QUARTERLY REPORT FOR PERIOD ENDED SEPTEMBER 30, 2009

Transcription

1 QUARTERLY REPORT FOR PERIOD ENDED SEPTEMBER 30, 2009 CAREVIEW COMMUNICATIONS, INC. 405 State Highway 121, Suite B-240 Lewisville, TX Phone: Fax: Federal I.D. No. CUSIP No ISSUER S EQUITY SECURITIES COMMON STOCK $.001 Par Value 300,000,000 Common Shares Authorized 110,732,990 Shares Issued and Outstanding

2 CAREVIEW COMMUNICATIONS, INC. 2 Item 1. The exact name of the issuer and its predecessors (if any): CAREVIEW COMMUNICATIONS, INC., a Nevada corporation f/k/a CAREVIEW COMMUNICATIONS, INC., a California corporation f/k/a ECOGATE, INC., a California corporation f/k/a PURPOSE, INC., a California corporation Item 2. Shares outstanding: As of September 30, 2009 and as of the filing of this Quarterly Report, there were 110,588,759 and 110,732,990 shares respectively of the Company s Common Stock issued and outstanding. Item 3. Interim financial statements: The Company s financial statements for the period ended September 30, 2009 are attached hereto. Item 4. Management s discussion and analysis or plan of operation: Please refer to the Annual Report published in the Pink Sheets New Services on March 27, 2009, as information contained therein is unchanged, as is included herein by reference. In addition to the information presented in the above-mentioned Annual Report, the Company currently has seven hospitals installed and three other hospitals under contract and awaiting installation. Item 5. Legal proceedings: The Company filed a complaint on April 15, 2009 in the United States District Court for the Eastern District of Texas, Sherman Division, against Silicon Standard Corporation and its Chief Executive Officer, Howard Kuo, for $827, and other relief for breach of contract and fraud relative to the manufacture of the Company s Room Control Platform. Initial discovery is being conducted. The court ruled against the defendant's motion to have the venue moved to California and the venue for the lawsuit was fixed in Texas. This lawsuit is continuing. On May 21, 2009, Silicon Standard Corporation and Intellect Lab, LLC filed a complaint in the Superior Court of the State of California, County of Santa Clara, against CareView Communications, Inc. and Steven G. Johnson, its President, for fraud, negligent misrepresentation, breach of contract, and various violations of California's Business and Professions Code. In addition to other relief, the complaint is asking for damages in the amount of $1,355,005. No discovery has yet taken place. The Company removed this case from California State Court to California Federal Court and has filed a Motion to Transfer Venue to Texas. The California Federal Court has yet to rule on the Company s Motion to Transfer. This suit is continuing. Item 6. Default upon senior securities: None for the three month period ended September 30, 2009 and through the date of this report.

3 3 Item 7. Other information: a) Entry into a material definitive agreement: On June 1, 2009, the Company engaged the law firm of Webb & Webb, P.C. on an hourly basis to represent the Company on general business matters and litigation. (See Item 5. Legal Proceedings.) The retainer was paid through the issuance of 192,308 shares of the Company's restricted Common Stock at a price of $0.52 issued to O'Huta Management Trust (the "Retainer Shares"). As services are performed by Webb & Webb, P.C., fifty percent (50%) of the regular charges incurred will be debited first against the retainer with the remaining fees to be paid in cash. (See Item 7h. Sales of Equity Securities.) On August 25, 2009, the Company entered into an Amended Agreement with Fourth Generation Private Equity Partners ("Fourth Generation") amending the Promissory Note dated October 2, 2008 (the "Note") under which Fourth Generation had loaned the Company $125,000. Terms of the Amended Agreement provided for Fourth Generation to loan an additional $26,000 to the Company and changed the maturity date on the Note from June 1, 2009 to January 15, As compensation for the Amended Agreement, the Company granted Fourth Generation a Common Stock Purchase Warrant (the "Warrant') to purchase up to 58,500 shares of the Company's Common Stock. The five-year Warrant has a fixed exercise price of $0.52 and contains a provision for cashless exercise. (See Item 7h. Sales of Equity Securities.) On September 9, 2009, the Company entered into a placement agent agreement (the "Agreement") with National Securities Corporation ("National Securities") under which National Securities will act as placement agent to assist the Company in raising capital through debt or equity-linked securities. The principal terms of the twelve-month Agreement call for the Company to pay National Securities a cash fee equal to seven percent (7%) of the aggregate sales price of all securities sold plus five-year warrants to purchase an aggregate of seven percent (7%) of the shares of the Company's Common Stock sold in the financing at a price equal to the price at which the shares were sold. Pursuant to the Agreement, the Company paid a non-refundable retainer of $20,000 which will be credited toward the above-described cash fee. On October 1, 2009, the Company relocated to a new office warehouse complex in Lewisville, Texas. This facility contains approximately 10,578 square feet and will accommodate the Company's expanding operations as well as being located closer to the Dallas/Ft. Worth International Airport. The Company's new address is 405 State Highway 121, Suite B-240, Lewisville, Texas The 63-month lease has a base lease rate of $4,187 for months 1-6, $8,374 for months 7-42, and $8,815 for months The lease contains renewal provisions under which the Company can renew the lease for an additional threeyear period under the same terms and conditions. b) Termination of a material definitive agreement: None for the three month period ended September 30, 2009 and through the date of this report. c) Completion of acquisition or disposition of assets, including but not limited to merger: None for the three month period ended September 30, 2009 and through the date of this report. d) Creation of a direct financial obligation or an obligation under an off-balance sheet arrangement of an issuer: See response to Item 7(a) above.

