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[March 28, 2014]
CAREVIEW COMMUNICATIONS INC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
(Edgar Glimpses Via Acquire Media NewsEdge) Management's Discussion and Analysis or Plan of Operation Overview 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. CareView understands the importance of providing high quality patient care in a safe environment and believes 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.
16 Liquidity and Capital Resources We began the operation of our current business plan in 2003 and have not yet attained a level of revenue to allow us to meet our current overhead and financing costs. We have historically reported net losses from operations and negative cash flows. Our cash position at December 31, 2013 was approximately $4,125,000. We are required to maintain a minimum cash balance of $4,000,000 pursuant to existing loan documents. Falling below that balance triggers a default with HealthCor Partners Fund, LP and HealthCor Hybrid Offshore Master Fund, LP (see NOTE 11 in the accompanying consolidated financial statements for further details) and Comerica Bank and Bridge Bank (see NOTE 12 in the accompanying consolidated financial statements for further details). In view of these facts, our continued successful operation is dependent upon us achieving positive cash flow through operations while maintaining adequate liquidity; however, we may be required to obtain additional financing. In order to support current and future operations, on January 16, 2014, we closed a $5 million funding (see NOTE 17 in the accompanying consolidated financial statements for further details). Upon receipt of this $5,000,000 funding, the minimum cash balance reference above was increased to $5,000,000 pursuant to existing loan documents. We expect that the proceeds from this private offering and funding, 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.
As more fully described in NOTE 12 in the accompanying consolidated financial statements, we have an additional financial resource with the Comerica/Bridge Bank revolving credit line for $20,000,000 ("Revolving Line"). At present, we have sufficient inventory to install and service a select number of large customers, but eventually we will have the need to address additional capital requirements through the Revolving Line under which we can borrow up to $20,000,000 by using eligible signed customer contracts as collateral; however, no eligible contracts were available for additional borrowings on the Revolving Line at December 31, 2013 and at the time of this filing. At December 31, 2013, the outstanding Revolving Line balance was $982,555. The Revolving Line expires in June 2014 unless extended by mutual agreement.
We expect to continue to spend substantial amounts on research and development.
Further, we may not have sufficient resources to develop fully any new products or technologies unless we are able to raise additional financing on acceptable terms or secure funds from new or existing partners. We can make no assurances that additional financing will be available on favorable terms or at all.
Additionally, these conditions may increase the cost to raise capital. If additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities would result in dilution to our existing stockholders. Additionally, these conditions may increase costs to raise capital and/or result in further dilution. Our failure to raise capital when needed would adversely affect our business, financial condition and results of operations, and could force us to reduce or cease our operations.
We believe that we will achieve operating profitability in late 2014; however, due to conditions and influences out of our control, including the current state of the national economy, we cannot guarantee that profitability will be achieved or that it will be achieved in the stated time frame, nor is there any assurance that such an operating level can ever be achieved.
As of December 31, 2013, our working capital was approximately $1,600,000, our accumulated deficit was approximately $79,800,000, and our stockholders' deficit was approximately $8,800,000. Operating loss was approximately $6,600,000 and $11,100,000 for the years ended December 31, 2013 and 2012, respectively. Our net loss attributable to CareView was approximately $14,500,000 and approximately $18,500,000 for the years ended December 31, 2013 and 2012, respectively.
17 The following is a summary of cash flow activity for the years ended December 31, 2013 and 2012.
2013 2012 (000's) Net cash flows used in operating activities $ (4,553 ) $ (7,322 ) Net cash flows used in investing activities (444 ) (1,011 ) Net cash provided by financing activities 3,708 5,220 Decrease in cash (1,289 ) (3,113 ) Cash at beginning of period 5,414 8,527 Cash at end of period $ 4,125 $ 5,414 The decrease in cash flows used in operating activities of approximately $2,800,000 is primarily a result of reduction in operating expenses and an increase in revenue. The decrease in cash flows used in investing activities of approximately $600,000 is primarily a result of reductions related to purchases and installation of CareView Systems. The decrease in cash provided by financing activities of approximately $1,500,000 million primarily reflects the $5,000,000 loan from HealthCor Partners Fund, LP and HealthCor Hybrid Offshore Master Fund, LP (as more fully described in NOTE 11 in the accompanying consolidated financial statements) during 2012 versus the Securities Purchase Agreement with net proceeds of approximately $2,700,000 during 2013 (as more fully described in NOTE 4 in the accompanying consolidated financial statements) and approximately $1,000,000 borrowing against the Revolving Line.
Results of Operations Year ended December 31, 2013 compared to year ended December 31, 2012 Year Ended December 31, 2013 2012 Change (000's) Revenue, net $ 2,069 $ 1,630 $ 439 Operating expenses: Network operations 2,477 2,906 (429 ) General and administration 2,735 4,808 (2,073 ) Sales and marketing 999 1,927 (928 ) Research and development 860 951 (91 ) Depreciation and amortization 1,612 2,113 (501 ) Operating expenses 8,683 12,705 (4,022 ) Operating loss $ (6,614 ) $ (11,075 ) $ 4,461 Revenue, net Revenue increased approximately $400,000 for the year ended December 31, 2013 as compared to the year ended December 31, 2012. Hospitals with billable units increased to 68 for the year ended December 31, 2013 as compared to 55 for the comparable period for the prior year. Of the 68 hospitals with billable units on December 31, 2013, two hospitals groups accounted for 45 and 14 of the total, respectively. Billable units (RCPs and Nurse Stations) for all hospitals totaled 3,292 (3,155 and 137, respectively) on December 31, 2013 as compared to 2,078 (2,016 and 62, respectively) on December 31, 2012.
