where he was awarded the Tufts University Distinguished Alumni Award and served as a member of the Board of Trustees from 1999-2009. He received his Juris Doctor from Columbia Law School in 1968. He is the recipient of Columbia University’s Distinguished Alumni Award and Columbia Law School’s Medal for Excellence, Columbia Law School’s most prestigious award and served as chairman of the Columbia Law School Board of Visitors from 2002-2015. Mr. Epstein currently also serves as a director of the following companies: Accumen, Inc., a private lab services company; Advance Health, a private nurse assessment company; Haights Cross Communications, Inc. a private education provider company; National Compliance Solutions, Inc.; a private drug and background search company; OrthoSensor, Inc.; a private orthopedic medical device company; ResCare, Inc. a private disability care company; Restorix Health, a private wound care company; and Solis Women’s Health, a private mammography company. Mr. Epstein’s lifetime legal career and knowledge in the healthcare industry makes him well-qualified to serve as a director of the Company.

 

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Dr. James R. Higgins - Director

 

Dr. James R. Higgins was elected as a director of CareView effective as of April 1, 2014. Dr. Higgins is a cardiologist practicing in Tulsa, Oklahoma. In addition to being boarded in cardiology he has sub specialty boards in nuclear cardiology, electrophysiology, invasive cardiology, cardiac CT angiography, echocardiography, carotid and peripheral sonography, pacemakers and defibrillators. He graduated summa cum laude with a BS degree in electrical engineering from South Dakota State University and sum cum laude with a MD degree from the University of Rochester School of Medicine and Dentistry. He was an extern at the Massachusetts General Hospital in Boston, and intern, resident, and chief resident at Barnes Hospital, Washington University, in St. Louis Missouri. His cardiology fellowship was obtained at the University of California, San Francisco, Moffitt and Long Hospital. He was then the Director of research and invasive cardiology at Wilford Hall Medical Center, United States Air Force, San Antonio, Texas. In addition to his busy cardiology practice, Dr. Higgins has started and owns a real estate company, an electronic medical billing company, an oil pipeline supply company, and has a large cattle ranch operation in Oklahoma. He has published more than 300 peer review articles and has multiple patents on medical devices, mainly related to pacemakers and internal defibrillators. Dr. Higgin’s vast experience in the healthcare industry makes him well-qualified to serve as a director of the Company

 

Kyle Johnson - Director of Engineering

 

Kyle Johnson has served as our Director of Engineering since August 2006 and is responsible for the design and development of our Room Control Platform and deployment of systems to hospitals. From June 2004 to August 2006, he served as Senior Product Manager of Cadco Systems, a company that specializes in broadband electronic design and manufacturing. As Senior Project Manager, Mr. Johnson managed the design and development of several products including the development of the technology used in the CareView System suite. Mr. Johnson is also one of the inventors on one issued patent for a System and Method for Using a Video Monitoring System to Prevent and Manage Decubitus Ulcers in Patients in the U.S. and an additional pending patent application for a System and Method for Predicting Falls in the U.S. (the technology underlying CareView’s Virtual Bed Rails). From February 2000 to June 2004, Mr. Johnson served as General Manager and Chief Engineer for 391 Communications, a company that is a service provider to cable and wireless cable companies. Mr. Johnson has been involved in several large scale deployments of CATV, MMDS, and DBS satellite systems, as well as designing and building numerous CATV/MMDS head-ends for major domestic and foreign CATV/MMDS providers. Mr. Johnson is the son of Steven Johnson, our Chief Executive Officer and President.

 

Matthew E. Jackson – General Counsel

 

Mr. Jackson joined CareView in 2012. Mr. Jackson is responsible for all company legal matters including drafting and negotiating contracts, litigation, risk management, labor and employment, corporate securities and corporate governance. Prior to joining the Company, Mr. Jackson practiced as a civil trial lawyer specializing in business litigation and transactional law. Mr. Jackson graduated from the University of Santa Barbara with a Bachelor of Science in Geology and earned his Juris Doctor from Whittier Law School. Mr. Jackson is admitted to practice law in both Texas and California.

 

Other Directorships

 

Other than as indicated within this section at Business Experience, none of our directors hold or have been nominated to hold a directorship in any company with a class of securities registered pursuant to Section 12 of the Exchange Act (the “Act”) or subject to the requirements of Section 15(d) of the Securities Act of 1933, or any company registered as an investment company under the Investment Company Act of 1940.

 

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Committees of the Board

 

Audit Committee

 

The Audit Committee reviews and discusses the audited consolidated financial statements with management, discusses with our independent registered public accounting firm matters required to be discussed by Public Company Accounting Oversight Board Auditing Standard No. 16 (Communications with Audit Committees) and Rule 3520 (Auditor Independence), and makes recommendations to the Board of Directors regarding the inclusion of our audited financial statements in this Annual Report on Form 10-K.

 

Our Audit Committee’s primary function is to provide advice with respect to our financial matters and to assist our Board of Directors in fulfilling its oversight responsibilities regarding finance, accounting, and legal compliance. The Audit Committee’s primary duties and responsibilities are to: (i) serve as an independent and objective party to monitor our financial reporting process and internal control system, (ii) review and appraise the audit efforts of our independent registered accounting firm, (iii) evaluate our quarterly financial performance as well as its compliance with laws and regulations, (iv) oversee management’s establishment and enforcement of financial policies and business practices, and (v) provide an open avenue of communication among the independent accountants, management and our Board of Directors.

 

For the year ended December 31, 2016, and as of the filing date of this Report, our Audit Committee consisted of three members of our Board of Directors, namely Jason Thompson as Chair, Allen Wheeler and Jeffrey Lightcap. Messrs. Thompson and Lightcap are deemed to be financial experts. Although our Board of Directors believes the members of our Audit Committee will exercise their judgment independently, no member is totally free of relationships that, in the opinion of the Board of Directors, might interfere with their exercise of independent judgment as a committee member. The Audit Committee’s Chair and members are to be designated annually by a majority vote of the Board of Directors. Any member may be removed at any time, with or without cause, and vacancies may be filled by a majority vote of the Board of Directors.

 

Compensation Committee

 

Our Compensation Committee’s function is to provide assistance to our Board of Directors in fulfilling their responsibility to our shareholders, potential shareholders, and the investment community relating to developing policies and making specific recommendations to the Board of Directors with respect to the direct and indirect compensation of our executive officers. The goal of such policies is to ensure that an appropriate relationship exists between executive pay and the creation of shareholder value, while at the same time motivating and retaining key employees. Our Compensation Committee’s primary duties and responsibilities are to: (i) review and approve our Company’s goals relevant to the compensation of our Chief Executive Officer, evaluate the Chief Executive Officer’s performance with respect to those goals, and set the Chief Executive Officer’s compensation based on that evaluation; (ii) assess the contributions of individual executives and recommend to our Board of Directors levels of salary and incentive compensation payable to them; (iii) compare compensation levels with those of other leading companies in the industry; (iv) grant stock incentives to key employees and administer our stock incentive plans; (v) monitor compliance with legal prohibition on loans to directors and executive officers; and (vi) recommend to our Board of Directors compensation packages for new corporate officers and termination packages for corporate officers as requested.

 

For the year ended December 31, 2016, and as of the filing date of this Report, our Compensation Committee consisted of three members of ours Board of Directors, namely Allen Wheeler as Chair, Jeffrey Lightcap and David White. Although our Board of Directors believes the members of our Compensation Committee will exercise their judgment independently, no member is totally free of relationships that, in the opinion of our Board of Directors, might interfere with their exercise of independent judgment as a committee member. Our Compensation Committee’s Chair and members are to be designated annually by a majority vote of our Board. Any member may be removed at any time, with or without cause, and vacancies may be filled by a majority vote of our Board.

 

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Nominating Committee

 

We do not currently have a Nominating Committee; therefore, our Board, as a whole, identifies director nominees by reviewing the desired experience, mix of skills and other qualities to assure appropriate Board composition, taking into consideration our current Board members and the specific needs of our Company and our Board. Among the qualifications to be considered in the selection of candidates, our Board considers the following attributes and criteria of candidates: experience, knowledge, skills, expertise, diversity, personal and professional integrity, character, business judgment and independence. Our Board recognizes that nominees for the Board should reflect a reasonable diversity of backgrounds and perspectives, including those backgrounds and perspectives with respect to business experience, professional expertise, age, gender and ethnic background. Nominations for the election of directors may be made by any member of the Board.

 

Our Board will also evaluate whether the nominee’s skills are complementary to the existing Board members’ skills; our Board’s needs for operational, management, financial, technological or other expertise; and whether the individual has sufficient time to devote to the interests of our Company. The prospective Board member cannot be a board member or officer at a competing company nor have relationships with a competing company and must be clear of any investigation or violations that would be perceived as affecting the duties and performance of a director.

 

Our Board identifies nominees by first evaluating the current members of our Board willing to continue in service. Current members of our Board with skills and experience that are relevant to the business and who are willing to continue in service are considered for re-nomination, balancing the value of continuity of service by existing members of the Board with that of obtaining a new perspective. If any member of our Board does not wish to continue in service, or if our Board decides not to nominate a member for re-election, our Board identifies the desired skills and experience of a new nominee and discusses with our Board suggestions as to individuals that meet the criteria.

 

Our Board is comprised of accomplished professionals who represent diverse and key areas of expertise including national business, operations, manufacturing, government, finance and investing, management, entrepreneurship, higher education and science, research and technology. We believe our directors’ wide range of professional experiences and backgrounds, education and skills has proven invaluable to our Company and we intend to continue leveraging this strength.

 

Board Involvement in Risk Oversight

 

Our Board of Directors is responsible for oversight of our risk assessment and management process. We believe risk can arise in every decision and action taken by us, whether strategic or operational. Our comprehensive approach is reflected in the reporting processes by which our management provides timely information to our Board of Directors to support its role in oversight, approval and decision-making.

 

Our Board of Directors closely monitors the information it receives from management and provides oversight and guidance to our management team concerning the assessment and management of risk. Our Board of Directors approves our high level goals, strategies and policies to set the tone and direction for appropriate risk taking within the business.

 

Our Board of Directors serving on the Compensation Committee have basic responsibility for oversight of management’s compensation risk assessment, and that committee reports to the Board on its review. Our Board of Directors also delegated tasks related to risk process oversight to our Audit Committee, which reports the results of its review process to our Board of Directors. The Audit Committee’s process includes a review, at least annually, of our internal audit process, including the organizational structure, as well as the scope and methodology of the internal audit process. The Board, as a whole, functions as the nominating committee to oversee risks related to our corporate governance, including director performance, director succession, director education and governance documents.

 

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Code of Business Conduct and Ethics

 

Our Board of Directors adopted a Code of Business Conduct and Ethics applicable to all of our directors and executive officers. This code is intended to focus the members of our Board of Directors and each executive officer on areas of ethical risk, provide guidance to directors and executive officers to help them recognize and deal with ethical issues, provide mechanisms to report unethical conduct, and help foster a culture of honesty and accountability. All members of our Board of Directors and all executive officers are required to sign this code on an annual basis.

 

Code of Ethics for Financial Executives

 

Our Board of Directors adopted a Code of Ethics applicable to all financial executives and any other senior officer with financial oversight responsibilities. This code governs the professional and ethical conduct of our financial executives, and directs that they: (i) act with honesty and integrity; (ii) provide information that is accurate, complete, objective, relevant, and timely; (iii) comply with federal, state, and local rules and regulations; (iv) act in good faith with due care, competence and diligence; and (v) respect the confidentiality of information acquired in the course of their work and not use the information acquired for personal gain. All of our financial executives are required to sign this code on an annual basis.

 

Insider Trading Policy

 

Our Board of Directors adopted an Insider Trading Policy applicable to all directors and officers. Insider trading generally refers to the buying or selling of a security in breach of a fiduciary duty or other relationship of trust and confidence while in possession of material, non-public information about the security. Insider trading violations may also include ‘tipping’ such information, securities trading by the person ‘tipped,’ and securities trading by those who misappropriate such information. The scope of insider trading violations can be wide reaching. As such, our Insider Trading Policy outlines the definitions of insider trading, the penalties and sanctions determined, and what constitutes material, non-public information. Illegal insider trading is against our policy as such trading can cause significant harm to our reputation for integrity and ethical conduct. Individuals who fail to comply with the requirements of the policy are subject to disciplinary action including dismissal for cause. All members of our Board of Directors and all executive officers are required to ratify the terms of this policy on an annual basis.

 

Whistleblower Policy

 

Our Board of Directors adopted a Whistleblower Policy to establish and maintain a complaint program to facilitate (i) the receipt, retention and treatment of complaints received by us regarding our accounting, internal accounting controls, auditing matters or violations of the Code of Conduct and (ii) the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters. Any person with a concern relating to the Accounting Policies or compliance with our Code of Conduct should submit their concern in writing to the Chair of our Audit Committee. Complaints may be made without fear of dismissal, disciplinary action or retaliation of any kind. We will not discharge, discipline, demote, suspend, threaten or in any manner discriminate against any officer or employee in the terms and conditions of employment based on any lawful actions with respect to (i) good faith reporting of concerns or complaints regarding Accounting Policies, or otherwise specified in Section 806 of the U.S. Sarbanes-Oxley Act of 2002, (ii) compliance with our Code of Conduct or (iii) providing assistance to the Audit Committee, management or any other person or group, including any governmental, regulatory or law enforcement body, investigating a concern.

