10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☑ Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2018

OR

☐ Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                      to                     

Commission File No. 000-24455

 CURAEGIS TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

New York
(State or other jurisdiction of incorporation or organization) 16-1509512
(I.R.S. Employer Identification No.)

1999 Mt. Read Blvd. Building 3, Rochester, New York 14615
(Address of principal executive offices and Zip Code)

(585) 254-1100
(Registrant’s telephone number, including area code)

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

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

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

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

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

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Class	Number of Shares Outstanding at August 6, 2018
Common Stock, $0.01 par value	49,999,696

1

CURAEGIS TECHNOLOGIES, INC.

INDEX 

		Page
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets as of June 30, 2018 (Unaudited) and December 31, 2017	3
	Condensed Consolidated Statements of Operations – Three Month and Six Month Periods Ended June 30, 2018 and 2017 (Unaudited)	4
	Condensed Consolidated Statements of Changes in Stockholders’ Deficit – Six Month Period Ended June 30, 2018 (Unaudited)	5
	Condensed Consolidated Statements of Cash Flows – Six Month Periods Ended June 30, 2018 and 2017 (Unaudited)	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25
Item 4.	Controls and Procedures	25
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	25
Item 1A.	Risk Factors	25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 3.	Defaults Upon Senior Securities	25
Item 4.	Mine Safety Disclosures	25
Item 5.	Other Information	25
Item 6.	Exhibits	26
SIGNATURE PAGE		27
EXHIBITS
	Exhibit 31.1
	Exhibit 31.2
	Exhibit 32

2

CURAEGIS TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30, 2018 (Unaudited)			December 31, 2017
ASSETS
Current Assets:
Cash	$	89,000		$	194,000
Accounts receivable		1,000			8,000
Inventory (net)		1,741,000			1,744,000
Prepaid expenses and other current assets		49,000			27,000
Total current assets		1,880,000			1,973,000
Software (net)		40,000			102,000
Property and equipment (net)		99,000			125,000
Total non-current assets		139,000			227,000
Total Assets	$	2,019,000		$	2,200,000
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable	$	249,000		$	167,000
Liability for inventory held at vendor		1,462,000			1,678,000
Other current liabilities		85,000			103,000
Accrued interest		165,000			87,000
Deferred revenue		19,000			5,000
Capital lease obligation - current		2,000			2,000
Total current liabilities		1,982,000			2,042,000
Capital lease obligation, non-current		2,000			3,000
Senior convertible notes (net)		5,353,000			3,563,000
Total Liabilities		7,337,000			5,608,000
Commitments		-			-
Stockholders' Deficit:
Preferred stock, $.01 par value, 100,000,000 shares authorized
Series C, voting, convertible, no dividend, shares issued and outstanding at June 30, 2018 and December 31, 2017: 15,687,500 and 15,937,500, respectively		157,000			159,000
Series C-2, voting, convertible, no dividend, shares issued and outstanding at June 30, 2018 and December 31, 2017: 24,500,000 and 25,000,000, respectively		245,000			250,000
Series C-3, voting, convertible, no dividend, shares issued and outstanding at June 30, 2018 and December 31, 2017: 3,268,000 and 3,388,000, respectively		33,000			34,000
Class A, non-voting, convertible, cumulative dividend $.40 per share per annum, shares issued and outstanding at June 30, 2018 and December 31, 2017: 468,221 and 468,221, respectively		5,000			5,000
Class B, non-voting, convertible, cumulative dividend $.50 per share per annum, shares issued and outstanding at June 30, 2018 and December 31, 2017: 67,500 and 67,500, respectively		1,000			1,000
Common stock, $.01 par value, 400,000,000 shares authorized; shares issued and outstanding at June 30, 2018 and December 31, 2017: 49,849,546 and 48,979,546 respectively		498,000			490,000
Additional paid-in capital		77,021,000			76,494,000
Accumulated deficit		(83,278,000	)		(80,841,000	)
Total Stockholders' Deficit		(5,318,000	)		(3,408,000	)
Total Liabilities and Stockholders' Deficit	$	2,019,000		$	2,200,000

See notes to condensed consolidated financial statements. 