4 e) Triggering events that accelerate or increase a direct financial obligation or an obligation under an off-balance sheet arrangement: None for the three month period ended September 30, 2009 and through the date of this report. f) Costs associated with exit or disposal activities: None for the three month period ended September 30, 2009 and through the date of this report. g) Material impairments: None for the three month period ended September 30, 2009 and through the date of this report. h) Sales of equity securities: On June 1, 2009, the Company engaged the law firm of Webb & Webb, P.C. on an hourly basis to represent the Company on general business matters and litigation. The retainer was paid through the issuance of 192,308 shares of the Company's restricted Common Stock at a price of $0.52 issued to O'Huta Management Trust. The certificate was issued with a restrictive legend that the shares had not been registered under the Securities Act. (See Item 7a. Entry into a Material Definitive Agreement and Item 5. Legal Proceedings.) The Company previously issued stock options to John Bailey (Chief Financial Officer), Samuel Greco (Chief Executive Officer), and Kyle Johnson (Director of Technology). For the extraordinary efforts put forth by these individuals on behalf of the Company, the Company's Compensation Committee recommended and the Board of Directors approved on August 9, 2009 an amendment to the stock options whereby any underlying shares not already vested would immediately become fully vested (an aggregate of 600,000 underlying shares) and the exercise period upon termination of employment for any reason was extended to a period of three (3) years. All other provisions of the stock options remain unchanged. No options have yet been exercised. On August 8, 2009, the Company approved a private placement under which it offered 10,000,000 shares for sale for a maximum offering price of $5,200,000. Through September 30, 2009, the Company sold an aggregate of 1,907,693 restricted shares of Common Stock for an aggregate purchase price of $992,000 or $0.52 per share. The aggregate shares and purchase price includes the Retainer Shares described above. The offering was made in reliance on exemptions from the registration requirements of the Securities Act of 1933, as amended and applicable state securities laws. To date, the following individuals have purchased shares for the stated purchase price: Jeff Fox ($100,000 for 192,308 shares), Karen G. Frank ($30,000 for 57,693 shares), James R. Higgins ($500,000 for 962,538 shares), O'Huta Management Trust ($100,000 for 192,308 shares), and Robert W. Winslow ($52,000 for 100,000 shares). In connection with and upon the closing of the Company's private placement, Develo Financial Group, LLC will be issued five-year Common Stock Purchase Warrants ( Warrants ) for the purchase of shares of the Company s Common Stock at an exercise price equal to the actual price paid by the funding source (including but not limited to the effect of any incentive shares issued by Company to an investor, on the price per share paid by the Investor). The number of Warrants to be issued will be equal to eight percent (8%) of the dollar amount of equity issued as a result of any investment. Since the end of the third quarter (September 30, 2009), the Company sold an aggregate of 144,231 restricted shares of Common Stock under the above-mentioned private placement for an aggregate purchase price of $75,000 or $0.52 per share as follows: DT Investments, LLC ($25,000 for 48,077 shares) and Paradise Wire and Cable ($50,000 for 96,154 shares). All stock certificates and Warrants related to the private placement were issued with a restrictive legend that the shares or underlying shares had not been registered under the Securities Act. 4