 

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Related Party Transactions Policy

 

Our Board of Directors adopted a Related Party Transactions Policy as we recognize that transactions involving related parties present a heightened risk of conflicts of interest and/or improper valuation (or the perception thereof). Therefore, our Board determined that our Audit Committee shall review, approve and, if necessary, recommend to the Board for its approval all related party transactions and any material amendments to such related party transactions. Our Board may determine that a particular related party transaction or a material amendment thereto shall instead be reviewed and approved by a majority of directors disinterested in the related party transaction. No director shall participate in any approval of a related party transaction for which the director is a related party, except that the director shall provide all material information concerning the related party transaction to the committee. Our President is responsible for providing to the Audit Committee, on a quarterly basis, a summary of all payments made by or to us in connection with duly approved related party transactions during the preceding fiscal quarter. The President is responsible for reviewing and approving all payments made by or to us in connection with duly approved related party transactions and shall certify to the Audit Committee that any payments made by or to us in connection with such related party transactions have been made in accordance with the policy. All related party transactions shall be disclosed in our applicable filings as required by the Securities Act of 1933 and the Securities Exchange Act of 1934 and related rules and regulations.

 

Committee Charters, Corporate Governance Guidelines, and Codes of Ethics

 

Our Board of Directors adopted charters for the Audit and Compensation Committees describing the authority and responsibilities delegated to each committee. We post on our website the charters of our Audit and Compensation Committees, our Code of Conduct and Ethics, our Code of Ethics for Financial Executive, and any amendments or waivers thereto applicable to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions; and any other corporate governance materials contemplated by SEC regulations. These documents are also available in print to any stockholder requesting a copy in writing from our Secretary at our executive offices set forth in this Report.

 

Board Meetings and Committees; Annual Meeting Attendance

 

We held six (6) meetings of the Board of Directors during the year ended December 31, 2016 and conducted other business through unanimous written actions.

 

Indemnification

 

Section 145 of the Nevada Corporation Law provides in relevant parts as follows:

 

(1)   A corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee, or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against expenses (including attorneys’ fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit, or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit, or proceeding by judgment, order, settlement, conviction, or on a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful.

 

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(2)   A corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee, or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise against expenses (including attorneys’ fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue, or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the corporation unless and only to the extent that the court in which such action or suit was brought shall determine on application that, despite the adjudication of liability but in view of all circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which such court shall deem proper.

 

(3)   To the extent that a director, officer, employee, or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit, or proceeding referred to in (1) or (2) of this subsection, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by him in connection therewith.

 

(4)   The indemnification provided by this section shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any bylaws, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of such a person.

 

The foregoing discussion of indemnification merely summarizes certain aspects of indemnification provisions and is limited by reference to the above discussed sections of the Nevada Corporation Law.

 

Our Articles of Incorporation and Bylaws provide that we may indemnify to the full extent of its power to do so, all directors, officers, employees, and/or agents. Insofar as indemnification by us for liabilities arising under the Securities Act that may be permitted to our officers and directors pursuant to the foregoing provisions or otherwise, we are aware that in the opinion of the Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.

 

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ITEM 11. EXECUTIVE COMPENSATION.

 

Summary Compensation Table

 

The table below shows certain compensation information for services rendered in all capacities for the last two fiscal years ended December 31, 2016 and 2015. The information includes the dollar value of base salaries, bonus awards, the number of non-qualified stock options (“Options”) granted and certain other compensation, if any, whether paid or deferred.

 

Name and
Principal Position
  Year     Salary
($)
    Bonus
($)
    Stock
Awards
($)
   

Option Awards
($)(1)

    Non-
Equity
Incentive
Plan
Compen-
sation
($)
    Nonquali-
fied
Deferred Compen-
sation
Earnings
($)
    All Other Compen-
sation
($)
    Total
($)
 

Steven G. Johnson(2)

(President, CEO, Sec., Treas.)

    2016     $ 255,228                 $ 114,000                 $ 18,711     $ 387,939  
  2015     $ 250,385     $ 35,000                             $ 20,049     $ 305,434  
                                                                     

Sandra K McRee(3)

(COO)

    2016     $ 212,507                 $ 114,000                 $ 5,145     $ 331,652  
  2015     $ 210,142                 $ 338,000                 $ 4,842     $ 552,984  
                                                                     
L. Allen Wheeler(4) (Principal Financial Officer)     2016                                                  
  2015                                                  
                                                                     

 

 
(1) The valuation methodology used to determine the fair value of the options granted during the year was the Black-Scholes Model. The Black-Scholes Model requires the use of a number of assumptions including volatility of the stock price, the weighted average risk-free interest rate, and the weighted average expected life of the options. For more detail, see NOTE 4 in the accompanying consolidated financial statements.
(2) For 2016: All Other Compensation includes $9,000 for car allowance and $9,711 for health insurance premiums paid on Mr. Johnson’s behalf. For 2015: All Other Compensation includes $9,000 for car allowance and $11,049 for health insurance premiums paid on Mr. Johnson’s behalf.
(3) For 2016: Option Awards includes Options to purchase 2,000,000 shares of our Common Stock. All Other Compensation is for health insurance premiums paid on Ms. McRee’s behalf. For 2015: Option Awards includes Options to purchase 1,000,000 shares of our Common Stock. All Other Compensation is for health insurance premiums paid on Ms. McRee’s behalf.
(4) Mr. Wheeler was named Principal Financial Officer and Chief Accounting Officer effective September 6, 2013 upon the resignation of our former CFO. Option Awards include Options to purchase 150,000 and 235,295 shares of our Common Stock during 2015 and 2016, respectively. These Options were awarded for services as Chairman of the Board of Directors, and is included in the Directors Compensation table below.

 

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Outstanding Equity Awards at Fiscal Year End

 

The table below shows outstanding equity awards for our executive officers as of the fiscal year ended December 31, 2016, which equity awards consists solely of ten-year, non-qualified stock options (the “Options”). No executive officers have exercised any of their Options.

 

      Option Awards   Stock Awards  
Name and Office    

Number of Securities Underlying Unexercised Options

(#)
Exercisable

   

Number of Securities Underlying Unexercised Options

(#) Unexercis-
able

   

Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options

(#)

   

Option
Exer-
cise
Price

($)

  Option
Expiry
Date
 

Number of Shares or Units of Stock That Have Not Vested (#)

   

Market Value of Shares or Units of Stock That Have Not Vested

($)

   

Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested

(#)

    Equity Incentive Plan Awards Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($)  

Steve G. Johnson

(Pres., CEO, Sec., Treas.)

      50,000 (1)               $ 0.52     01/05/20                        
    50,000 (2)               $ 0.52     03/25/20                        
            2,000,000 (3)         $ 0.10     12/27/26                        

Sandra K McRee

(COO)

      2,000,000 (4)                 $ 0.51     11/01/23                        
    333,333 (5)     666,667 (5)         $ 0.53     02/25/25                        
            2,000,000 (3)         $ 0.10     12/27/26                        
L. Allen Wheeler (Principal Financial Officer)       75,000 (1)               $ 0.52     01/05/20                        
    75,000 (2)               $ 0.52     03/25/20                        
    50,000 (6)     100,000 (6)         $ 0.53     02/25/25                        
            235,295 (7)         $ 0.17     08/31/26                        

 

 
(1) All underlying shares vested on January 6, 2010.
(2) All underlying shares vested on December 31, 2010.
(3) An aggregate of 666,666 underlying shares vest on December 7, 2017, and 666,667 vest on each of December 7, 2018 and 2019.
(4) An aggregate of 666,666 underlying shares vested on November 1, 2014, and 666,667 vested on each of November 1, 2015 and 2016.
(5) An aggregate of 333,333 underlying shares vested on February 25, 2016, 333,333 vest on February 25, 2017 and 333,334 vest on February 25, 2018.
(6) An aggregate of 50,000 underlying shares vested on each of February 25, 2016 and 50,000 underlying shares vest on each of February 25, 2017 and 2018. This Option were awarded for services as Chairman of the Board of Directors, and is included in the Directors Compensation table below.
(7) An aggregate of 78,432 underlying shares vest on each of August 31, 2017 and 2018 and 78,431 underlying shares vest on August 31, 2019. This Option were awarded for services as Chairman of the Board of Directors, and is included in the Directors Compensation table below.

 

Employment Agreements with Executive Officers

 

We have no employment agreements with our executive officers.

 

Director Compensation

 

We do not pay cash fees to directors who attend regularly scheduled and special board meetings; however, we may reimburse out-of-state directors for costs associated with travel and lodging to attend such meetings. Our directors have also been granted non-qualified stock options from time to time as detailed in the table below. Beginning in August 2017, and annually thereafter, directors will be granted ten-year, non-qualified stock options equal to $40,000 based on the closing price of our Common Stock as reported on www.yahoofinance.com on the date of the quote. Beginning in March 31, 2018 and annually thereafter, our directors will be compensated as follows: All Directors $10,000, Board Chair $3,000, Committee Chairpersons $2,000, and Committee Members $1,000.

 

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We paid no compensation to our directors for services rendered for the year ended December 31, 2016. The table below shows outstanding equity awards for our directors who are not executive officers, which equity awards consists solely of ten-year, non-qualified stock options. No options have been exercised.

 

Name     Fees
Earned
or Paid
in Cash
    Stock
Awards
($)
    Option
Awards
($)(1)
    Non-Equity
Incentive Plan
Compensation
($)
    Nonqual-
ified
Deferred
Compen-
sation
Earnings
($)
    All Other
Com-
pensation
($)
    Total
($)
 
L. Allen Wheeler(2)                 $ 52,650                       $ 52,650  
                  $ 49,650                       $ 49,650  
                  $ 50,700                       $ 50,700  
              $ 24,000                 $ 24,000  
                  $ 211,500                       $ 211,500  
Steven B. Epstein(3)                 $ 16,900                       $ 16,900  
              $ 24,000                 $ 24,000  
Dr. James R. Higgins(4)                 $ 66,450                       $ 66,450  
            $ 24,000                 $ 24,000  
Jeffery C. Lightcap                                  
Jason T. Thompson(5)                 $ 39,000                       $ 39000  
              $ 24,000                 $ 24,000  
David R. White(6)                 $ 130,000                       $ 130,000  
              $ 24,000                 $ 24,000  

 

 

 

(1) The valuation methodology used to determine the fair value of the options granted during the year was the Black-Scholes Model. The Black-Scholes-Merton model requires the use of a number of assumptions including volatility of the stock price, the weighted average risk-free interest rate, and the weighted average expected life of the options. For more detail, see NOTE 4 in the accompanying consolidated financial statements.
(2) An aggregate of 75,000 underlying shares vested on each of January 6, 2010 and December 31, 2010. An aggregate 50,000 underlying shares vested on February 25, 2016 and 50,000 vest on each of February 25, 2017 and 2018. An aggregate of 78,432 underlying shares vest on each of August 31, 2017 and 2018 and 78,431 vest on August 31, 2019.
(3) An aggregate of 166,667 underlying shares vested on each of April 1 2015 and 2016 and 166,666 underlying shares vest on April 1, 2017. An aggregate of 16,666 underlying shares vested on February 25, 2016 and 16,667 underlying shares vest on each of February 25, 2017 and 2018. An aggregate of 78,432 underlying shares vest on each of August 31, 2017 and 2018 and 78,431 underlying shares vest on August 31, 2019.
(4) An aggregate of 50,000 underlying shares vested on each of April 1 2015 and 2016 and 50,000 Options vest on each of April 1, 2017. An aggregate of 78,432 underlying shares vest on each of August 31, 2017 and 2018 and 78,431 underlying shares vest on August 31, 2019.
(5) An aggregate of 50,000 underlying shares vested on each of January 2, 2015 and 2016, and 50,000 underlying shares vest on January 2 2017. An aggregate of 78,432 underlying shares vest on each of August 31, 2017 and 2018 and 78,431 underlying shares vest on August 31, 2019.
(6) An aggregate of 166,667 underlying shares vested on each of January 2, 2015 and 2016, and 166,666 underlying shares vest on January 2 2017. An aggregate of 78,432 underlying shares vest on each of August 31, 2017 and 2018 and 78,431 underlying shares vest on August 31, 2019. From April 1, 2015 through May 31, 2016, Mr. White’s was under contract with us to assist in sales and marketing activities. His compensation for this service was $5,000 per month.