3

CURAEGIS TECHNOLOGIES, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

	Three Months Ended June 30, 2018			Three Months Ended June 30, 2017			Six Months Ended June 30, 2018			Six Months Ended June 30, 2017
Revenue	$	8,000		$	8,000		$	16,000		$	17,000
Cost of Revenue		33,000			37,000			70,000			74,000
Loss on Revenue		(25,000	)		(29,000	)		(54,000	)		(57,000	)
Costs and expenses:
Engineering and development:
E&D costs, excluding stock-based compensation		301,000			459,000			727,000			944,000
Stock-based compensation		28,000			8,000			7,000			16,000
Total engineering and development		329,000			467,000			734,000			960,000
General and administrative:
G&A costs, excluding stock-based compensation		522,000			709,000			1,124,000			1,439,000
Stock-based compensation		7,000			21,000			30,000			116,000
Total general and administrative		529,000			730,000			1,154,000			1,555,000
Total costs and expenses		858,000			1,197,000			1,888,000			2,515,000
Loss from operations		(883,000	)		(1,226,000	)		(1,942,000	)		(2,572,000	)
Interest expense		(259,000	)		(165,000	)		(496,000	)		(321,000	)
Other income		-			1,000			1,000			2,000
Non-operating (expense)		(259,000	)		(164,000	)		(495,000	)		(319,000	)
Loss before income taxes		(1,142,000	)		(1,390,000	)		(2,437,000	)		(2,891,000	)
Income taxes		-			-			-			-
Net Loss		(1,142,000	)		(1,390,000	)		(2,437,000	)		(2,891,000	)
Preferred stock dividends		54,000			62,000			108,000			124,000
Net Loss attributable to common stockholders	$	(1,196,000	)	$	(1,452,000	)	$	(2,545,000	)	$	(3,015,000	)
Net Loss per common share attributable to common stockholders
Basic and Diluted	$	(0.02)		$	(0.03)		$	(0.05)		$	(0.06)
Weighted average number of shares of common stock:
Basic and Diluted		49,571,000			47,810,000			49,302,000			47,591,000

See notes to condensed consolidated financial statements.

4

CURAEGIS TECHNOLOGIES, INC.

Condensed Consolidated Statement of Changes in Stockholders' Deficit

(Unaudited) 

	Class C Preferred Stock						Class C-2 Preferred Stock						Class C-3 Preferred Stock						Class A Preferred Stock				Class B Preferred Stock				Common Stock				Additional Paid in		Accumulated			Total Stockholders'
	Shares			Amount			Shares			Amount			Shares			Amount			Shares		Amount		Shares		Amount		Shares		Amount		Capital		Deficit			Deficit
Balance at December 31, 2017		15,937,500		$	159,000			25,000,000		$	250,000			3,388,000		$	34,000			468,221	$	5,000		67,500	$	1,000		48,979,546	$	490,000		$76,494,000		($80,841,000	)		($3,408,000	)
Conversion of C Preferred Shares to Common		(250,000	)		(2,000	)																						250,000		2,000
Conversion of C2 Preferred Shares to Common								(500,000	)		(5,000	)																500,000		5,000
Conversion of C3 Preferred Shares to Common														(120,000	)		(1,000	)										120,000		1,000
Stock-based compensation																																37,000					37,000
Issuance of warrants with convertible note																																431,000					431,000
Beneficial conversion feature on convertible note																																59,000					59,000
Net Loss																																		(2,437,000	)		(2,437,000	)
Balance At June 30, 2018		15,687,500		$	157,000			24,500,000		$	245,000			3,268,000		$	33,000			468,221	$	5,000		67,500	$	1,000		49,849,546	$	498,000		$77,021,000		($83,278,000	)		($5,318,000	)

See notes to condensed consolidated financial statements.