5 On August 25, 2009, in connection with the Amended Agreement with Fourth Generation mentioned in item 7(a) above, the Company issued a Common Stock Purchase Warrant to Fourth Generation (the "Warrant") under which Fourth Generation may purchase up to 58,500 shares of the Company's Common Stock. The Warrant expires five (5) years from the date of issuance, has a fixed exercise price of $0.52 and contains provisions for cashless exercise. The Warrant has not yet been exercised. Neither the Warrant nor the underlying shares have been registered under the Securities Act. (See Item 7a. Entry into a Material Definitive Agreement and Item 5. Legal Proceedings.) On September 3, 2009, the Company issued a Common Stock Purchase Warrant to James R. Higgins (the "Warrant") under which Mr. Higgins may purchase up to 100,000 shares of the Company's Common Stock. The Warrant was issued as compensation for services rendered to the Company by Mr. Higgins. The Warrant expires two (2) years from the date of issuance, has a fixed exercise price of $0.52 and contains provisions for cashless exercise. The Warrant has not yet been exercised. Neither the Warrant nor the underlying shares have been registered under the Securities Act. On October 9, 2009, the Company issued a Non-Qualified Stock Option ( Option ) to Samuel Greco, the Company's Chief Executive Officer, for the remaining shares available under the Company's 2007 Stock Incentive Plan (the "2007 Plan") in which 1,763,735 underlying shares have an exercise price of $0.52 and one-third of the underlying shares vest on the first, second, and third anniversary date of the Option. The Option has not been exercised. Neither the Option nor the underlying shares have been registered under the Securities Act. Upon the issuance of the Option, the 2007 Plan was closed. On October 9, 2009, the Company's Board of Directors and a majority of the Company's shareholders approved the CareView Communications, Inc Stock Incentive Plan (the "2009 Plan") under which the Company may issue options to purchase up to 10,000,000 shares. On October 9, 2009, the Company issued a Non-Qualified Stock Option ("Option") to Samuel Greco, the Company's Chief Executive Officer, in which the 999,074 underlying shares have an exercise price of $0.52 and one-third of the underlying shares vest on the first, second, and third anniversary date of the Option. The Option has not been exercised. Neither the Option nor the underlying shares have been registered under the Securities Act. In connection with above-mentioned sales of unregistered securities, each investor represented in writing that they were accredited investors (as defined by Rule 501 under the Securities Act of 1933) and were acquiring the shares for investment and not distribution, that they could bear the risks of the investment and could hold the securities for an indefinite period of time. The investors received written disclosures that the securities had not been registered under the Securities Act and that any resale must be made pursuant to a registration or an available exemption from such registration. No general solicitation was undertaken by the issuer in connection with the offer or sale of these securities. None of the shares issued in the private placement were registered under the Securities Act of 1933, and all of the certificates representing shares sold in the offering contain a restrictive legend indicating that the transferability of the shares is restricted under the Securities Act of All of the sales by CareView of its unregistered securities were made by CareView in reliance upon Section 4(2) of the Act and/or under Rule 506 of Regulation D. All of the individuals and/or entities listed above that purchased the unregistered securities were all known to the Company and its management or its placement agent, through pre-existing business relationships, as long standing business associates, friends, and employees. All purchasers were provided access to all material information that they requested and all information necessary to verify such information and were afforded access to management of the Company in connection with their purchases. All purchasers of the unregistered securities acquired such securities for investment and not with a view toward distribution, acknowledging such intent to the Company. All certificates or agreements representing such securities that were issued contained restrictive legends, prohibiting further transfer of the 5

6 certificates or agreements representing such securities, without such securities either being first registered or otherwise exempt from registration in any further resale or disposition. i) Material modification to rights of security holders: None for the three month period ended September 30, 2009 and through the date of this report. j) Changes in issuer s certifying accountant: None for the three month period ended September 30, 2009 and through the date of this report. k) Non-reliance on previously issued financial statements or a related audit report or completed interim review: None for the three month period ended September 30, 2009 and through the date of this report. l) Changes in control of issuer: None for the three month period ended September 30, 2009 and through the date of this report. m) Departure of directors or officers; election of directors; appointment of principal officers: On August 4, 2009, David Webb tendered his resignation as a director and as the Chair of the Company's Audit Committee. On the same date, Henry Burkhalter tendered his resignation as a director and as the Chair of the Compensation Committee. Mr. Webb and Mr. Burkhalter both resigned to focus on their other investments and had no disagreements with the Company's management or its Board of Directors. On October 9, 2009, the Board named Tommy Thompson as Chair of the Compensation Committee and as a member of the Audit Committee and named Allen Wheeler as Chair of the Audit Committee and as a member of the Compensation Committee. n) Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year. None for the three month period ended September 30, 2009 and through the date of this report. o) Amendments to the Issuer s Code of Ethics, or Waiver of a provision of the Code of Ethics: None for the three month period ended September 30, 2009 and through the date of this report. 6 Item 8. Exhibits: Exh. No. Date Document June 1, 2009 Webb & Webb Agreement August 4, 2009 Resignation of David Webb August 4, 2009 Resignation of Henry Burkhalter August 9, 2009 CareView Communications, Inc Stock Option Plan August 25, 2009 Amended Agreement with Fourth Generation September 9, 2009 Investment Banking Agreement with National Securities Corporation October 1, 2009 Lease for Lewisville office