 

  41  
 

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

 

Beneficial Security Ownership Table

 

As of the date of this filing, the following table sets forth certain information with respect to the beneficial ownership of our Common Stock by (i) each shareholder known by us to be the beneficial owner of more than five percent (5%) of our Common Stock, (ii) by each of our current directors and executive officers as identified herein, and (iii) all of our directors and executive officers as a group. Each person has sole voting and investment power with respect to the shares of Common Stock, except as otherwise indicated. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Shares of Common Stock and non-qualified stock options (“Options”), common stock purchase warrants (“Warrants”), and convertible securities that are currently exercisable or convertible into shares of our Common Stock within sixty (60) days of the date of this document, are deemed to be outstanding and to be beneficially owned by the person holding the Options, Warrants, or convertible securities for the purpose of computing the percentage ownership of the person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. Unless otherwise noted, the address for all officers and directors listed below is 405 State Highway 121, Suite B-240, Lewisville, Texas 75067.

 

Title of Class   Name and Address of Officer and Directors   Amount and Nature
of Beneficial
Ownership(1)
 

Percent

of

Class

 
Common Stock   Steve G. Johnson (Chief Executive Officer, President, Secretary, Treasurer, Director)  

17,892,829 (2)

    12.64 %
Common Stock   L. Allen Wheeler (Chairman of the Board, Principal Financial Officer, Chief Accounting Officer)  

16,555,946 (3)

    11.73 %
Common Stock   Sandra K. McRee (Chief Operating Officer)   4,038,892 (4)     2.83 %
Common Stock   Jeffrey C. Lightcap (Director)   80,652,888 (5)     36.65 %
Common Stock   David R. White (Director)   500,000 (6)     0.36 %
Common Stock   Jason T. Thompson (Director)   843,057 (7)     0.60 %
Common Stock   Steven B. Epstein (Director)   2,811,116 (8)     2.00 %
Common Stock   Dr. James R. Higgins (Director)   12,621,777 (9)     8.95 %
Common Stock   All Officers & Directors as a Group (8 persons)   136,271,696 (10)     58.88 %
     Name and Address of Shareholders            
Common Stock   Robert J. Smith
13650 Fiddlesticks Blvd., Suite 202-324,
Ft. Myers, FL 33912
 

13,605,506 (11)

    9.49 %

 

 
(1) Unless otherwise noted, we believe that all shares are beneficially owned and that all persons named in the table have sole voting and investment power with respect to all shares of Common Stock owned by them. Applicable percentage of ownership is based on 139,380,748 shares of Common Stock currently outstanding, as adjusted for each shareholder.
(2) This amount includes (i) 208,977 shares directly owned by Johnson, (ii) 100,000 shares due to Johnson upon exercise of vested Options, (iii) 400,001 shares due to Johnson upon exercise of vested warrants, (iv) 1,622,235 shares that may be acquired upon conversion of convertible debt dated February 17, 2015 (including interest paid in kind through May 29, 2016), and (v) 15,561,616 shares beneficially owned by SJ Capital, LLC, a company controlled by Johnson. The percentage of class for Johnson is based on 141,502,984 shares which would be outstanding if all of Johnson’s vested Options and Warrants were exercised and convertible debt was converted.
(3) This amount includes (i) 516,345 shares directly owned by Wheeler, (ii) 250,000 shares due to Wheeler upon exercise of Options, (iii) 307,692 shares due to Wheeler upon exercise of vested warrants (iv) 1,247,873 shares that may be acquired upon conversion of convertible debt dated February 17, 2015 (including interest paid in kind through May 29,2016), (v) 14,201,820 shares beneficially owned by Dozer Man, LLC, an entity controlled by Wheeler, and (vi) 32,216 shares beneficially owned by Global FG, LLC, an entity of which Wheeler owns 50%. The percentage of class for Wheeler is based on 141,186,313 shares which would be outstanding if all of Wheeler’s vested Options and Warrants were exercised and convertible debt was converted.
(4) This amount includes (i) 750,000 shares directly owned by McRee, (ii) 2,666,667 shares due to McRee upon exercise of vested Options, (iii) 123,076 shares due to McRee upon exercise of vested warrants, and (iv) 499,149 shares that may be acquired upon conversion of convertible debt dated February 17, 2015 (including interest paid in kind through May 29, 2016). The percentage of class for McRee is based on 142,669,640 shares which would be outstanding if all of McRee’s vested Options and Warrants were exercised and convertible debt was converted.

 

  42  
 

 

(5) HealthCor Management, LP, HealthCor Associates, LLC, HealthCor Hybrid Offshore Master Fund, LP, HealthCor Hybrid Offshore GP, LLC, HealthCor Group, LLC, HealthCor Partners Management, L.P., HealthCor Partners Management GP, LLC, HealthCor Partners Fund, LP, HealthCor Partners, LP HealthCor Partners GP, LLC, Jeffrey C. Lightcap, Joseph Healey and Arthur Cohen (collectively, the Reporting Persons), beneficially own an aggregate of 81,008,079 shares, representing (i) 4,527,702 shares that may be acquired upon conversion of convertible debt dated February 17, 2015 (including interest paid in kind through May 29, 2016) (ii) 18,621,456 shares that may be acquired upon conversion of the 2014 Notes (iii) 7,509,620 shares that may be acquired upon conversion of the 2012 Notes, (iv) 32,450,032 shares that may be acquired upon conversion of the 2011 Notes, and (v) 17,899,269 shares that may be acquired upon exercise of Warrants. The amounts detailed above include (i) 430,769 shares due to Lightcap upon exercise of vested Warrants and (ii) 1,747,023 shares that may be acquired upon conversion of convertible debt dated February 17, 2015 (including interest paid in kind through May 29, 2016), The percentage of class for Reporting Persons and Lightcap as an individual is based on 220,033,636 shares which would be outstanding if the Reporting Persons notes and convertible debt held Lightcap and his minor children were converted and all Warrants held by the Reporting Persons and Lightcap and his minor children were exercised.
(6) This amount includes (i) 500,000 shares due to White upon exercise of vested Options. The percentage of class for White is based on 139,880,748 shares which would be outstanding if all of White’s vested Options were exercised.
(7) This amount includes (i) 537,500 shares directly owned by Thompson, (ii) 150,000 shares due to Thompson upon exercise of vested Options, (iii) 30,769 shares due to Thompson upon exercise of vested warrants, and (iv) 124,788 shares that may be acquired upon conversion of convertible debt dated February 17, 2015 (including interest paid in kind through May 29, 2016). The percentage of class for Thompson is based on 139,686,305 shares which would be outstanding if all of Thompson’s vested Options and Warrants were exercised and convertible debt was converted.
(8) This amount includes (i) 1,500,000 shares directly owned by Epstein, (ii) 533,333 shares due to Epstein upon exercise of vested Options, (iii) 153,846 shares due to Epstein upon exercise of vested warrants, and (iv) 623,937 shares that may be acquired upon conversion of convertible debt dated February 17, 2015 (including interest paid in kind through May 29, 2016). The percentage of class for Epstein is based on 140,691,864 shares which would be outstanding if all of Epstein’s vested Options and Warrants were exercised and convertible debt was converted.
(9) This amount includes (i) 4,731,445 shares directly owned by Higgins, (ii) 1,361,538 shares jointly owned by Higgins and his wife, (ii) 4,823,229 shares held in trust by Higgins’ wife, (iv) 150,000 shares due to Higgins upon exercise of vested Options, (v) 307,692 shares due to Higgins upon exercise of vested warrants, and (vi) 1,247,873 shares that may be acquired upon conversion of convertible debt dated February 17, 2015 (including interest paid in kind through May 29, 2016). The percentage of class for Higgins is based on 141,086,313 shares which would be outstanding if all of Higgin’s vested Options and Warrants were exercised and convertible debt was converted.
(10) This amount includes all shares directly and beneficially owned by all officers and directors and all shares to be issued directly and beneficially upon exercise of vested shares under Options and Warrants and upon conversion of convertible securities. The percentage of class for all officers and directors is based on 231,427,758 shares which would be outstanding if all the aforementioned Options, Warrants and convertible securities were exercised or converted.
(11) This amount includes: (i) 265,000 shares directly owned by Smith, (ii) 75,000 shares held in trust for Smith’s minor children, (iii) 6,210,723 shares beneficially owned by Plato & Associates, LLC, a company controlled by Smith, (iv) 3,054,783 shares beneficially owned by Energy Capital, LLC, a company controlled by Smith and (v) 4,000,000 shares due to Smith upon the exercise of Warrants. The percentage of class for Smith is based on 143,380,748 shares which would be outstanding if all Warrants owned by Plato & Associates, LLC were exercised.

 

Under Rule 144 promulgated under the Securities Act, our officers, directors and beneficial shareholders may sell up to one percent (1%) of the total outstanding shares (or an amount of shares equal to the average weekly reported volume of trading during the four calendar weeks preceding the sale) every three months provided that (1) current public information is available about our Company, (2) the shares have been fully paid for at least one year, (3) the shares are sold in a broker’s transaction or through a market-maker, and (4) the seller files a Form 144 with the SEC if seller is an affiliate.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

During the year ended December 31, 2016, we acknowledge that none of our officers or directors failed to file on a timely basis certain ownership forms required by Section 16(a) of the Exchange Act.

 

  43  
 

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

 

Exclusive of the Fifth Amendment discussed above in Item 7, none of our directors, officers or principal shareholders, nor any associate or affiliate of the foregoing, has any interest, direct or indirect, in any transaction or in any proposed transaction, which materially affected us during the year ended December 31, 2016.

 

Related Party Transactions Policy

 

As indicated hereinabove, our Board of Directors adopted a Related Party Transactions Policy and all related party transactions will be disclosed in our applicable filings as required by the Securities Act of 1933 and the Securities Exchange Act of 1934 and related rules and regulations.

 

Director Independence

 

Although our Board of Directors believes that our directors will exercise their judgment independently, no director is totally free of relationships that, in the opinion of the Board of Directors, might interfere with their exercise of independent judgment as a director.

 

Promoters and Certain Control Persons

 

None.

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

 

Audit Fees. The aggregate amount expected to be billed for professional services rendered by BDO USA, LLP (“BDO”) for the 2016 quarterly reviews and the annual audit for the year ended December 31, 2016 is $268,345. BDO billed us $257,000 for professional services rendered for the annual audit for the year ended December 31, 2015 and for quarterly review of our financial statements for 2015, and other services that are normally provided by an accountant in connection with statutory and regulatory filings or engagements for the fiscal year.

 

Tax Fees. The aggregate amount expected to be billed for tax return preparation for the year ended December 31, 2016 rendered by BDO is $44,300. BDO billed us $35,300 for tax return preparation for the year ended December 31, 2015.

 

All Other Fees. We incurred no other fees for the 2016 and 2015 fiscal years.

 

The Audit Committee of our Board of Directors adopted a policy requiring that it pre-approve all fees paid to our independent registered public accounting firm, regardless of the type of service. All non-audit services were reviewed with the Audit Committee, which concluded that the provision of such services by BDO USA, LLP was compatible with the maintenance of that firm’s independence in the conduct of its auditing functions.

 

  44  
 

 

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

 

Exhibit
No.
Date of
Document

Name of Document

     

3.8

11/06/07

Notice of Conversion filed in State of Nevada (to convert CareView Communications, Inc. from a California corporation to a Nevada corporation) (1)
3.9 11/06/07 Articles of Incorporation for CareView Communications, Inc. filed in State of Nevada(1)
3.12 n/a Bylaws of CareView Communications, Inc., a Nevada corporation(1)
10.00 02/28/05 Subscription and Investor Rights Agreement(1)
10.01 n/a Products and Services Agreement (a/k/a Hospital Agreement), form of(1)
10.09 12/03/07 CareView Communications, Inc. 2007 Stock Incentive Plan(1)
10.10 12/03/07 Non-Qualified Stock Option, form of(1)
10.11 12/13/07 Audit Committee Charter(1)
10.12 12/13/07 Compensation Committee Charter(1)
10.14 02/13/08 Advisory Board Charter(1)
10.42 09/11/09 CareView Communications, Inc. 2009 Stock Incentive Plan(1)
10.43 10/01/09 Commercial Lease Agreement (for Lewisville location)(1)
10.44 11/16/09 Rockwell JV – Master Investment Agreement(1)
10.45 11/16/09 Rockwell JV – Project Hospital Contract Assignment, form of(1)
10.46 11/16/09 Rockwell JV – Project Escrow Deposit Agreement, form of(1)
10.47 11/16/09 Rockwell JV – Limited License of Intellectual Property Rights,, form of(1)
10.48 11/16/09 Rockwell JV – Project Note, form of (1)
10.49 11/16/09 Rockwell JV – Amended and Restated Project Note, form of(1)
10.50 11/16/09 Rockwell JV – Project LLC Operating Agreement, form of(1)
10.51 11/16/09 Rockwell JV – Project Security Agreement, form of(1)
10.52 11/16/09 Rockwell JV – Project Services Subcontract Agreement, form of(1)
10.53 11/16/09 Rockwell JV – Project Warrant, form of(1)
10.62 06/29/10 First Amendment to Commercial Lease Agreement(1)