5

CURAEGIS TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended June 30, 2018			Six Months Ended June 30, 2017
Cash flows from operating activities:
Net loss	$	(2,437,000	)	$	(2,891,000	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		88,000			92,000
Amortization of discount reported as interest		289,000			231,000
Stock-based compensation		37,000			132,000
Changes in working capital items:
Accounts receivable		7,000			4,000
Inventory		3,000			24,000
Prepaid expenses and other current assets		(22,000	)		8,000
Accounts payable and other current liabilities		(75,000	)		205,000
Deferred revenue		14,000			(7,000	)
Net cash used in operating activities		(2,096,000	)		(2,202,000	)
Cash flows from investing activities:
Purchase of property, equipment and software		-			(142,000	)
Net cash used in investing activities		-			(142,000	)
Cash flows from financing activities:
Proceeds from issuance of senior convertible note (net)		1,991,000			392,000
Proceeds from exercise of common stock warrant		-			10,000
Net cash provided by financing activities		1,991,000			402,000
Net decrease in cash		(105,000	)		(1,942,000	)
Cash at beginning of period		194,000			2,009,000
Cash at end of period	$	89,000		$	67,000
Supplemental Disclosures:
Cash used for payment of interest	$	128,000			-

  See notes to condensed consolidated financial statements.

6

CURAEGIS TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION

CurAegis Technologies, Inc. (“CurAegis”, “the Company”) was incorporated as a New York business corporation in September 1996 under the name Torvec, Inc. The Company’s name was changed to CurAegis Technologies, Inc. in 2016 in connection with the establishment of its two business divisions. The CURA (Circadian User Risk Assessment) division is engaged in the fatigue management business and the Aegis division is engaged in the power and hydraulic business.

The Company develops and markets advanced technologies in the areas of safety, wellness and power. The Company is focused on the commercialization of a wellness and safety system (the CURA System) and a uniquely designed hydraulic pump that will be smaller, lighter, less expensive, and more efficient than current technology. The Company has not had any significant revenue-producing operations.  

The Company has created the CURA System to market products that reduce fatigue risk in the workplace and help individuals manage their sleep and improve alertness. The CURA System consists of the following capabilities:

● real-time alertness monitoring utilizing the CURA app,

● the Group Wellness Index, and

● the Z-Coach wellness program. 

Our goal with the Aegis hydraulic pump technology is to bring to the marketplace a unique concept in hydraulic pumps and motors that will be:

● smaller, lighter and less expensive than conventional pumps and motors,

● more efficient,

● as reliable,

● price competitive, and

● unique in its ability to scale larger, allowing more powerful pumps and motors.

It is important to note, regarding both the CURA and Aegis products, that the cycle time from the initiation of the sales process to revenue realization can be highly variable especially as a start-up entity. In addition to the activities to be undertaken to implement our plan of operations, we may expand and/or refocus our activities depending upon future circumstances and developments.

Current Cash Outlook and Management Plans

As of June 30, 2018, we have cash on hand of $89,000, negative working capital of $102,000, a stockholders’ deficit of $5,318,000 and an accumulated deficit of $83,278,000. During the six months ended June 30, 2018 we raised $1,995,000 in gross proceeds through the issuance of convertible notes and warrants, proceeds of which have been used to support the ongoing development and marketing of our core technologies and product initiatives.

Management estimates that the 2018 cash needs, based on its current development and product plans, will range from $4.0 to $4.5 million. As of June 30, 2018, the Company’s cash on hand is not sufficient to cover the Company’s future working capital requirements. This raises substantial doubt as to the Company’s ability to continue as a going concern. Management continues to use its best efforts to develop financing opportunities to fund the development and commercialization of the CURA and Aegis products.

Since inception, we have financed our operations by the sale of our securities and debt financings. We need to raise additional funds to meet our working capital needs, to fund expansion of our business, to complete development, testing and marketing of our products, or to make strategic acquisitions or investments. No assurance can be given that necessary funds will be available for us to finance our development on acceptable terms, if at all. Furthermore, such additional financings may involve dilution to our stockholders or may require that we relinquish rights to certain of our technologies or products. In addition, we may experience operational difficulties and delays due to working capital restrictions. If adequate funds are not available from additional sources of financing, we will have to delay or scale back our growth plans. 