7 7 Item 9: Certifications: I, John R. Bailey, Chief Financial Officer of the issuer, certify that: a. I have reviewed the Quarterly Report including the financial statements for the period ended September 30, 2009 and the footnotes of CareView Communications, Inc. b. Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this disclosure statement; and c. Based on my knowledge, the financial statements, other financial information included or incorporated by reference including the previously filed information and disclosure statement, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented. October 26, 2009 /s/ John R. Bailey John R. Bailey Chief Financial Officer I, Samuel A. Greco, Chief Executive Officer of the issuer, certify that: a. I have reviewed the Quarterly Report including the financial statements for the period ended September 30, 2009 and the footnotes of CareView Communications, Inc. b. Based on my knowledge, this Quarterly Report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this disclosure statement; and c. Based on my knowledge, the financial statements, other financial information included or incorporated by reference including the previously filed information and disclosure statement, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented. October 26, 2009 /s/ Samuel A. Greco Samuel A. Greco Chief Executive Officer

8 CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS September 30, December 31, Unaudited Audited Current Assets: Cash $ 329,853 $ 898,139 Accounts receivable 8,268 - Other current assets 1,057, ,951 Total current assets 1,395,966 1,122,090 Fixed Assets: Property and equipment, net of accumulated depreciation of $118,308 and $71,442 at September 30, 2009 and December 31, 2008, respectively 197, ,883 Other Assets: ASSETS Intellectual property, net of accumulated amortization of $963,529 and $550,588 at September 30, 2009 and December 31, 2008, respectively 1,815,374 2,228,154 Total assets $ 3,408,633 $ 3,597,127 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 257,989 $ 17,536 Promissory notes payable, net of debt discount of $35,719 and $333,760 at September 30, 2009 and December 31, 2008, respectively 1,490,281 1,166,240 Promissory notes payable related parties 246,767 - Due to officer 260, ,000 Accrued interest 59,864 15,229 Other current liabilities 257,621 1,276 Total current liabilities 2,572,522 1,460,281 Long-term Liabilities Convertible notes payable, net of debt discount of $567, ,170 Accrued interest - 120,556 Total long-term liabilities - 552,726 Total liabilities 2,572,522 2,013,007 Commitments and Contingencies Stockholders' Equity: 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; 110,588,759 and 106,250,678 issued and outstanding at September 30, 2009 and December 31, 2008, respectively 110, ,251 Additional paid in capital 10,074,888 6,958,234 Accumulated deficit (9,349,366) (5,480,365) Total stockholders' equity 836,111 1,584,120 Total liabilities and stockholders' equity $ 3,408,633 $ 3,597,127 The accompanying footnotes are an integral part of these consolidated financial statements.

9 CAREVIEW COMMUNICATION INC. AND SUBSIDIARY UNAUDITED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008 September 30, 2009 September 30, 2008 For the Three For the Nine For the Three For the Nine Months Ended Months Ended Months Ended Months Ended Revenues, net $ 25,252 $ 47,846 $ 10,682 $ 31,060 Operating expenses: General and administration 322, , , ,310 Sales and marketing 49, ,698 59, ,323 Research and development 126, , , ,506 Depreciation and amortization 156, , , ,334 Total operating expense 654,063 2,051, ,371 1,822,473 Operating loss (628,811) (2,003,967) (653,689) (1,791,413) Other income and (expense) Interest expense (40,115) (134,417) (44,204) (151,857) Amortization of debt discount (12,017) (913,607) (77,436) (232,308) Non-cash compensation (883,440) (883,932) - (5,850) Interest income - 5,406-2,229 Other income 10 61, Total other income (expense) (935,562) (1,865,034) (121,640) (387,786) Loss before taxes (1,564,373) (3,869,001) (775,329) (2,179,199) Provision for income taxes Net loss $ (1,564,373) $ (3,869,001) $ (775,329) $ (2,179,199) Earnings Per Share, Basic and Diluted: Net income (loss) $ (0.01) $ (0.04) $ (0.01) $ (0.02) Weighted Average Number of Shares Outstanding 109,089, ,535, ,225, ,527,440 The accompanying footnotes are an integral part of these consolidated financial statements.

10 CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARY UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE PERIOD FROM JANUARY 1, 2007 TO SEPTEMBER 30, 2009 Common Stock Additional Paid in Accumulated Shares Amount Capital Deficit Total Balance, January 1, ,352,210 $ 1,352 $ 540,020 $ (477,499) $ 63,873 Issuance of no par value common shares to an individual for a note 2,000 56, ,580 Effect of merger and recapitalization pursuant to execution of Security Exchange Agreement 98,971,676 42,394 1,281,951-1,324,345 Issuance of options and warrants to purchase common stock , ,950 Beneficial conversion feature of convertible debt , ,198 Net loss (1,829,083) (1,829,083) Balance, December 31, ,325, ,326 3,542,119 (2,306,582) 1,335,863 Shares issued in private placement, net of fees of $112,887 2,952,683 2,953 1,418,599-1,421,552 Shares issued in exchange for debt 3,174,032 3,174 1,647,323-1,650,497 Warrants issued with debt , ,474 Options issued as compensation ,517-11,517 Cancellation of shares in exchange for amount due company (201,923) (202) (104,798) - (105,000) Net loss (3,173,783) (3,173,783) Balance, December 31, ,250, ,251 6,958,234 (5,480,365) 1,584,120 Shares issued in private placement, net of fees of $62,760 2,084,617 2,085 1,019,155-1,021,240 Shares issued in exchange for debt 2,253,464 2,253 1,165,831-1,168,084 Warrants issued with debt ,736-47,736 Options and warrants issued as compensation , ,932 Net loss (3,869,001) (3,869,001) Balance, September 30, ,588,759 $ 110,589 $ 10,074,888 $ (9,349,366) $ 836,111 The accompanying footnotes are an integral part of these consolidated financial statements.