10.72

04/21/11

Note and Warrant Purchase Agreement between the Company and HealthCor Partners Fund, LP and HealthCor Hybrid Offshore Master Fund, LP(4)

10.73

04/21/11

Senior Secured Convertible Note of the Company payable to HealthCor Partners Fund, LP(4)

10.74

04/21/11

Senior Secured Convertible Note of the Company payable to HealthCor Hybrid Offshore Master Fund, LP(4)

10.75

04/21/11

Warrant to Purchase 5,488,456 shares of the Company issued to HealthCor Partners Fund, LP(4)

10.76

04/21/11

Warrant to Purchase 6,293,403 shares of the Company issued to HealthCor Hybrid Offshore Master Fund, LP(4)

10.77

04/21/11

Registration Rights Agreements between the Company and HealthCor Partners Fund, LP and HealthCor Hybrid Offshore Master Fund, LP(4)

10.78

04/21/11

Pledge and Security Agreement between the Company and HealthCor Partners Fund, LP and HealthCor Hybrid Offshore Master Fund, LP(4)

10.79

04/21/11

Intellectual Property Security Agreement between the Company and HealthCor Partners Fund, LP and HealthCor Hybrid Offshore Master Fund, LP(4)

10.83

08/31/11

Loan and Security Agreement between Comerica Bank and Bridge Bank and CareView Communications, Inc., a Nevada corporation, CareView Communications, Inc., a Texas corporation, and CareView Operations, LLC, a Texas limited liability company(6)

10.84

08/31/11

Prime Referenced Rated Addendum between the Company and Comerica Bank as Collateral Agent for the Banks(6)

10.85

08/31/11

Subordination Agreement between Comerica Bank and HealthCor Partners Fund, L.P. and HealthCor Hybrid Offshore Master Fund, L.P. (6)

 

  45  
 

 

10.86 08/31/11 Intellectual Property Security Agreement, form of(6)

10.87

08/31/11

Warrant issued to Comerica Bank to purchase 714,286 shares of the Company’s Common Stock(6)

10.88

08/31/11

Warrant issued to Bridge Bank to purchase 714,286 shares of Company’s Common Stock(6)
10.90 12/31/11 Note and Warrant Amendment Agreement with HealthCor(8)
10.91 01/09/12 Binding Term Sheet with HealthCor(9)
10.92 12/31/11 Note and Warrant Amendment Agreement(2)
10.94 01/31/12 Second Amendment to Note and Warrant Purchase Agreement(10)

10.95

01/31/12

Senior Secured Convertible Note of the Company payable to HealthCor Partners Fund, LP(10)

10.96

01/31/12

Senior Secured Convertible Note of the Company payable to HealthCor Hybrid Offshore Master Fund, LP(10)

10.97

01/31/12

First Amendment to Loan and Security Agreement among the Company, certain of its subsidiaries, Comerica Bank and Bridge Bank, National Association(10)
10.98 01/31/12 Amendment to and Affirmation of Subordination Agreement(10)
10.100 n/a Insider Trading Policy, form of(11)
10.101 n/a Whistleblower Policy(11)
10.102 n/a Related Party Transactions Policy(11)
10.106 03/20/11 Master Agreement with Health Management Associates, Inc. (15)
10.108 03/27/13 Securities Purchase Agreement, form of(16)
10.109 n/a Common Stock Purchase Warrant, form of(16)

10.111

01/15/13

Second Amendment to Loan and Security Agreement among the Company, certain of its subsidiaries, Comerica Bank and Bridge Bank, National Association(17)
10.112 01/15/13 Amendment to and Affirmation of Subordination Agreement(17)

10.113

05/24/13

Extension of Maturity Date for Promissory Note and Investment Interest (related to Hillcrest) (18)

10.114

07/19/13

Extension of Maturity Date for Promissory Note and Investment Interest (related to Saline) ) (18)

10.115

08/20/13

Third Amendment to Note and Warrant Purchase Agreement between the Company and HealthCor(19)

10.116

08/20/13

Third Amendment to Loan and Security Agreement among the Company, certain of its subsidiaries, Comerica Bank and Bridge Bank, National Association(19)
10.117 08/20/13 Affirmation of Subordination Agreement(19)

10.119

12/31/13

Separation Agreement and General Release between the Company and Samuel A. Greco(21)

10.120

12/31/13

Consulting Agreement between the Company and Samuel A. Greco (attached as Exhibit “A” to Separation Agreement and General Release (Exhibit 10.119 herein))(21)

10.121

12/31/13

Resignation of Samuel A. Greco (attached as Exhibit “A” to Separation Agreement and General Release (Exhibit 10.119 herein))(21)

10.122

12/31/13

Warrant, form of (attached as Exhibit “C” to Separation Agreement and General Release (Exhibit 10.119 herein))(21)

10.123

06/21/10

Indemnification Agreement between the Company and Samuel A. Greco (attached as Exhibit “D” to Separation Agreement and General Release (Exhibit 10.119 herein))(21)
10.124 12/31/13 Resignation of Tommy G. Thompson(21)

10.126

01/16/14

Fourth Amendment to Note and Warrant Purchase Agreement between the Company and HealthCor(22)

10.127

01/16/14

Fourth Amendment to Loan and Security Agreement among the Company, certain of its subsidiaries, Comerica Bank and Bridge Bank, National Association(22)

10.128

01/16/14

2014 Supplemental Closing Note of the Company payable to HealthCor Partners Fund, LP(22)

10.129

01/16/14

2014 Supplemental Closing Note of the Company payable to HealthCor Hybrid Offshore Master Fund, LP(22)

 

  46  
 

 

10.130

01/16/14

2014 Supplemental Warrant issued to HealthCor Partners Fund, LP to purchase 1,863,200 shares of the Company’s Common Stock(22)

10.131

01/16/14

2014 Supplemental Warrant issued to HealthCor Hybrid Offshore Master Fund, LP to purchase 2,136,800 shares of the Company’s Common Stock(22)
10.132 01/16/14 Amendment to and Affirmation of Subordination Agreement(22)

10.133

01/16/14

Replacement 2011 Senior Secured Convertible Note of the Company payable to HealthCor Partners Fund, LP(22)

10.134

01/16/14

Replacement 2011 Senior Secured Convertible Note of the Company payable to HealthCor Hybrid Offshore Master Fund, LP(22)

10.135

01/16/14

Replacement 2012 Senior Secured Convertible Note of the Company payable to HealthCor Partners Fund, LP(22)

10.136

01/16/14

Replacement 2012 Senior Secured Convertible Note of the Company payable to HealthCor Hybrid Offshore Master Fund, LP(22)

10.137

12/04/14

Fifth Amendment to Note and Warrant Purchase Agreement between the Company and HealthCor(23)
10.138 12/04/14 Form of Fifth Amendment Supplemental Closing Note(23)
10.139 12/04/14 Form of Fifth Amendment Supplemental Warrant(23)
10.140

12/04/14

Amended Pledge and Security Agreement between the Company and HealthCor Partners Fund, LP and HealthCor Hybrid Offshore Master Fund, LP(25)

10.141

12/04/14

Amended Intellectual Property Security Agreement between the Company and HealthCor Partners Fund, LP and HealthCor Hybrid Offshore Master Fund, LP(25)

10.142

02/19/15

Extension of Maturity Date for Promissory Note and Investment Interest (related to Hillcrest)(25)

10.143

02/19/15

Extension of Maturity Date for Promissory Note and Investment Interest (related to Saline)(25)
10.144 02/25/15 CareView Communications, Inc. 2015 Stock Option Plan(24)

10.145

03/31/15

Sixth Amendment to Note and Warrant Purchase Agreement between the Company and HealthCor Funds(25)
10.146 03/31/15 Sixth Amendment Supplemental Warrant, form of(25)
10.147 06/26/15 Credit Agreement between the Company and PDL BioPharma, Inc.(26)
10.148 06/26/15 Subordination and Intercreditor Agreement between the Company, PDL BioPharma, Inc., the HealthCor Funds and the Second Lien Claimholders(26)
10.149 06/26/15 Guarantee and Collateral Agreement between the Company and PDL BioPharma, Inc. (26)
10.150 06/26/15 Registration Rights Agreement between the Company and PDL BioPharma, Inc. (26)
10.151 06/26/15 Warrant to purchase 4,444,445 shares of the Company’s common stock issued to PDL BioPharma, Inc. (26)
10.152 06/26/15 Seventh Amendment to Note and Warrant Purchase Agreement between the Company and the HealthCor Funds and the Investors named therein(26)
10.153 06/26/15 Amendment to Registration Rights Agreement the Company and the HealthCor Fund(26)
10.154 10/07/15 First Amendment to Credit Agreement between the Company and PDL BioPharma, Inc. (27)
10.155 10/07/15 Tranche One Term Note in the Principal amount of $20 million issued to PDL BioPharma, Inc.(27)
10.156 10/17/15 Amended and Restated Warrant to purchase 4,444,445 shares of the Company’s common stock issued to PDL BioPharma, Inc.(27)
10.157 01/13/17 Settlement and LLC Interest Purchase Agreement between the Company and Rockwell Holdings I, LLC(28)
10.158 01/13/17 Interest Transfer Agreement between the Company and Rockwell Holdings I, LLC(28)
10.159 01/13/17 CareView Communications Inc. Promissory Note to Rockwell Holdings I, LLC(28)
10.160 01/13/17 Amended Warrant to Rockwell Holdings I, LLC(28)
14.00 n/a 2011 Code of Business Conduct and Ethics, form of(1)
14.01 n/a 2011 Code of Business Ethics for Financial Executives, form of(1)
21.00 03/30/16 Subsidiaries of the Registrant*

31.1

03/30/16

Certification of Chief Executive Officer of Periodic Report pursuant to Rule 13a-14a and Rule 14d-14(a).*

31.2

03/30/16

Certification of Chief Financial Officer of Periodic Report pursuant to Rule 13a-14a and Rule 15d-14(a).*

 

  47  
 

 

32.1 03/30/16 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.*
32.2 03/30/16 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.*
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*

 

 
(1) Filed as an exhibit to our Form 10 filed with the SEC on August 23, 2010.
(2) Filed as an exhibit to our quarterly report on Form 10-Q filed with the SEC on November 7, 2010.
(3) Filed as an exhibit to our annual report on Form 10-K filed with the SEC on April 15, 2011.
(4) Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on April 27, 2011.
(5) Filed as an exhibit to our quarterly report on Form 10-Q filed with the SEC on August 22, 2011.
(6) Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on September 7, 2011.
(7) Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on November 10, 2011.
(8) Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on January 5, 2012.
(9) Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on January 9, 2012.
(10) Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on February 2, 2012.
(11) Filed as an exhibit to our annual report on Form 10-K filed with the SEC on March 15, 2012.
(12) Filed as an exhibit to our quarterly report on Form 10-Q filed with the SEC on May 9, 2012.
(13) Filed as an exhibit to our quarterly report on Form 10-Q filed with the SEC on August 8, 2012.
(14) Filed as an exhibit to our quarterly report on Form 10-Q filed with the SEC on November 8, 2012.
(15) Filed as an exhibit to our quarterly report on Form 10-Q, Amendment No. 1, filed with the SEC on February 1, 2013. Certain information in this exhibit has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.
(16) Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on March 28, 2013.
(17) Filed as an exhibit to our annual report on Form 10-K filed with the SEC on April 1, 2013.
(18) Filed as an exhibit to our quarterly report on Form 10-Q filed with the SEC on August 9, 2013.
(19) Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on August 26, 2013.
(20) Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on September 10, 2013.
(21) Filed as an exhibit to our Current Report on Form, 8-K filed with the SEC on January 3, 2014.
(22) Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on January 22, 2014.
(23) Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on December 10, 2014.
(24) Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on March 19, 2015.
(25) Filed as an exhibit to our annual report on Form 10-K filed with the SEC on March 31, 2015
(26) Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on June 29, 2015.
(27) Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on October 13, 2015.
(28) Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on February 2, 2017.
* Filed herewith.

 

  48  
 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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.

 

DATE: March 31, 2017

     
  CAREVIEW COMMUNICATIONS, INC.
     
  By: /s/ Steven G. Johnson
      Steven G. Johnson
      Chief Executive Officer
      Principal Executive Officer
     
  By: /s/ L. Allen Wheeler
      L. Allen Wheeler
      Principal Financial Officer
      Chief Accounting Officer

 

  49  
 

  

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Steven G. Johnson and L. Allen Wheeler and each of them, his attorney-in-fact with power of substitution for him in any and all capacities, to sign any amendments, supplements or other documents relating to this Annual Report on Form 10-K he deems necessary or appropriate, and to file the same, with exhibits thereto, and other documents in connection therewith, with the SEC, hereby ratifying and confirming all that such attorney-in-fact or their substitute may do or cause to be done by virtue hereof.