The Company’s ability to fund its current and future commitments from its available cash depends on a number of factors. These factors include the Company’s ability to (i) launch and generate sales from the CURA division; (ii) generate revenue from the licensing or sale of our hydraulic technologies; or (iii) decrease engineering and development and administrative expenses. Even if these and other factors are not met, the Company will need to raise funds in order to meet its working capital needs and pursue its growth strategy. Although there can be no such assurances, management believes that sources for these additional funds will be available through either current or future investors.     

7

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 

Basis of Presentation: The Company’s unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 8-03 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Accordingly, the condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of the Company’s management, all adjustments considered necessary for a fair presentation (consisting of normal recurring adjustments) have been included. The results for interim periods are not necessarily indicative of what the results will be for the fiscal year. The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2017 contained in the Company’s 2017 Annual Report on Form 10-K filed with the SEC.

Consolidation: The financial statements include the accounts of the Company, our wholly-owned subsidiary Iso-Torque Corporation, and our majority-owned subsidiary, Ice Surface Development, Inc. (56% owned). As of June 30, 2018, each of the subsidiaries is non-operational.  All material intercompany transactions and account balances have been eliminated in consolidation.

Use of Estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. These estimates are subject to a high degree of judgment and potential change. Actual results could differ from those estimates.  

Reclassifications: Certain reclassifications may have been made to prior year balances to conform to the current year’s presentation.

Cash: We maintain cash at financial institutions which periodically may exceed federally insured amounts. We have a corporate credit card program through our primary financial institution, JPMorgan Chase Bank, N.A. In connection with this, the Company granted a security interest to the bank in our money market account to act as collateral for the activity within the corporate card program, up to $15,000. 

Inventory: Inventory is stated at the lower of cost or net realizable value with cost determined under the average cost method. We record provisions for excess, obsolete or slow-moving inventory based on changes in customer demand, technology developments or other economic factors. The allowance for excess, obsolete or slow-moving inventory was $6,000 at June 30, 2018 and December 31, 2017.

Accounts Receivable: We carry our accounts receivable at invoice amount less an allowance for doubtful accounts.  On a periodic basis, we evaluate our accounts receivable and establish an allowance for doubtful accounts, based on a history of past write-offs and collections and current credit conditions.  We do not accrue interest on past due invoices.  The allowance for doubtful accounts was zero at June 30, 2018 and December 31, 2017.

Software, Property and Equipment: Capitalized software, property and equipment are stated at cost. Estimated useful lives are as follows: 

Software (in years)		3
Office equipment (in years)	5	-	7
Leasehold improvements	lesser of useful life or lease term

Depreciation and amortization are computed using the straight-line method. Betterments, renewals and significant repairs that extend the life of the assets are capitalized. Other repairs and maintenance costs are expensed when incurred. When disposed, the cost and accumulated depreciation applicable to assets retired are removed from the accounts and the gain or loss on disposition is recognized in Other income. Depreciation and software amortization expense for the six months ended June 30, 2018 and 2017 amounted to $88,000 and $92,000, respectively. Depreciation and software amortization expense for the three months ended June 30, 2018 and 2017 amounted to $44,000 and $46,000, respectively.

Whenever events or circumstances indicate, our long-lived assets including any intangible assets with finite useful lives are tested for impairment by using the estimated future cash flows directly associated with, and that are expected to arise as a direct result of, the use of the assets. If the carrying amount exceeds the estimated undiscounted cash flows, impairment may be indicated. The carrying amount is compared to the estimated discounted cash flows and if there is an excess, such amount is recorded as impairment. During the six months ended June 30, 2018 and June 30, 2017 no impairment charges were recorded.