11 CAREVIEW COMMUNICATIONS, INC. AND SUBSIDIARY UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008 Nine Months Ended September 30, 2009 September 30, 2008 CASH FLOWS FROM OPERATING ACTIVITES Net loss $ (3,869,001) $ (2,178,999) Adjustments to reconcile net loss to net cash flows from operating activities: Depreciation 56,300 84,393 Amortization of intangible assets 412, ,941 Amortization of debt discount 913, ,308 Non-cash compensation 883,932 5,850 Changes in assets and liabilities: Accounts receivable (8,267) 2,229 Inventory - (83,521) Prepaid expenses and other current assets (833,895) 53,612 Accounts payable 340,453 5,361 Accrued interest 92, ,857 Accrued expenses and other current liabilities 256, ,903 Net cash flows used in operating activities (1,755,421) (1,123,066) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of equipment (22,711) (199,329) Proceeds from sale of vehicle 16,000 Patents and trademarks (161) - Net cash flows used in investing activities (6,872) (199,329) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from sale of common stock 921,240 1,055,943 Proceeds from loans from related parties 246,767 74,232 Proceeds from loans from third parties 26,000 - Repayment of loans from related parties - (121,732) Net cash flows provided by financing activities 1,194,007 1,008,443 Increase in cash (568,286) (313,952) Cash, beginning of period 898, ,643 Cash, end of period $ 329,853 $ 691 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest $ 37,914 $ - Cash paid for income taxes $ - $ - Common stock issued for debt $ 1,268,084 $ 1,650,497 The accompanying footnotes are an integral part of these consolidated financial statements.

12 NOTE A THE COMPANY CAREVIEW COMMUNICATION, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 CareView Communications, Inc. ( CareView-NV or the Company ), formerly known as Ecogate, Inc, was formed in California in July 1997 as Purpose, Inc., subsequently changing its name to Ecogate, Inc. in April In October 2007, the Company changed its name to CareView Communications, Inc., and in November 2007, the Company changed its state of incorporation to Nevada. On September 28, 2007, the Company entered into a Security Exchange Agreement with CareView Communication, Inc., a Texas corporation ( CareView-TX ), whereby the Company acquired 100% of the issued and outstanding shares of CareView-TX s Common Stock. The transaction was accounted for as a reverse acquisition and recapitalization. CareView-TX was the acquirer for accounting purposes. CareView-TX, whose operation began in 2003, is a healthcare information technology company with a patented patient monitoring and entertainment system. The CareView-TX system ( CareView System ) creates a high-speed data network throughout a healthcare facility utilizing the existing cable television infrastructure, Cat-5, or fiber and CareView-TX s control server. In addition, CareView-TX s room communication platform provides bedside, point-of-care monitoring, movies and patient education and wireless connectivity to the healthcare facility s IT network, allowing remote monitoring of medical equipment in the patient s room and deployment of other emerging point-of-care technologies, including the Company s newest offering Virtual Bed Rails (patent pending). Virtual Bed Rails is a fall prediction system that monitors a patient s activity while in bed and if the patient breaches the virtual bed rails, a fall alert is immediately transmitted to the healthcare professional at the nurse s station. The Company has seven hospitals installed and three other hospitals under contract and awaiting installation. NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its subsidiary. All inter-company accounts and transactions have been eliminated in consolidation. Cash and Cash Equivalents For purposes of the Statements of Cash Flows, the Company considers amounts held by financial institutions and short-term investments with an original maturity of 90 days or less to be cash and cash equivalents. The Company periodically deposits cash with financial institutions in excess of the maximum federal insurance limits (FDIC) of $250,000 per bank. Accounts Receivable Accounts receivable are customer obligations due under normal trade terms. Senior management reviews accounts receivable on a monthly basis to determine if any receivables will be potentially uncollectible. The Company includes any accounts receivable balances that are determined to be uncollectible, along with a general reserve, in its overall allowance for doubtful accounts. After all attempts to collect a receivable have failed, the receivable is written off against the allowance.