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

         
Signature   Title   Date
         
/s/ Steven G. Johnson   Chief Executive Officer, President, Secretary,    
Steven G. Johnson   Treasurer, Director   March 31, 2017
         
/s/ L. Allen Wheeler   Chairman of the Board, Principal Financial Officer,    
L. Allen Wheeler   Chief Accounting Officer   March 31, 2017
         
/s/ Sandra K. McRee        
Sandra K. McRee   Chief Operating Officer   March 31, 2017
         
/s/ Jeffrey C. Lightcap        
Jeffrey C. Lightcap   Director   March 31, 2017
         
/s/ David R. White        
David R. White   Director   March 31, 2017
         
/s/ Jason T. Thompson        
Jason T. Thompson   Director   March 31, 2017
         
/s/ Steven B. Epstein        
Steven B. Epstein   Director   March 31, 2017
         
/s/ Dr. James R. Higgins        
Dr. James R. Higgins   Director   March 31, 2017

 

  50  
 

 

INDEX TO FINANCIAL STATEMENTS

 

  Page
   
Report of Independent Registered Public Accounting Firm F-1
   
Consolidated Balance Sheets as of December 31, 2016 and 2015 F-2
   
Consolidated Statements of Operations for the years ended December 31, 2016 and 2015 F-3
   
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2016 and 2015 F-4
   
Consolidated Statements of Cash Flows for the years ended December 31, 2016 and 2015 F-5
   
Notes to Consolidated Financial Statements F-6

 

 

 

 

Report of Independent Registered Public Accounting Firm 

 

 

Board of Directors and Stockholders

CareView Communications, Inc.
Lewisville, TX 

 

We have audited the accompanying consolidated balance sheets of CareView Communications, Inc. as of December 31, 2016 and 2015 and the related consolidated statements of operations, stockholders’ deficit, and cash flows for each of the two years in the period ended December 31, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CareView Communications, Inc. at December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.

 

 

 

/s/ BDO USA, LLP 

Dallas, TX

 

 

March 30, 2017

 

 

  F-1  
 

 

CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
         
    December 31,  
    2016     2015  
ASSETS  
Current Assets:                
Cash and cash equivalents   $ 10,088,258     $ 17,678,969  
Accounts receivable, net     1,069,304       1,176,404  
Other current assets     114,717       471,075  
Total current assets     11,272,279       19,326,448  
                 
Property and equipment, net     4,152,414       4,483,440  
                 
Other Assets:                
Restricted cash     3,250,000       3,250,000  
Intangible assets, net     612,337       380,765  
Other assets     2,168,894       2,689,758  
Total other assets     6,031,231       6,320,523  
Total assets   $ 21,455,924     $ 30,130,411  
                 
 LIABILITIES AND STOCKHOLDERS’ DEFICIT  
Current Liabilities:                
Accounts payable   $ 195,472     $ 332,402  
Notes payable     439,173       441,498  
Mandatorily redeemable equity in joint venture     439,173       441,498  
Accrued interest     328,979       261,450  
Other current liabilities     485,221       479,226  
Total current liabilities     1,888,018       1,956,074  
                 
Long-term Liabilities:                
Senior secured convertible notes, net of debt discount and debt costs of $21,267,829 and $23,041,363, respectively     42,271,224       33,729,093  
Loan payable     20,000,000       20,000,000  
Fair value of warrant liability     629       168,805  
Total long-term liabilities     62,271,853       53,897,898  
Total liabilities     64,159,871       55,853,972  
                 
Commitments and Contingencies                
                 
Stockholders’ Deficit:                
Preferred stock - par value $0.001; 20,000,000 shares authorized; no shares issued and outstanding            
Common stock - par value $0.001; 300,000,000 shares authorized; 139,380,748 issued and outstanding     139,381       139,381  
Additional paid in capital     84,119,834       82,434,461  
Accumulated deficit     (126,408,409 )     (107,795,712 )
Total CareView Communications Inc. stockholders’ deficit     (42,149,194 )     (25,221,870 )
Noncontrolling interest     (554,753 )     (501,691 )
Total stockholders’ deficit     (42,703,947 )     (25,723,561 )
Total liabilities and stockholders’ deficit   $ 21,455,924     $ 30,130,411  

 

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

 

  F-2  
 

 

CAREVIEW COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
     
    Year Ended December 31,  
    2016     2015  
             
Revenues, net   $ 5,973,985     $ 5,139,450  
                 
Operating expenses:                
Network operations     4,679,297       4,597,887  
General and administration     3,757,816       3,744,095  
Sales and marketing     776,961       845,322  
Research and development     1,252,850       1,085,760  
Depreciation and amortization     1,816,093       1,727,440  
Total operating expense     12,283,017       12,000,504  
                 
Operating loss     (6,309,032 )     (6,861,054 )
                 
Other income and (expense)                
Interest expense     (12,592,998 )     (9,651,869 )
Change in fair value of warrant liability     168,176       133,059  
Interest income     17,267       8,642  
Other income     50,828       21,148  
Total other income (expense)     (12,356,727 )     (9,489,020 )
                 
Loss before taxes     (18,665,759 )     (16,350,074 )
                 
Provision for income taxes            
                 
Net loss     (18,665,759 )     (16,350,074 )
                 
Net loss attributable to noncontrolling interest     (53,062 )     (65,082 )
                 
Net loss attributable to CareView Communications, Inc.   $ (18,612,697 )   $ (16,284,992 )
                 
Net loss per share attributable to CareView Communications, Inc., basic and diluted   $ (0.13 )   $ (0.12 )
                 
Weighted average number of common shares outstanding, basic and diluted     139,380,748       139,380,748  

 

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

 

  F-3  
 

 

CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
                         
                Additional                    
    Common Stock     Paid in     Accumulated     Noncontrolling        
    Shares     Amount     Capital     Deficit     Interest     Total  
                                     
Balance, December 31, 2014     139,380,748       139,381       76,502,913       (91,510,720 )     (436,609 )     (15,305,035 )
                                                 
Options granted as compensation                 774,322                   774,322  
                                                 
Warrants issued in connection with senior secured convertible notes                 1,471,105                   1,471,105  
                                                 
Warrants issued in connection with loan payable                 1,257,778                   1,257,778  
                                                 
Warrants issued for services                 9,655                   9,655  
                                                 
Adjustment to fair value of warrants for extension of exercise period                 102,457                   102,457  
                                                 
Beneficial conversion features for senior secured convertible notes                 2,316,231                   2,316,231  
                                                 
Net loss                       (16,284,992 )     (65,082 )     (16,350,074 )
                                                 
Balance, December 31, 2015     139,380,748       139,381       82,434,461       (107,795,712 )     (501,691 )     (25,723,561 )
                                                 
Options granted as compensation                 717,385                   717,385  
                                                 
Beneficial conversion features for senior secured convertible notes                 967,988                   967,988  
                                                 
Net loss                       (18,612,697 )     (53,062 )     (18,665,759 )
                                                 
Balance, December 31, 2016     139,380,748     $ 139,381     $ 84,119,834     $ (126,408,409 )   $ (554,753 )   $ (42,703,947 )

 

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

 

  F-4  
 

 

CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
         
    Year Ended December, 31,  
    2016     2015  
             
CASH FLOWS FROM OPERATING ACTIVITES                
Net loss   $ (18,665,759 )   $ (16,350,074 )
Adjustments to reconcile net loss to net cash flows used in operating activities:                
Depreciation     1,759,016       1,693,128  
Amortization of debt discount and debt costs     2,741,522       2,311,167  
Amortization of deferred installation costs     7,576       355,335  
Amortization of deferred debt issuance and debt financing costs     291,084       165,911  
Amortization of intangible assets     57,077       34,312  
Interest incurred and paid in kind     6,768,597       6,477,845  
Stock based compensation related to options granted     717,385       774,322  
Stock based costs related to warrants issued           112,112  
(Gain) loss on disposal of assets     2,825       47,137  
Change in fair value of warrant liability     (168,176 )     (133,059 )
Changes in operating assets and liabilities:                
Accounts receivable     107,100       (496,261 )
Other current assets     359,533       (194,165 )
Other assets     16,394       16,393  
Accounts payable     (136,930 )     87,620  
Accrued expenses and other current liabilities     73,523       (242,204 )
Net cash flows used in operating activities     (6,069,233 )     (5,340,481 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES                
Change in restricted cash           (3,250,000 )
Purchase of property and equipment     (1,430,814 )     (878,913 )
Payment for deferred installation costs     (173,657 )     (330,771 )
Recovery of unused deferred installation costs     379,467        
Patent and trademark costs     (291,824 )     (148,995 )
Purchase of computer software and website costs           (4,799 )
Net cash flows used in investing activities     (1,516,828 )     (4,613,478 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES                
Proceeds from notes and loan payable           26,000,000  
Financing costs           (913,142 )
Repayment of notes payable     (4,650 )     (192 )
Repayment of revolving line of credit            
Net cash flows provided by financing activities     (4,650 )     25,086,666  
                 
Increase (decrease) in cash     (7,590,711 )     15,132,707  
Cash and cash equivalent, beginning of period     17,678,969       2,546,262  
Cash and cash equivalents, end of period   $ 10,088,258     $ 17,678,969  
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:  
                 
Cash paid for interest   $ 2,722,149     $ 640,970  
                 
Cash paid for income taxes   $     $  
                 
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:  
                 
Beneficial conversion features for senior secured convertible notes   $ 967,988     $ 2,316,231  
Warrants issued in connection with senior secured convertible notes   $     $ 1,471,105  
Warrants issued in connection with the loan payable   $     $ 1,257,778  

 

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

 

  F-5  
 

 

CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 – DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

 

CareView Communications, Inc., a Nevada corporation (“CareView-NV” or the “Company”), was originally formed in California on July 8, 1997 under the name Purpose, Inc., changing our name to Ecogate, Inc. in April 1999, and CareView Communications, Inc. in October 2007. We began our current operation in 2003 as a healthcare information technology company with a patented patient monitoring and entertainment system.

 

Throughout these Notes to the Consolidated Financial Statements, the terms “we,” “us,” “our,” “CareView,” or the “Company” refers to CareView-NV, 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”). Also included are CareView-Hillcrest, LLC (“CareView-Hillcrest”) and CareView-Saline, LLC (“CareView-Saline”), collectively, (the “Project LLCs”). We own 50% of CareView-Hillcrest and CareView-Saline, with each determined to be variable interest entities (“VIEs”) in which we exercise control and are deemed the Primary Beneficiary (See NOTE 14 for further details). Our business consists of a single segment of products and services all of which are sold and provided within the United States.

 

Description of Business

 

Our mission is to be the leading provider of products and on-demand application services for the healthcare industry, specializing in bedside video monitoring, software tools to improve hospital communications and operations, and patient education and entertainment packages. Our proprietary, high-speed data network system is the next generation of patient care monitoring that allows real-time bedside and point-of-care video monitoring designed to improve patient safety and overall hospital costs. The entertainment packages and patient education enhance the patient’s quality of stay. Reported results from CareView-driven hospitals prove that our products reduce falls, reduce the cost of sitter fees, increase patient satisfaction and reduce bed turnaround time to increase patient flow. For patients, we have a convenient in-room, entertainment package that includes high-speed Internet, access to first-run on-demand movies and visual connectivity to family and friends from anywhere in the world. For the hospital, we offer tools to provide superior patient care, peace of mind and customer service satisfaction.

 

Our CareView System® suite of video monitoring, guest services and related applications connect patients, families and healthcare providers. Through the use of telecommunications technology and the Internet, our evolving products and on-demand services greatly increase the access to quality medical care and education for patients/consumers and healthcare professionals. We understand the importance of providing high quality patient care in a safe environment and believe in partnering with hospitals to improve the quality of patient care and safety by providing a system that monitors and records continuously. We are committed to providing an affordable video monitoring tool to improve the practice of nursing, create a better work environment and make the patient’s hospital stay more informative and satisfying. Our suite of products and services can simplify and streamline the task of preventing and managing patients’ falls, enhance patient safety, improve quality of care and reduce costs associated with bringing information technology directly to patients, families and healthcare providers. Our products and services can be used in all types of hospitals, nursing homes, adult living centers and selected outpatient care facilities domestically and internationally.

 

  F-6  
 

 

CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 – DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION (Continued)

 

Description of Business (continued)

 

CareView’s secure video monitoring system connects the patient room to a touch-screen monitor at the nursing station or a mobile handheld device, allowing the nursing staff to maintain a level of visual contact with each patient. This configuration enhances the use of the nurse call system, reduces unnecessary steps to and from patient rooms, and facilitates a host of modules for patient safety and workflow improvements. The CareView System suite can be easily configured to meet the individual privacy and security requirements of any hospital or nursing facility. The Health Insurance Portability and Accountability Act of 1996 (“HIPAA’) compliant, patient approved video record can be included as part of the patient’s medical record and serves as additional documentation of bedside care, procedures performed, patient and hospital ancillary activities, safety or care incidents, support to necessitate additional clinical services, and, if necessary, as evidence. Additional HIPAA-compliance features allow privacy options to be enabled at any time by the patient, nurse or physician.