8

Fair Value of Financial Instruments: As defined by U.S. GAAP, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A hierarchy for ranking the quality and reliability of the information is used to determine fair values. Assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories: 

Level 1: Quoted market prices in active markets for identical assets or liabilities

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data

Level 3: Unobservable inputs that are not corroborated by market data 

The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The Financial Accounting Standards Board’s (“FASB”) guidance for the disclosure about fair value of financial instruments requires disclosure of an estimate of the fair value of certain financial instruments. The fair value of financial instruments pursuant to FASB’s guidance for the disclosure about fair value of financial instruments approximated their carrying values at June 30, 2018 and December 31, 2017. The carrying amount of cash, accounts receivable, prepaid expenses and other current assets, accounts payable, deferred revenue and accrued expenses approximates their fair value due to their short maturity. The carrying amount of capital lease obligations approximates fair value because stated or implied interest rates approximate current interest rates that are available for debt with similar terms. The senior convertible notes can be converted into 26,874,775 shares of common stock with an underlying value of $8,062,000 as of June 30, 2018 based on the trading price on June 30, 2018. 

Revenue Recognition and Deferred Revenue: On January 1, 2018, the Company adopted FASB ASC 606, "Revenue from Contracts with Customers" and all related amendments for all contracts using the modified retrospective method.  There was no impact upon the adoption of ASC 606. The Company has determined that the adoption of this standard did not require a cumulative effect adjustment. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. For contracts where performance obligations are satisfied at a point in time, the Company recognizes revenue when the product is shipped to the customer. For contracts where the performance obligation is satisfied over time, as in the Z-Coach sales, the Company recognizes revenue over the subscription period.  Revenue from the sale of the Company's products is recognized net of cash discounts, sales returns and allowances. The Company has two sources of revenue: (i) from the sale of CURA System products and (ii) from stand-alone Z-Coach subscriptions.

The Company's net revenue is derived primarily from domestic customers.  For the six months ended June 30, 2018 net revenue from products transferred over time amounted to $12,000 and net revenue from products transferred at a point in time amounted to $4,000. For the three months ended June 30, 2018 and 2017, net revenue from products transferred over time amounted to $8,000 in each quarter.  There were no sales from products transferred at a point in time during the second quarter of 2018.

Revenue from the sale of CURA System products is recognized upon the shipment of myCadian devices to a customer and upon the company’s satisfaction of all performance obligations as described in customer agreements. The Z-Coach Program provides fatigue training over an annual subscription period of twelve months. The Z-Coach Program allows the user unlimited access during the annual subscription period. Customers are billed at the acceptance of the subscription, and revenue is recognized ratably over the subscription period as our performance obligations are satisfied and when collection is reasonably assured. Our collection terms provide customers standard terms of net 30 days. Future performance obligations are reflected in deferred revenue. Revenue earned from the sale of the CURA app since the soft launch in May 2018 is not material.

One customer accounted for 79% of total Z-Coach subscription sales made during the six months ended June 30, 2018 and another customer accounted for 40% of the sales made in the three months ended June 30, 2018.  During the three and six month periods ended June 30, 2017, a single customer accounted for 66% and 55%, respectively of the sales made in each respective period.  Our collection terms provide customers standard terms of net 30 days. Future performance obligations are reflected in deferred revenue.

Engineering and Development and Patents: Engineering and development costs and patent expenses are charged to operations as incurred. Engineering and development includes personnel-related costs, materials and supplies, depreciation and consulting services.

Patent costs for the three months ended June 30, 2018 and June 30, 2017 amounted to $25,000 and $44,000, respectively, and are included in general and administrative expenses. Patent costs for the six months ended June 30, 2018 and June 30, 2017 amounted to $56,000 and $74,000, respectively, and are included in general and administrative expenses.

Stock-based Compensation: FASB Accounting Standards Codification (“ASC”) 718-10 requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense over the service period (generally the vesting period) in the consolidated financial statements based on their fair values on the grant date. The impact of actual forfeitures prior to vesting is considered in the amount recognized. In addition, the realization of tax benefits in excess of amounts recognized for financial reporting purposes will be recognized as a financing activity in accordance with ASC 718-10. No tax benefits were attributed to the stock-based compensation expense because a valuation allowance was maintained for substantially all net deferred tax assets.   