13 CAREVIEW COMMUNICATION, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 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. The Company begins depreciating Network Equipment when such equipment is installed and activated. The Company attributes no salvage value to the Network Equipment and depreciation is computed using the straight-line method based on the estimated useful life of five years, which generally coincides with the term of the contract entered into with the hospital where the equipment is deployed. Also using the straight-line method, depreciation of furniture and fixtures and electronic equipment is based on the estimated useful lives of the assets, generally three years for electronic equipment, and five years for furniture and fixtures. Allowance for System Removal The Company would remove the CareView System due to a number of factors, including, but not limited to, collection and revenue performance issues. The Company regularly evaluates the installed CareView Systems. Costs attributed to the de-installation of equipment are charged to operating expense. As of September 30, 2009, no de-installations have occurred. Long-Lived Assets The Company reviews the carrying value of long-lived assets, such as property and equipment, whenever events or circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized to reduce the carrying value of the asset to its estimated fair value. Software Development and Patents The Company has capitalized certain costs of developing software for its CareView System in accordance with Statement of Financial Accounting Standards ( SFAS ) No. 86 Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed. Capitalized costs are reported at the lower of unamortized cost or net realizable value, and are amortized over the CareView System s estimated useful life, not to exceed five years. For the nine month period ended September 30, 2009, the Company capitalized no software development costs. Amortization of software development costs for the nine month periods ending September 30, 2009 and 2008 was $412,941. Fair Value of Financial Instruments Fair value estimates are made at a specific point in time, based on relevant information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

14 CAREVIEW COMMUNICATION, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Income Taxes Income taxes are provided for the tax effect of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences for financial and income tax reporting related to net operating losses that are available to offset future federal and state income taxes. The deferred tax assets and liabilities represent the future tax consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Revenue Recognition The Company offers CareView s products and services through a subscription-based contract with each facility for a minimum term of three years. The contract requires the facility to pay the Company the subscription fee monthly. Additionally, the Company collects gross shared revenue from the patient for daily usage and per the terms of the contract remits a portion of those collections to the facility. During the term of the contract, the Company provides continuous monitoring of the CareView System and is required to maintain and service all CareView System equipment. If the customer requires additional products or services the contract is amended with new pricing or revenue sharing terms and conditions. Earnings Per Share The Company calculates earnings per share ( EPS ) in accordance with SFAS No. 128, Earnings Per Share, which requires the computation and disclosure of two EPS amounts, basic and diluted. Basic EPS is computed based on the weighted average number of shares of common stock 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. Such potential dilutive common shares consist of stock options, non-vested shares (restricted stock) and warrants. Potential common shares that have an anti-dilutive effect totaling 20,346,074 are excluded from the diluted earnings per share. Stock Based Compensation The Company follows the requirements of SFAS 123(R), Share Based Payments with regard to stockbased compensation issued to employees. The Company has various employment agreements and consulting arrangements that call for stock to be awarded to the employees and consultants at various times as compensation and periodic bonuses. The expense for this stock based compensation is equal to the fair value of the stock that was determined by using the closing trading price on the day the stock was awarded multiplied by the number of shares awarded. Debt Discounts Costs incurred with parties who are providing long-term financing, which include the intrinsic value of beneficial conversion features associated with the underlying debt, are reflected as a debt discount. These discounts are generally amortized over the life of the related debt. For the nine month periods ending September 30, 2009 and 2008 the Company s amortization expense related to these discounts totaled $913,607 and $232,308, respectively, and have an unamortized balance of $35,719 at September 30, Amortization expense is included in interest expense on the Consolidated Statement of Operations.

15 CAREVIEW COMMUNICATION, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Shipping and Handling Costs The Company expenses all shipping and handling costs as incurred. These costs are included in operating expense. Advertising Costs The Company expenses all advertising costs as incurred. For the nine month period ended September 30, 2009, the Company incurred no advertising costs. Concentration of Credit Risks and Customer Data The Company currently derives all of its revenue from hospitals. For the nine month period ended September 30, 2009, Baylor Medical Center at Frisco and Hillcrest Medical Center accounted for all of the Company s revenue. Use of Estimates The Company s financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. 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 Issued and Newly Adopted Accounting Pronouncements In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles-a replacement of FASB Statement No. 162 (SFAS 168). Upon assumption, the FASB Accounting Standards Codification ("Codification") will be the single source of authoritative nongovernmental U.S. generally accepted accounting principles. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. SFAS 168 is effective for interim and annual periods ending after September 15, All existing accounting standards are superseded as described in SFAS 168. All other accounting literature not included in the Codification is nonauthoritative. The adoption of SFAS 168 will not have a material impact on the Company s consolidated financial statements. In March 2008, the FASB issued SFAS No. 161, Disclosures About Derivative Instruments and Hedging Activities an amendment of FASB Statement No. 133, ( SFAS 161 ). SFAS 161 enhances the disclosure requirements for an entity s derivative instruments and hedging activities. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. Since SFAS 161 requires additional disclosures concerning derivatives and hedging activities, the adoption of SFAS 161 will not have a material impact on the Company s consolidated financial position, results of operations or cash flows.