 

In addition to patient safety and security, we also provides a suite of services to increase patient satisfaction scores and enhance the overall image of the hospital including first-run on-demand movies, Internet access via the patient’s television, and video visits with family and friends from most places throughout the world. Through continued investment in patient care technology, our products and services help hospitals and assisted living facilities build a safe, high quality healthcare delivery system that best serves the patient, while striving for the highest level of satisfaction and comfort.

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of the Company, our wholly owned subsidiaries and our Project LLCs for which we control the operating activities. All material inter-company balances and transactions have been eliminated in consolidation.

 

We report noncontrolling interests in our VIEs as a component of stockholders’ deficit in the Consolidated Balance Sheets and the loss attributable to noncontrolling interests as an adjustment to net loss to arrive at net loss attributable to the Company in the Consolidated Statements of Operations.

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Variable Interest Entities

 

We use a qualitative analysis to determine if we are the primary beneficiary of a VIE. We consider whether the enterprise’s variable interest or interests give it a controlling financial interest in a VIE. This analysis identifies the primary beneficiary of a VIE as the enterprise that has both of the following characteristics, among others: (a) the power to direct the activities of a VIE that most significantly impacts the entity’s economic performance, and (b) the obligation to absorb losses or the right to receive benefits from the entity, that could potentially be significant to the VIE.

 

  F-7  
 

 

CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Cash and Cash Equivalents

 

We consider all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. We maintain cash at financial institutions that at times may exceed federally insured limits. We have never experienced any losses related to these funds

 

Restricted Cash

 

At December 31, 2016, we have $3,250,000 included in restricted cash in other assets on the consolidated balance sheet. The restricted cash is associated with our minimum cash requirement as stipulated in our credit agreement with PDL BioPharma, Inc. See further discussion in NOTE 13.

 

Trade Accounts Receivable

 

Trade accounts receivable are customer obligations due under normal trade terms. We provide an allowance for doubtful accounts, which is based upon a review of outstanding receivables, historical collection information and existing economic conditions. Trade accounts receivable past due more than 90 days are considered delinquent. Delinquent receivables are written off based on individual credit evaluations, results of collection efforts, and specific circumstances of the customer. Recoveries of accounts previously written off are recorded as reductions of bad debt expense when received.

 

Property and Equipment

 

Property and equipment is stated at cost, net of accumulated depreciation. Maintenance costs, which do not significantly extend the useful lives of the respective assets, and repair costs are charged to operating expense as incurred. We include Network Equipment in fixed assets upon receipt, and begin depreciating the Network Equipment when such equipment passes our incoming inspection and is available for use. We attribute no salvage value to the Network Equipment and depreciation is computed using the straight-line method based on the estimated useful life of seven years. Also using the straight-line method, depreciation of office and test equipment, warehouse equipment and furniture is based on the estimated useful lives of the assets, generally three years for office and test equipment, and five years for warehouse equipment and furniture.

 

Allowance for System Removal

 

We would remove the CareView System from customer premises due to a number of factors; including, but not limited to, collection/revenue performance issues and contract expiration/non-renewal. We regularly evaluate the installed CareView Systems for such factors and an allowance is set up based on the estimated cost of removal. As of December 31, 2016 and 2015, an allowance of $116,350 and $54,771, respectively, was recorded.

 

  F-8  
 

 

CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Impairment of Long-Lived Assets

 

Carrying values of property and equipment and finite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying values may not be recoverable. Such events or circumstances include, but are not limited to:

 

Significant declines in an asset’s market price;
Significant deterioration in an asset’s physical condition;
Significant changes in the nature or extent of an asset’s use or operation;
Significant adverse changes in the business climate that could impact an asset’s value, including adverse actions or assessments by regulators;
Accumulation of costs significantly in excess of original expectations related to the acquisition or construction of an asset;
Current-period operating or cash flow losses combined with a history of such losses or a forecast that demonstrates continuing losses associated with an asset’s use; and
Expectations that it is more likely than not that an asset will be sold or otherwise disposed of significantly before the end of our previously estimated useful life.

 

If impairment indicators are present, we determine whether an impairment loss should be recognized by testing the applicable asset or asset groups’ carrying value for recoverability. This test requires long-lived assets to be grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities, the determination of which requires judgment. We estimate the undiscounted future cash flows expected to be generated from the use and eventual disposal of the assets and compare that estimate to the respective carrying values in order to determine if such carrying values are recoverable. This assessment requires the exercise of judgment in assessing the future use of and projected value to be derived from the eventual disposal of the assets to be held and used. Assessments also consider changes in asset utilization, including the temporary idling of capacity and the expected timing for placing this capacity back into production. If the carrying value of the assets is not recoverable, then a loss is recorded for the difference between the assets’ fair value and respective carrying value. The fair value of the assets is determined using an “income approach” based upon a forecast of all the expected discounted future net cash flows associated with the subject assets. Some of the more significant estimates and assumptions include: market size and growth, market share, projected selling prices, manufacturing cost and discount rate. Our estimates are based upon our historical experience, our commercial relationships, market conditions and available external information about future trends. We believe our current assumptions and estimates are reasonable and appropriate; however, unanticipated events and changes in market conditions could affect such estimates resulting in the need for an impairment charge in future periods. During the years ended December 31, 2016 and 2015, no impairment was recognized.

 

Research and Development

 

Research and development costs are expensed as incurred. Costs regarding the development of software to be sold, leased or otherwise marketed are subject to capitalization beginning when a product’s technological feasibility has been established and ending when a product is available for general release to customers. We did not capitalize any such costs during the years ended December 31, 2016 and 2015.

 

  F-9  
 

 

CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Intellectual Property

 

We capitalize certain costs of developing software upon the establishment of technological feasibility and prior to the availability of the product for general release to customers for our CareView System in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Capitalized costs are reported at the lower of unamortized cost or net realizable value and are amortized over the estimated useful life of the CareView System not to exceed five years. Additionally, we test our intangible assets for impairment whenever circumstances indicate that their carrying value may not be recoverable. No impairment was recorded during the years ended December 31, 2016 and 2015.

 

Intellectual property is comprised of purchased and internally developed software costs totaling approximately $2,800,000, all of which was capitalized prior to 2008 and was fully amortized at December 31, 2012. During the years ended December 31, 2016 and 2015, we capitalized no additional intellectual property costs.

 

Patents and Trademarks

 

We have capitalized certain costs related to registering trademarks and patent pending technology. In accordance with GAAP, we amortize our intangible assets with a finite life on a straight-line basis, over 10 years for trademarks and 20 years for patents. We begin amortization of these costs on the date patents or trademarks are awarded.

 

Derivative Financial Instruments

 

Derivatives are recorded on the balance sheet at fair value and changes in fair value are recorded in earnings at each reporting date in accordance with GAAP. See Fair Value of Financial Instruments, below, and NOTES 11 and 12 for further details regarding derivative activity during the years ended December 31, 2016 and 2015.

 

Fair Value of Financial Instruments

 

Our financial instruments consist primarily of receivables, accounts payable, accrued expenses and short and long-term debt. The carrying amount of receivables, accounts payable and accrued expenses approximates our fair value because of the short-term maturity of such instruments and they are considered Level 1 assets under the fair value hierarchy. We have elected not to carry our debt instruments at fair value. The carrying amount of our debt approximates fair value. Interest rates that are currently available to us for issuance of short and long-term debt with similar terms and remaining maturities are used to estimate the fair value of the our short and long-term debt and would be considered Level 3 inputs under the fair value hierarchy.

 

  F-10  
 

 

CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Fair Value of Financial Instruments (continued)

 

We have categorized our assets and liabilities that are valued at fair value on a recurring basis into a three-level fair value hierarchy in accordance with GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets and liabilities (Level 1) and lowest priority to unobservable inputs (Level 3).

 

Assets and liabilities recorded in the consolidated balance sheets at fair value are categorized based on a hierarchy of inputs, as follows:

 

Level 1 -- Unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 -- Quoted prices for similar assets or liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.

Level 3 -- Unobservable inputs for the asset or liability.

 

The Company’s financial assets and liabilities recorded at fair value on a recurring basis include the fair value of warrant liability discussed in NOTE 4. The fair value of this warrant liability is included in long-term liabilities on the accompanying consolidated financial statements.

 

The following table provides the financial assets and liabilities reported at fair value and measured on a recurring basis at December, 31:

 

Description     Assets/
(Liabilities)
Measured at
Fair Value
    Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
    Significant
Other
Observable
Inputs
(Level 2)
    Significant
Other
Unobservable
Inputs
(Level 3)
 
                           
Fair value of warrant liability                                  
2016     $ (629 )   $     $     $ (629 )
2015     $ (168,805 )   $     $     $ (168,805 )

 

  F-11  
 

 

CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Fair Value of Financial Instruments (continued)

 

The following table provides a summary of changes in fair value associated with the Level 3 liabilities for the year ended December 31:

 

   

Fair Value Measurements Using Significant Unobservable Inputs

(Level 3)

 
    2016     2015  
                 
Balance, beginning of period   $ (168,805 )   $ (301,864 )
Issuances of derivative liabilities            
Change in fair value of warrant liability     168,176       133,059  
Transfers in and/out of Level 3            
Balance, end of period   $ (629 )   $ (168,805 )

 

The above table of Level 3 liabilities begins with the prior period balance and adjusts the balance for changes that occurred during the current period. The ending balance of the Level 3 financial instrument presented above represent our best estimates and may not be substantiated by comparisons to independent markets and, in many cases, could not be realized in immediate settlement of the instruments.

 

Income Taxes

 

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the related temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized when the rate change is enacted. Valuation allowances are recorded to reduce deferred tax assets to the amount that will more likely than not be realized. In accordance with GAAP, we recognize the effect of uncertain income tax positions only if the positions are more likely than not of being sustained in an audit, based on the technical merits of the position. Recognized uncertain income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which those changes in judgment occur. We recognize both interest and penalties related to uncertain tax positions as part of the income tax provision.

 

  F-12  
 

 

CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Revenue Recognition

 

Revenue is recognized when persuasive evidence of a sales arrangement exists, when the selling price is fixed or determinable, when installation and official acceptance by the facility occurs, and when collection is probable. Because we consolidate our financial statements, 100% of the revenue generated by the Project LLCs is included in our results with all intra-company accounts and transactions eliminated in consolidation.

 

We offer CareView’s services through a subscription-based contract with each facility for a standard term of three to five years. We begin to bill monthly subscription fees to the facility upon official acceptance of the CareView System by the facility. The contract requires the facility to pay us the subscription fee monthly. During the term of the contract, we provide continuous monitoring of the CareView System and are required to maintain and service all CareView System equipment. If the customer requires additional products or services, the contract is amended accordingly.

 

Earnings Per Share

 

We calculate earnings per share (“EPS”) in accordance with GAAP, which requires the computation and disclosure of two EPS amounts, basic and diluted. Basic EPS is computed based on the weighted average number of common shares outstanding during the period. Diluted EPS is computed based on the weighted average number of common shares outstanding plus all potentially dilutive common shares outstanding during the period under the treasury stock method. Such potential dilutive common shares consist of stock options, warrants to purchase our Common Stock (the “Warrants”) and convertible debt. Potential common shares totaling approximately 122,000,000 and 108,000,000 at December 31, 2016 and 2015, respectively, have been excluded from the diluted earnings per share calculation as they are anti-dilutive due to our reported net loss.

 

Stock Based Compensation

 

We recognize compensation expense for all share-based payments granted and amended based on the grant date fair value estimated in accordance with GAAP. Compensation expense is generally recognized on a straight-line basis over the employee’s requisite service period based on the award’s estimated lives for fixed awards with ratable vesting provisions.

 

Debt Discount Costs

 

Costs incurred with parties who are providing long-term financing, with Warrants issued with the underlying debt, are reflected as a debt discount based on the relative fair value of the debt and Warrants. These discounts are generally amortized over the life of the related debt, using the effective interest rate method or other methods approximating the effective interest method. Additionally, convertible debt issued with a beneficial conversion feature is recorded at a discount based on the difference in the effective conversion price and the fair value of the Company’s stock on the date of issuance, if any. Outstanding debt is presented net of any such discounts on the accompanying consolidated financial statements.

 

  F-13  
 

 

CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Deferred Debt Issuance and Debt Financing Costs

 

Costs incurred through the issuance of Warrants to parties who are providing long-term financing availability, which includes revolving credit lines, are reflected as deferred debt issuance based on the fair value of the Warrants issued. Costs incurred with third parties related to issuance of debt are recorded as deferred financing costs. These costs are generally amortized over the life of the financing instrument using the effective interest rate method or other methods approximating the effective interest method. Amounts associated with our senior secured convertible notes are netted with the outstanding debt on the accompanying consolidated financial statements while amount associated with credit facilities are presented in other assets on the accompanying consolidated financial statements.

 

Installation Costs

 

We defer all costs associated with the installation of the CareView System into a particular hospital until the CareView System is fully operational and accepted by the hospital. Upon acceptance, the associated costs are expensed ratably over the life of the hospital contract. These costs are included in network operations on the accompanying consolidated statements of operations.

 

Shipping and Handling Costs

 

We expense all shipping and handling costs as incurred. These costs are included in network operations on the accompanying consolidated financial statements.