9

FASB ASC 505-50, “Equity-Based Payments to Non-Employees,” requires all share-based payments to non-employees, including grants of stock options, to be recognized in the consolidated financial statements as expense generally over the service period of the consulting arrangement or as performance conditions are expected to be met. Using a Black-Scholes valuation model, we periodically reassess the fair value of non-employee options as service conditions are met, which generally aligns with the vesting period of the options, and we adjust the expense recognized in the consolidated financial statements accordingly.

FASB ASC 718-20 requires that modifications of the terms or conditions of equity awards be treated as an exchange of the original award for a new award.  Incremental compensation cost is measured as the excess, if any, of the fair value of the modified award over the fair value of the original award immediately before its terms are modified.

Income Taxes: We account for income taxes using the asset and liability method, the objective of which is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting and the tax basis of our assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. A valuation allowance related to deferred tax assets is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized.  

We account for uncertain tax positions using a more-likely-than-not recognition threshold based on the technical merits of the tax position taken. Tax benefits that meet the more-likely-than-not recognition threshold should be measured as the largest amount of tax benefits, determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement in the financial statements. It is our policy to recognize interest and penalties related to income tax matters as general and administrative expenses. As of June 30, 2018, and December 31, 2017, there were no accrued interest or penalties related to uncertain tax positions.

Loss per Common Share: FASB’s ASC 260-10 (“Earnings Per Share”) requires the presentation of basic earnings per share, which is based on weighted average common stock outstanding, and dilutive earnings per share, which gives effect to options, warrants and convertible securities in periods when they are dilutive. At June 30, 2018 and 2017 we excluded 87,941,132 and 72,197,708 potential common shares, respectively, relating to convertible preferred stock, convertible notes, options and warrants outstanding from the diluted net loss per common share calculation because their inclusion would be anti-dilutive. In addition, we excluded 625,000 warrants from the diluted net loss per common share calculation at June 30, 2018 and 2017 as the conditions for their vesting are not probable.   

Recent Accounting Pronouncements:  In June 2018, the FASB issued ASU No.2018-07, "Compensation - Stock Compensation (Topic 718) Improvements to Nonemployee Share-Based Payment Accounting." The FASB issued this update as part of its Simplification Initiative. The amendments in this update expand the scope of Topic 718 to include share-based payments for acquiring goods and services from nonemployees.  An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option model and the attribution of cost.  The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor's own operations by issuing share-based payment awards. The amendments for this update are effective for public companies for fiscal years beginning after December 15, 2018. Early adoption is permitted but no earlier than the adoption date of Topic 606. An entity should only remeasure liability-classified awards that have not been settled by the date of adoptions and equity classified awards for which a measurement date has not been established through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption.  Upon transition, the entity is required to measure these nonemployee awards at fair value as of the adoption date.  The Company believes the adoption of this standard on our consolidated financial statements and related disclosures will not be material.

On February 25, 2016, the FASB issued ASU No. 2016-02, “Leases,” a comprehensive new lease standard which will supersede previous lease guidance. The standard requires a lessee to recognize in its balance sheet assets and liabilities related to long-term leases that were classified as operating leases under previous guidance. An asset will be recognized related to the right to use the underlying asset and a liability will be recognized related to the obligation to make lease payments over the term of the lease. The standard also requires expanded disclosures surrounding leases. The standard is effective for fiscal periods beginning after December 15, 2018, and requires modified retrospective adoption, with early adoption permitted. The Company believes the adoption of this standard on our consolidated financial statements and related disclosures will not be material.

NOTE 3 – INVENTORY AND RELATED VENDOR LIABILITY

The Company had the following inventory held at our manufacturing vendor and on hand as of June 30, 2018 and December 31, 2017:

	June 30,			December 31,
	2018			2017
Raw materials	$	1,678,000		$	1,681,000
Finished goods		69,000			69,000
		1,747,000			1,750,000
Less: Reserve for quality		(6,000	)		(6,000	)
Inventory (net)	$	1,741,000		$	1,744,000
Liability for inventory held at vendor	$	1,462,000		$	1,678,000

10

During 2017, the Company initiated an agreement with a vendor to manufacture and assemble the myCadian watch. In connection with this agreement, the Company agreed to a cancellation charge for products purchased on behalf of the Company in the instance that the purchase order is subsequently modified, delayed or cancelled. As of June 30, 2018, the Company has $1,678,000 in raw material inventory which were purchased by the vendor on our behalf and a related liability of $1,462,000 for amounts payable in connection with this agreement.