16 CAREVIEW COMMUNICATION, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Recently Issued and Newly Adopted Accounting Pronouncements (continued) In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations ( SFAS 141R ). SFAS 141R requires the acquiring entity in a business combination to recognize all (and only) assets acquired and liabilities assumed in the transaction; establishes the acquisition date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. SFAS 141R is effective for fiscal years beginning on or after December 15, The adoption of SFAS 141R will not have a material impact on the Company s financial condition, results of operations or cash flows. In December 2007, the FASB issued SFAS No.160, Noncontrolling Interests in Consolidated Financial Statements ( SFAS 160 ). SFAS 160 states that a noncontrolling interest, sometimes called a minority interest, in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity, but separate from stockholders equity, in the consolidated financial statements. Currently, companies report noncontrolling interests as a liability or in the mezzanine section between liabilities and equity. Accordingly, the Company will continue to reflect noncontrolling interest in the mezzanine section between liabilities and equity. Following the adoption of SFAS 160, the Company will retroactively reflect noncontrolling interest as equity. SFAS 160 will also change the way a noncontrolling interest is presented in the consolidated statement of operations, by requiring that consolidated net income include amounts attributable to both the parent and the noncontrolling interest. SFAS 160 also requires disclosure on the face of the statement of operations of those amounts of consolidated net income attributable to both parent and noncontrolling interest. Prior to the adoption of SFAS 160, noncontrolling interest will continue to be reported as a deduction in arriving at consolidated net income. The adoption of SFAS 160 will change the presentation of noncontrolling interest in the Company s balance sheet and statement of operations, and will not have a material impact on the Company s consolidated financial position, results of operations or cash flows. In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities- Including an amendment of FASB Statement No. 115 ( SFAS 159 ). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value. The adoption of SFAS 159 on January 1, 2008 did not have a material impact on the Company s consolidated financial condition, results of operations or cash flows. Going Concern The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company incurred a loss from operations of $3,869,001 during the nine months ended September 30, 2009, had an accumulated deficit, and had negative cash flow from operations of $1,755,421. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans include raising additional proceeds from debt and equity transactions. In addition, the Company increased its sales and marketing activities for the CareView System.

17 CAREVIEW COMMUNICATION, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 NOTE C STOCKHOLDERS EQUITY Preferred Stock At September 30, 2009, the Company had 20,000,000 shares of Preferred Stock, par value $0.001 authorized and none outstanding, which can be designated by the Company s Board of Directors. Common Stock At September 30, 2009, the Company had 300,000,000 shares of Common Stock, $0.001 par value authorized, with 110,588,759 shares of Common Stock issued and outstanding. On June 1, 2009, the Company engaged a law firm on an hourly basis to represent the Company on general business matters and litigation. The retainer was paid through the issuance of 192,308 shares of the Company's restricted Common Stock at a price of $0.52 (the Retainer Shares ). On August 8, 2009, the Company approved a private placement under which it offered 10,000,000 shares for sale for a maximum offering price of $5,200,000. Through September 30, 2009, the Company sold an aggregate of 1,907,693 restricted shares of Common Stock for an aggregate purchase price of $992,000 or $0.52 per share. The aggregate shares and purchase price includes the Retainer Shares described above. The offering was made in reliance on exemptions from the registration requirements of the Securities Act of 1933, as amended and applicable state securities laws. In connection with and upon the closing of the Company's private placement, the Company s placement agent will be issued five-year Common Stock Purchase Warrants ( Warrants ) for the purchase of shares of the Company s Common Stock at an exercise price equal to the actual price paid by the funding source (including but not limited to the effect of any incentive shares issued by Company to an investor, on the price per share paid by the Investor). The number of Warrants to be issued will be equal to eight percent (8%) of the dollar amount of equity issued as a result of any investment. Warrants to Purchase Common Stock A summary of the Company's Warrants activity and related information follows as of September 30, 2000 follows: Number of Shares Under Warrant Range of Warrant Price Per Share Weighted Average Exercise Price Balance at December 31, ,228,309 $0.52-$1.04 $0.94 Granted 3,881, Exercised Cancelled Balance at September 30, ,109,809 $0.52-$1.04 $0.82