 

Advertising Costs

 

We consider advertising costs as costs associated with the promotion of our products through the various media outlets and trade shows. We expense all advertising costs as incurred. Our advertising expense for the years ended December 31, 2016 and 2015 totaled approximately $168,000 and $222,000, respectively.

 

Concentration of Credit Risks and Customer Data

 

We derive all of our revenues from hospitals. For the year ended December 31, 2016, 93 hospitals accounted for all of our revenue. During 2016 IASIS Healthcare Corporation (“IASIS”), Community Health Systems, Inc. (“CHS”) and Tenet Healthsystems Medical, Inc. (“Tenet”), accounted for 17%, 23% and 18% of our net revenues, respectively. For the year ended December 31, 2015, 96 hospitals accounted for all of our revenue. During 2015 IASIS, CHS and Tenet, accounted for 33%, 20% and 15% of our net revenues, respectively.

 

  F-14  
 

 

CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Use of Estimates

 

Our financial statements have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. We evaluate our estimates, including those related to contingencies, on an ongoing basis. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

Recently Adopted Accounting Pronouncements

 

In April 2015, FASB, issued ASU No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). ASU 2015-03 requires that debt issuance costs be reported in the balance sheet as a direct deduction from the face amount of the related liability, consistent with the presentation of debt discounts and further requires the amortization of debt issuance cost to be reported as interest expense. Similarly, debt issuance costs and any discount or premium are considered in the aggregate when determining the effective interest rate of the debt. ASU 2015-03 is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. Management opted for early adoption of ASU 2015-03 and there is no material effect on the 2016 or 2015 consolidated financial statements.

 

In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis (“ASU 2015-02”). ASU 2015-02 amends the consolidation guidance for VIEs and general partners’ investments in limited partnerships and modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities. ASU 2015-02 is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. There was no material effect on the 2016 consolidated financial statements upon adoption.

 

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”), to provide guidance on management’s responsibility to perform interim and annual assessments of an entity’s ability to continue as a going concern. ASU 2014-15 also requires certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. ASU 2014-15 applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. The adoption of these amendments did not have a material effect on our consolidated financial statements.

 

Recently Issued Accounting Pronouncements

 

In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-15, Statement of Cash Flows (Topic 230) (“ASU 2016-15”). ASU 2016-15 is intended to reduce the diversity in practice regarding how certain transactions are classified within the statement of cash flows. ASU 2016-15 is effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted with retrospective application. We are currently evaluating the impact of this guidance on our consolidated financial statements and disclosures.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13").  The ASU sets forth an "expected credit loss" impairment model to replace the current "incurred loss" method of recognizing credit losses.  The standard requires measurement and recognition of expected credit losses for most financial assets held.  The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.  Early adoption is permitted for periods beginning after December 15, 2018.  We are currently evaluating the impact of this guidance on our consolidated financial statements and disclosures.

 

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). This guidance simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The guidance is effective for public business entities for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted in any annual or interim period for which financial statements have not been issued or made available for issuance, but all of the guidance must be adopted in the same period. If an entity early adopts the guidance in an interim period, any adjustments must be reflected as of the beginning of the fiscal year that includes that interim period. We will adopt the various amendments in ASU 2016-09 in our consolidated financial statements for the quarterly period ending March 31, 2017 with an effective date of January 1, 2017. We do not expect the adoption of these amendments will have a material effect on our consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”). The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. While we are continuing to assess all potential impacts of the standard, we currently believe, the impact of this standard will be primarily related to the accounting for our operating lease.

 

  F-15  
 

 

CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Recently Issued Accounting Pronouncements (continued)

 

In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date to fiscal periods beginning after December 15, 2017. Early adoption is permitted for fiscal periods beginning after December 15, 2016. The standard permits the use of either the retrospective or cumulative effect transition method. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 is a comprehensive new revenue recognition model, which requires a company to recognize revenue to depict the transfer of promised goods or services to a customer in an amount that reflects the consideration the company expects to receive in exchange for those goods or services. We are in the initial stages of evaluating the effect of the standard on our consolidated financial statements and continue to evaluate the available transition methods.

  

NOTE 3 – LIQUIDITY AND MANAGMENTS PLAN

 

Our cash position at December 31, 2016 was approximately $10,088,000. We also have $3,250,000 recorded as restricted cash related to a debt covenant in our credit agreement with PDL BioPharma, Inc. as discussed below.

 

Pursuant to the terms of a Note and Warrant Purchase Agreement dated April 21, 2011 (as subsequently amended) with HealthCor Partners Fund, LP and HealthCor Hybrid Offshore Master Fund, LP (“HealthCor”) we are required to maintain a minimum cash balance $2,000,000 (see NOTE 11 for further details), and we are in compliance with the minimum cash balance as of the date of this filing.

 

Our continued successful operation is dependent upon us achieving positive cash flow through operations while maintaining adequate liquidity. We expect that the cash on hand, as well as our existing and projected cash flow from billable contracts, will enable us to continue to operate for the twelve month period beginning March 31, 2017. We believe that our sales and marketing plan to attract new business and our ongoing deployment and installation of units under existing hospital agreements, will meet our near-term cash needs and will help us achieve future operating profitability.

 

  F-16  
 

 

CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 3 – LIQUIDITY AND MANAGMENTS PLAN (Continued)

 

At present, we have sufficient inventory to install and service a select number of large customers, but eventually we will need to address additional capital requirements. To that end, on June 26, 2015, we entered into a Credit Agreement with PDL Biopharma, Inc., as administrative agent and lender (“the Lender”), (the “PDL Credit Agreement”) pursuant to which the Lender made available to us up to $40 million in two tranches of $20 million each, with each tranche contingent upon us meeting certain milestones. On October 7, 2015, pursuant to the First Amendment to the PDL Credit Agreement (the “First Amendment”) the Lender made the first tranche of $20 million available and funded us $19,533,992, net of fees. As of December 31, 2016, we are including $20 million in long-term liabilities on the accompanying condensed consolidated financial statements. Pursuant to the terms of the PDL Credit Agreement, we are required to maintain a minimum cash balance $3,250,000, and we are in compliance with the minimum cash balance as of the date of this filing (see NOTE 12 for further details). No funds under the second tranche of the PDL Credit Agreement were available to us as of December 31, 2016.

 

NOTE 4 – STOCKHOLDERS’ EQUITY

 

Preferred Stock

 

At December 31, 2016 and 2015, we had 20,000,000 shares of Preferred Stock, par value $0.001 authorized and none outstanding, which can be designated by our Board of Directors.

 

Common Stock

 

At December 31, 2016 and 2015, we had 300,000,000 shares of Common Stock, $0.001 par value authorized, and 139,380,748 shares of Common Stock issued and outstanding. There was no Common Stock issued during the years ended December 31, 2016 or 2015.

 

Warrants to Purchase Common Stock of the Company

 

We use the Black-Scholes-Merton option pricing model (“Black-Scholes Model”) to determine the fair value of Warrants (except certain Warrants issued to HealthCor in 2011 as discussed in NOTE 11 and the warrants issued in connection with a private placement completed in April 2013 “Private Placement Warrants”. The Private Placement Warrants contain provisions that protect the holders from a decline in the issue price of our common stock or “down round” provisions. In accordance with the accounting standards, we determined that these instruments qualify as derivative liabilities and should be recorded at their fair value on the date of issuance and re-measured at fair value each reporting period with the change reported in earnings). The Black-Scholes Model is an acceptable model in accordance with the GAAP. The Black-Scholes Model requires the use of a number of assumptions including volatility of the stock price, the weighted average risk-free interest rate, and the weighted average term of the Warrant. The fair value of the Warrants issued to HealthCor and the Private Placement Warrants was computed using the Binomial Lattice model, incorporating transaction details such as the price of our Common Stock, contractual terms, maturity and risk free rates, as well as assumptions about future financings, volatility, and holder behavior. Due to the down round provisions associated with the exercise price of these Warrants, we determined that the Binomial Lattice model was the most appropriate model for valuing these instruments. As discussed in NOTE 11, the Warrants issued to HealthCor in 2011 were substantially amended and no longer contain down round provisions.

 

  F-17  
 

 

CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 4 – STOCKHOLDERS’ EQUITY (Continued)

 

Warrants to Purchase Common Stock of the Company (continued)

 

The risk-free interest rate assumption is based upon observed interest rates on zero coupon U.S. Treasury bonds whose maturity period is appropriate for the term of the Warrants and is calculated by using the average daily historical stock prices through the day preceding the grant date.

 

Estimated volatility is a measure of the amount by which our stock price is expected to fluctuate each year during the expected life of the award. Our estimated volatility is an average of the historical volatility of our stock prices (and that of peer entities whose stock prices were publicly available) over a period equal to the expected life of the awards. Where appropriate we used the historical volatility of peer entities due to the lack of sufficient historical data of our stock price during 2007-2009.

 

No Warrants were granted during 2016. The assumptions used in the Black-Scholes Model during the year ended December 31, 2015 are set forth in the table below.

 

    2016     2015  
Risk-free interest rate     NA       1.37-2.49 %
Volatility     NA       60.02-77.14 %
Expected life     NA       5-10  
Dividend yield     NA       0.00 %

 

A summary of our Warrants activity and related information follows:

 

    Number of
Shares
Under
Warrant
    Range of
Warrant Price
Per Share
    Weighted
Average
Exercise
Price
    Weighted
Average
Remaining
Contractual
Life
 
Balance at December 31, 2014     34,598,572       $0.40-$1.65     $ 0.93       4.2  
Granted     9,191,752       $0.33-$0.46     $ 0.46       9.3  
Exercised                              
Expired     (8,592,626 )                        
Balance at December 31, 2015     35,197,698       $0.33-$1.65     $ 0.82       5.6  
Granted                              
Exercised                              
Expired     (500,000 )                        
Balance at December 31, 2016     34,697,698       $0.33-$1.65     $ 0.82       4.7  
Vested and Exercisable at December 31, 2016     34,697,698      

$0.33-$1.65

    $ 0.82       4.7  

 

As of December 31, 2016 and 2015, we had no unamortized costs associated with capitalized Warrants, excluding the HealthCor Warrants and Private Placement Warrants.

 

  F-18  
 

 

CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 4 – STOCKHOLDERS’ EQUITY (Continued)

 

Warrants to Purchase Common Stock of the Company (continued)

 

Warrant Activity During 2016

 

No Warrants were granted during 2016. In April and May 2016, 400,000 and 100,000 Warrants expired.

 

Warrant Activity During 2015

 

At December 31, 2015, the Private Placement Warrants, discussed above in this NOTE, were re-valued with a fair value determination of $168,805 and the difference of $133,059 was included as change in fair value of warrant liability in the accompanying consolidated financial statements.

 

On October 1, 2015, we issued a five-year Warrant to purchase 50,000 shares of our Common Stock (with a fair value of $8,800) at an exercise price of $0.34 per share to an individual.

 

On August 12, 2015, we issued a five-year Warrant to purchase 5,000 shares of our Common Stock (with a fair value of $855) at an exercise price of $0.33 per share to an individual.

 

On June 26, 2015, in conjunction with the PDL Credit Agreement, we issued a warrant to purchase 4,444,445 shares of our Common Stock, subject to adjustment as described therein (the “PDL Warrant”). The PDL Warrant has an exercise price of $0.40, a fair value of $1,257,778, and expires on June 26, 2025 (see NOTE 12 for further details).

 

On March 31, 2015, we issued HealthCor a Warrant for 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 Purchase Agreement. This Warrant has an exercise price of $0.53 per share, expires on March 31, 2025 and has a fair value of $378,000 (see NOTE 11 for further details).

 

On February 17, 2015, with the closing of the Fifth Amendment to the Note and Warrant Purchase Agreement with HealthCor and certain other 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 equal to $0.52 (subject to adjustment for standard anti-dilution provisions) and (ii) additional Warrants for an aggregate of up to 3,692,307 shares of our Common Stock at an exercise price per share equal to $0.52 (subject to adjustment for standard anti-dilution provisions) (the “Fifth Amendment Warrants”). The fair value of the convertible debt and the Fifth Amendment Warrants was determined to be $7,336,615, resulting in a relative fair value of $1,093,105 for the Fifth Amendment Warrants on the date of grant (see NOTE 11 for further details).

 

  F-19  
 

 

CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 4 – STOCKHOLDERS’ EQUITY (Continued)

 

Stock Options

 

Effective December 3, 2007, we established the CareView Communications, Inc. 2007 Stock Incentive Plan (“2007 Plan”) pursuant to which 8,000,000 shares of Common Stock were reserved for issuance upon the exercise of options (“2007 Plan Option(s)”). The 2007 Plan was designed to serve as an incentive for retaining our qualified and competent key employees, officers and directors, and certain consultants and advisors. The 2007 Plan Options vest over three years and have an exercise period of ten years from the date of issuance. At December 31, 2016, 2007 Plan Options to purchase 8,000,000 shares of our Common Stock have been issued with 318,684 remaining outstanding.