18 Operating Expenses Our principal operating costs include the following items as a percentage of total expense.
Year Ended December 31, 2013 2012Human resource costs, including benefits 41 % 30 %Non-cash expense (options and warrants for services) 6 % 12 % Depreciation and amortization expense 19 % 17 % Professional fees and consulting 10 % 13 %Product deployment costs 8 % 10 % Travel and entertainment 9 % 7 % Other 7 % 11 % Operating expenses decreased by approximately $4,000,000 (32%) as a result of the following items: (000's)Decrease in human resource costs $ (240 ) Decrease in non-cash expense (options and warrants for services) (1,064 ) Decrease in depreciation and amortization (501 ) Decrease in product deployment costs (544 ) Decrease in travel and entertainment (122 ) Decrease in professional and consulting (784) Decrease in other (767 ) $ (4,022 ) Human resource related costs (including salaries and benefits) decreased primarily as a result of a lower average head count in 2013 compared to 2012.
While we had 42 employees at December 31, 2013 as compared to 45 for the comparable period for the prior year, on average we employed 44 employees over the course of 2013 as compared to 49 for the comparable prior year period.Non-cash expense decreased as a result of reduced costs related to the fair value of warrants issued for services for the comparable periods as well as reductions in non-cash compensation expense between the two periods.
The decrease in depreciation and amortization expense was primarily related to reduced amortization expense of intellectual property and software purchase costs fully amortized at December 31, 2012.
During 2012, we expensed certain previously capitalized installation costs totaling approximately $400,000 resulting from a customer's notification that due to a variety of budgetary concerns (i.e., Patient Protection and Affordable Care Act and other economic concerns specifically, the fiscal cliff), they wanted to reduce their number of billable units, otherwise, product deployment costs decreased by approximately $100,000.
19 Travel and entertainment expense decreased as a result of reduced sales lead activity partially offset by increased installation and training efforts related to supporting our existing installed base.
The decrease in professional and consulting fees was primarily a result of: (i) reduced administrative support assistance and public company filing support costs totaling approximately $618,000, (ii) reduced third party product deployment support services totaling approximately $111,000, and (iii) reduced third party sales and marketing efforts to aid us with sales and contract negotiations totaling approximately $55,000.
Other decreased primarily as a result of (i) the recovery of certain property taxes over accrued in 2012 totaling approximately $332,000 and (ii) the accounting treatment of the fair value of warrants issued with our April 1, 2013 private placement totaling approximately $302,000 (see NOTE 4 in the accompanying consolidated financial statements for further details).
Critical Accounting Estimates and New Accounting Pronouncements Critical Accounting Estimates The preparation of financial statements in accordance with accounting principles generally accepted in the U.S. ("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.
Share-Based Compensation Expense. We calculate share-based compensation expense for option awards and warrant issuances ("Share-based Awards") 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.
20 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 agiven period.
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.
21 New Accounting Pronouncements In July 2013, the Financial Accounting Standards Board ("FASB") issued authoritative guidance related to the presentation of unrecognized tax benefits.
The update requires that the entity present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carry forward or a tax credit carry forward in the statement of financial position. The guidance does not apply to the extent that a net operating loss carry forward or tax credit carry forward at the reporting date is not available under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position. The guidance is effective for annual reporting periods beginning after December 15, 2013, and interim reporting periods thereafter. We expect to present deferred tax assets net of unrecognized tax benefits, as appropriate, in the consolidated balance sheets. We do not anticipate that this guidance will have a material impact on our financial position or results of operations.
In February 2013, the FASB issued authoritative guidance which adds new disclosure requirements for items reclassified out of Accumulated Other Comprehensive Income (Loss) ("AOCI"). The update requires that an entity present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of AOCI based on its source and the income statement line items affected by the reclassification. The guidance was effective for the quarter ended March 30, 2013. The adoption of this guidance did not have an impact on our financial position or results from operations.
In July 2012, the FASB guidance giving entities an option to first assess qualitative factors to determine whether the existence of events and circumstances indicate that it is more likely than not that the indefinite-lived intangible asset impaired. If based on its qualitative assessment an entity concludes that it is more likely than not that the fair value of an indefinite lived intangible asset is less than its carrying amount, quantitative impairment testing is required. However, if an entity concludes otherwise, quantitative impairment testing is not required. The guidance was effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The adoption of this guidance did not have a material impact on our financial position or results of operations.
22 Recent Events Since December 31, 2013 On January 16, 2014, we entered into a Fourth Amendment to the Note and Warrant Purchase Agreement with HealthCor Partners Fund, LP and HealthCor Hybrid Offshore Master Fund, LP (the "Investors") and agreed to sell and issue to the Investors (i) additional notes in the initial aggregate principal amount of $5,000,000, with a conversion price per share equal to $0.40 (subject to adjustment as described therein) and (ii) additional warrants to purchase an aggregate of up to 4,000,000 shares of our Common Stock at an exercise price per share equal to $0.40 (subject to adjustment as described therein).
Off-Balance Sheet Arrangements As of December 31, 2013, we had no material off-balance sheet arrangements.
Contractual Arrangements Provided in the table below are our known contractual obligations as of December 31, 2013.
Contractual Obligations Less than 1 1 to 3 3 to 5 More than 5 (000's) Total Year Years Years Years Long-Term Debt $ 34,190 - - - $ 34,190 Operating Lease 256 $ 171 $ 85 - - Total $ 34,446 $ 171 $ 85 $ - $ 34,190
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