18 CAREVIEW COMMUNICATION, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 NOTE C STOCKHOLDERS EQUITY (Continued) Warrants to Purchase Common Stock (Continued) The valuation methodology used to determine the fair value of the Warrants issued during the six month period was the Black-Scholes-Merton option-pricing model, an acceptable model in accordance with SFAS 123(R), Share Based Payments. 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 Warrants. 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 the Company s stock price is expected to fluctuate each year during the expected life of the award. The Company s estimated volatility is an average of the historical volatility of peer entities whose stock prices were publicly available. The Company s calculation of estimated volatility is based on historical stock prices of these peer entities over a period equal to the expected life of the awards. The Company uses the historical volatility of peer entities due to the lack of sufficient historical data of its stock price. The weighted average fair value of Warrants granted and the assumptions used in the Black-Scholes- Merton model during the nine months ended September 30, 2009 are set forth in the table below. Stock Options Weighted average fair value of Warrants granted $0.52 Risk-free interest rate 0.87%-1.12% Volatility 96.71% % Expected life 2 Dividend yield 0.00% Effective December 3, 2007, the Company established the CareView Communications, Inc Stock Incentive Plan (the "2007 Plan") pursuant to which 8,000,000 shares of Common Stock was reserved for issuance upon the exercise of options. The 2007 Plan was designed to serve as an incentive for retaining qualified and competent key employees, officers and directors of the Company. As of October 9, 2009, non-qualified stock options for all available shares under the 2007 Plan had been issued and the Plan was closed. No options under the 2007 Plan have yet been exercised. On August 9, 2009, the Company amended the terms of three of its previously issued non-qualified stock options wherein 600,000 underlying shares became immediately vested and the exercise period upon termination of employment for any reason was extended to a period of three (3) years from the date of termination. All other provisions of the non-qualified stock options remainder unchanged. On October 9, 2009, the Company's Board of Directors and a majority of the Company's shareholders approved the CareView Communications, Inc 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. The 2009 Plan was designed to serve as an incentive for retaining qualified and competent key employees, officers and directors of the Company. To date, options for 999,074 underlying shares have been issued. No options under the 2009 Plan have yet been exercised.

19 CAREVIEW COMMUNICATION, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 NOTE C STOCKHOLDERS EQUITY (Continued) Stock Options (Continued) A summary of the Company's stock option activity and related information as of September 30, 2009 follows: Number of Shares Under Option Range of Options Price Per Share Weighted Average Exercise Price Balance at December 31, ,496,265 $0.15-$1.00 $0.35 Granted 740, Exercised Cancelled Balance at September 30, ,236,265 $0.15-$1.00 $0.37 The valuation methodology used to determine the fair value of the options issued during the six month period was the Black-Scholes-Merton option-pricing model, an acceptable model in accordance with SFAS 123(R), Share Based Payments. 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. 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 stock option and is calculated by using the average daily historical stock prices through the day preceding the grant date. Estimated volatility is a measure of the amount by which the Company s stock price is expected to fluctuate each year during the expected life of the award. The Company s estimated volatility is an average of the historical volatility of peer entities whose stock prices were publicly available. The Company s calculation of estimated volatility is based on historical stock prices of these peer entities over a period equal to the expected life of the awards. The Company uses the historical volatility of peer entities due to the lack of sufficient historical data of its stock price. Share-based compensation expense for stock option recognized in our results for the nine months ended September 30, 2009 (totaling $118,742) is based on awards vested and the Company estimated no forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised in subsequent periods if actual forfeitures differ from the estimates. The weighted average fair value of options granted and the assumptions used in the Black-Scholes- Merton model during the nine months ended September 30, 2009 are set forth in the table below. Weight average fair value of options granted $0.52 Risk-free interest rate % Volatility % Expected life 2 Dividend yield 0.00%

20 CAREVIEW COMMUNICATION, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 NOTE C STOCKHOLDERS EQUITY (Continued) Lock-Up Agreements In February 2009, the Company s board of directors ratified and approved Lock-Up Agreements between the Company and 14 individuals or entities covering an aggregate of 87,115,455 shares of its Common Stock. Terms of the Lock-Up Agreements call for the shareholders to refrain from selling shares in order to encourage an orderly trading market for the Company s stock. The Lock-Up Agreements terminate in December 2009 after which the shareholder agrees not to dispose or sell more than 2.5% of their holdings per quarter for the next twelve-month period. The Lock-Up Agreements terminate upon any change of control of more than 50% of the Company s shares. NOTE D INCOME TAXES At September 30, 2009, the Company has a net operating loss carry forward of approximately $4,511,000 resulting in a deferred tax asset of $1,173,000. The deferred tax asset has been fully reserved against a valuation allowance. NOTE E OTHER CURRENT ASSETS At September 30, 2009, other current assets consist of the following: Equipment inventory to be deployed $736,726 Other receivables-related party 170,823 Prepaid expenses 130,222 Deferred costs 20,074 TOTAL OTHER CURRENT ASSETS $1,057,845 (Remainder of page intentionally left blank.)