 

Effective September 30, 2009, we established the CareView Communications, Inc. 2009 Stock Incentive Plan (the “2009 Plan”) pursuant to which 10,000,000 shares of Common Stock was reserved for issuance upon the exercise of options (“2009 Plan Option(s)”). The 2009 Plan was designed to serve as an incentive for retaining our qualified and competent key employees, officers and directors. The 2009 Plan Options vest over three years and have an exercise period of ten years from the date of issuance. As of December 31, 2016, 2009 Plan Options to purchase 10,000,000 shares of our Common Stock have been issued with 6,518,260 remaining outstanding.

 

On February 25, 2015, we established the CareView Communications, Inc. 2015 Stock Option Plan (the “2015 Plan”) pursuant to which 5,000,000 shares of Common Stock was reserved for issuance upon the exercise of options (“2015 Plan Option(s)”). The 2015 Plan was designed to serve as an incentive for retaining our qualified and competent key employees, officers and directors. The 2015 Plan Options vest over three years and have an exercise period of ten years from the date of issuance. As of December 31, 2016, 2015 Plan Options to purchase 5,000,000 shares of our Common Stock have been issued with 4,829,000 remaining outstanding.

 

On December 7, 2016, we established the CareView Communications, Inc. 2016 Stock Option Plan (the “2016 Plan”) pursuant to which 20,000,000 shares of Common Stock was reserved for issuance upon the exercise of options (“2016 Plan Option(s)”). The 2016 Plan was designed to serve as an incentive for retaining our qualified and competent key employees, officers and directors. The 2016 Plan Options vest over three years and have an exercise period of ten years from the date of issuance. As of December 31, 2016, 2016 Plan Options to purchase 4,245,031 shares of our Common Stock have been issued and are outstanding.

 

The valuation methodology used to determine the fair value of the 2007 Plan Options, 2009 Plan Options, 2015 Plan Options and 2016 Plan Options, collectively, (the “Option(s)”) issued during the year was the Black-Scholes Model. The Black-Scholes Model requires the use of a number of assumptions including volatility of the stock price, the weighted average risk-free interest rate, and the weighted average expected term of the options.

 

  F-20  
 

 

CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 4 – STOCKHOLDERS’ EQUITY (Continued)

 

Stock Options (continued)

 

The assumptions used in the Black-Scholes Model during the years ended December 31, 2016 and 2015 are set forth in the table below.

 

    2016     2015  
Risk-free interest rate     1.13-1.84 %     1.41-1.74 %
Volatility     63.49-73.73 %     61.00-71.86 %
Expected life     6       6  
Dividend yield     0.00 %     0.00 %

 

The risk-free interest rate assumption is based upon observed interest rates on zero coupon U.S. Treasury bonds whose maturity period is appropriate for the expected term of the stock option and is calculated by using the average daily historical stock prices through the day preceding the grant date.

 

Estimated volatility is a measure of the amount by which our stock price is expected to fluctuate each year during the expected life of the award. Our estimated volatility is an average of the historical volatility of our stock prices (and that of peer entities whose stock prices were publicly available) over a period equal to the expected life of the awards. Where appropriate we used the historical volatility of peer entities due to the lack of sufficient historical data of our stock price during 2007-2009.

 

A summary of our Option activity and related information follows:

 

    Number of
Shares
Under
Option
    Weighted
Average
Exercise
Price
    Weighted  
Average
Remaining
Contractual
Life
    Aggregate
Intrinsic
Value
 
Balance at December 31, 2014     14,273,810     $ 0.54       6.3     $  
Granted     2,393,500     $ 0.47                  
Exercised                              
Expired     (6,795,471 )                        
Forfeited     (521,172 )                        
Balance at December 31, 2015     9,350,667     $ 0.58       7.6     $ 15,705  
Granted     6,907,975     $ 0.11                  
Exercised                              
Expired     (206,664 )                        
Forfeited     (141,003 )                        
Balance at December 31, 2016     15,910,975     $ 0.37       8.0     $  
Vested and Exercisable at December 31, 2016     7,020,180     $ 0.60       6.2     $  

 

The weighted-average grant date fair value of Options granted during the years ended December 31, 2016 and 2015 was $.06 and $0.29 per share, respectively.

 

  F-21  
 

 

CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 4 – STOCKHOLDERS’ EQUITY (Continued)

 

Stock Options (continued)

 

Share-based compensation expense for Options charged to our operating results for the years ended December 31, 2016 and 2015 ($717,385 and $774,322, respectively) is based on awards vested. The estimate of forfeitures are to be estimated at the time of grant and revised in subsequent periods if actual forfeitures differ from the estimates. We have not included an estimate for forfeitures due to our limited history and we revise based on actual forfeitures each period.

 

At December 31, 2016, total unrecognized estimated compensation expense related to non-vested Options granted prior to that date was approximately $742,000, which is expected to be recognized over a weighted-average period of 2.1 years. No tax benefit was realized due to a continued pattern of operating losses.

 

Option Activity During 2016

 

In March 2016, we granted 2015 Plan Options to purchase 20,000 shares with an exercise price of $0.30 per share to an employee,
In August 2016, we granted 2015 Plan Options to 5 directors (235,295 each, totaling 1,176,475) and 35,000 to an employee to purchase shares with an exercise price of $0.17 and $0.18 per share, respectively,
In September 2016, we granted 2015 Plan Options to purchase 50,000 shares with an exercise price of $0.08 per share to an employee,
In December 2016, we granted 2015 Plan Options to purchase 1,381,469 shares with an exercise price of $0.08 per share to certain employees and 754,969 shares with an exercise price of $0.10 to an employee, and
In December 2016, we granted 2016 Plan Options to an officer/directors (2,000,000), an officer (2,000,000) and 245,031 to an employee to purchase shares with an exercise price of $0.10 per share.

 

Option Activity During 2015

 

In February 2015, we granted 2009 Plan Options to purchase 56,444 shares with an exercise price of $0.53 per share to an employee,
In February 2015, we granted 2015 Plan Options to a director (150,000), an executive officer (1,000,000) and certain employees (558,556) to purchase shares with an exercise price of $0.53 per share,
In March 2015, we granted 2015 Plan Options to purchase 50,000 shares with an exercise price of $0.50 per share to a director,
In August 2015, we granted 2015 Plan Options to purchase 5,000 shares with an exercise price of $0.38 per share to an employee,
In November 2015, we granted 2015 Plan Options to purchase 50,000 shares with an exercise price of $0.31 per share to an employee, and
In December 2015, we granted 2015 Plan Options to purchase 523,500 shares with an exercise price of $0.26 per share to certain employees.

 

  F-22  
 

 

CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 5 – INCOME TAXES

 

At December 31, 2016, we had approximately $69 million of federal net operating tax loss carry-forward which begins to expire in 2028 and approximately $14 million of state net operating losses which begins to expire in 2028.

 

The differences between the actual income tax benefit and the amount computed by applying the statutory federal tax rate (35%) to the loss before taxes are as follows:

 

    Years Ended December 31,  
    2016     2015  
             
Expected income tax benefit at statutory rate   $ (6,514,444 )   $ (5,699,747 )
Debt discount amortization     701,240       700,029  
Permanently disallowed interest     801,750       914,129  
Other permanent differences     30,818       41,515  
State income tax benefit, net of tax effect at state statutory rate            
Deferred pool true-ups/corrections related to:                
Amortization            
Net operating losses     45,138       232,567  
Other     (43,369 )     104,765  
Change in valuation account     4,978,867       3,706,742  
Income tax expense (benefit)   $     $  

 

The components of the deferred tax assets and liabilities are as follows:

 

    December 31,  
    2016     2015  
Deferred Tax Assets:                
Tax benefit of net operating loss carry-forward   $ 23,966,537     $ 21,321,688  
Accrued interest     6,525,289       4,199,730  
Stock based compensation     1,804,050       1,556,344  
Amortization of intangible assets     389,695       441,399  
Depreciation of fixed assets     223,211       (57,012 )
Accrued expenses     105,674       96,284  
Research and development credit carry-forward     29,084       29,084  
Donations     11,241       11,241  
Total deferred tax assets     33,054,781       27,598,758  
Deferred tax liability-beneficial conversion feature     (3,066,771 )     (2,589,615 )
Valuation allowance for deferred tax assets     (29,988,010 )     (25,009,143 )
Deferred tax assets, net of valuation allowance   $     $  

 

As a result of certain income tax accounting realization requirements with respect to accounting for share based compensation, the table of deferred tax assets shown above does not include certain deferred tax assets at December 31, 2016 that arose directly from tax deductions related to equity compensation that is greater than the compensation recognized for financial reporting. If such deferred tax assets are subsequently realized, they will be recorded to contributed capital in the amount of approximately $690,000.

 

  F-23  
 

 

CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 5 – INCOME TAXES (Continued)

 

In 2016 and 2015, the deferred tax valuation allowance increased by $4,978,867 and $3,706,742 respectively. The realization of the tax benefits is subject to the sufficiency of taxable income in future years. The combined deferred tax assets represent the amounts expected to be realized before expiration.

 

We periodically assess the likelihood that we will be able to recover our deferred tax assets. We consider all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible profits.

 

As of December 31, 2016 and 2015, we established valuation allowances equal to the full amount of the net deferred tax assets due to the uncertainty of the utilization of the operating losses in future periods.

 

For the years ended December 31, 2016 and 2015, no amounts have been recognized for uncertain tax positions and no amounts have been assessed or recognized related to interest or penalties related to uncertain tax positions. We have determined that it is not reasonably likely for the amounts of unrecognized tax benefits to significantly increase or decrease within the next twelve months. We are currently subject to the general three year statute of limitation for federal tax. Under this general rule, the earliest period subject to potential audit is 2013. For years in which the company may utilize its net operating losses, the IRS the ability to examine the tax year that generated those losses and propose adjustments up to the amount of losses utilized.

 

NOTE 6 – OTHER CURRENT ASSETS

 

Other current assets consist of the following:

 

    December 31,  
    2016     2015  
Prepaid expenses   $ 102,601     $ 467,137  
Other current assets     12,116       3,938  
TOTAL OTHER CURRENT ASSETS   $ 114,717     $ 471,075  

 

NOTE 7 – PROPERTY AND EQUIPMENT

 

Property and equipment consist of the following:

 

    December 31,  
    2016     2015  
Network equipment   $ 12,632,559     $ 11,310,495  
Office equipment     243,267       200,683  
Test equipment     166,484       115,712  
Vehicles     161,584       158,803  
Furniture     87,646       81,838  
Warehouse equipment     9,524       9,524  
Leasehold improvements     5,121       5,121  
      13,306,185       11,882,176  
Less: accumulated depreciation     (9,153,771 )     (7,398,736 )
TOTAL PROPERTY AND EQUIPMENT   $ 4,152,414     $ 4,483,440  

 

  F-24  
 

 

CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 7 – PROPERTY AND EQUIPMENT (Continued)

 

Depreciation expense for the years ended December 31, 2016 and 2015 was $1,759,016 and $1,693,128, respectively.

 

NOTE 8 – OTHER ASSETS

 

Intangible assets consist of the following:

 

    December 31, 2016  
    Cost     Accumulated Amortization     Net  
Patents and trademarks   $ 711,961     $ 104,574     $ 607,387  
Other intangible assets     53,088       48,138       4,950  
     TOTAL INTANGIBLE ASSETS   $ 765,049     $ 152,712     $ 612,337  

 

    December 31, 2015  
    Cost     Accumulated Amortization     Net  
Patents and trademarks   $ 420,137     $ 53,706     $ 366,431  
Other intangible assets     56,263       41,929       14,334  
     TOTAL INTANGIBLE ASSETS   $ 476,400     $ 95,635     $ 380,765  

 

Other assets consist of the following:

 

    December 31, 2016  
    Cost     Accumulated Amortization     Net  
Deferred debt issuance costs   $ 1,257,778     $ 271,528     $ 986,250  
Deferred financing costs     805,917       185,466       620,451  
Deferred installation costs     1,582,059       1,228,558       353,501  
Prepaid license fee     249,999       87,431       162,568  
Security deposit     46,124             46,124  
TOTAL OTHER ASSETS   $ 3,941,877     $ 1,772,983     $ 2,168,894  

 

    December 31, 2015  
    Cost     Accumulated Amortization     Net  
Deferred debt issuance costs   $ 1,257,778     $ 91,840     $ 1,165,938  
Deferred financing costs     805,917       74,070       731,847  
Deferred installation costs     1,787,869       1,220,982       566,887  
Prepaid license fee     249,999       71,038       178,962  
Security deposit     46,124             46,124  
TOTAL OTHER ASSETS   $ 4,147,687     $ 1,457,930     $ 2,689,758  

 

  F-25  
 

 

CAREVIEW COMMUNICATION, INC. AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 9 – OTHER CURRENT LIABILITIES

 

Other current liabilities consist of the following:

 

    December 31,  
    2016     2015  
Accrued taxes   $ 182,122     $ 235,162