NOTE 4 - SENIOR CONVERTIBLE NOTES AND WARRANTS

At June 30, 2018, the Company had $7,821,000 in convertible notes outstanding which have been presented net of unamortized debt discounts of $2,468,000, resulting in a carrying value of $5,353,000 as of June 30, 2018. As of December 31, 2017, the Company had $5,825,000 in convertible notes outstanding, presented net of unamortized debt discounts of $2,262,000 resulting in a carrying value of $3,563,000 as of December 31, 2017.

As of June 30, 2018, the Company had outstanding $1,902,000 in convertible notes payable to five of our directors and $1,170,000 in convertible notes payable to an investor that is deemed an affiliate.

2018 Convertible Notes

Face value June 30, 2018	$	400,000
Debt discount at issuance		(120,000	)
Amortization of debt discount since inception		2,000
2018 Senior Convertible Notes (net)	$	282,000

On May 8, 2018, the board of directors authorized the issuance of up to $1 million in non-interest bearing Senior Convertible Promissory Notes and Warrants (the “2018 Convertible Notes”) in connection with the May 8, 2018 Securities Purchase Agreement (the “2018 SPA”). The 2018 Convertible Notes have five year maturity.

The conversion rate of the notes was fixed at $0.25 per share as determined at the close of business on May 8, 2018. Investors making cumulative investments, in this offering, of less than $500,000 were granted warrants to purchase an aggregate number of shares of common stock equal to 10% of the number of shares issuable upon the conversion of the notes and investors making cumulative investments, in this offering, of $500,000 and greater were granted warrants to purchase an aggregate number of shares of common stock equal to 25% of the number of shares issuable upon the conversion of the notes. The warrants have a fixed exercise price of $0.25 and a ten-year term from the date of issuance. The notes were offered in a private placement exempt from registration under Section 4(a)(2) of the Securities Act of 1933 as amended (the "Securities Act") and Rule 506(c) of Regulation D as promulgated by the Securities and Exchange Commission. The offering was available only to “accredited investors” as defined in Rule 501(a) of Regulation D under the Securities Act.  

During the six months ended June 30, 2018, the Company issued $400,00 face value of 2018 Convertible Notes and granted 310,000 warrants with an exercise price of $0.25 per share and 10 year terms. The Company incurred approximately $4,000 in legal costs in connection with the issuance of the 2018 Convertible Notes. In accordance with FASB ASU 2015-03 Interest-Imputation of Interest (Subtopic 835-30), these debt issuance costs have been presented as a direct deduction from the carrying amount of the Convertible Note liability and reflected as a component of debt discount which is amortized and included in interest expense over the five-year term of the Convertible Notes.

The Company allocated $120,000 of the proceeds from the 2018 Notes to debt discount based on the computed fair value of the warrants and the debt issuance costs on the date of investment. As of June 30, 2018, these notes have a face value of $400,000 and are presented net of unamortized debt discount of $118,000 related to warrants, beneficial conversion feature and debt issuance costs resulting in a carrying value of $282,000.

During the six months ended June 30, 2018, the Company recorded $2,000 in interest expense which includes the amortization of debt discount.

2017 6% Convertible Notes

Face value of 2017 Convertible Notes	$	4,420,000
Debt discount at issuance		(1,897,000	)
2017 extinguishment impact on discount		1,183,000
Amortization of debt discount since inception		127,000
2017 Senior Convertible Notes (net)	$	3,833,000

11

The board of directors authorized the issuance of up to $5 million in 6% Senior Convertible Promissory Notes and Warrants (the “2017 Convertible Notes”) in connection with the May 31, 2017 Securities Purchase Agreement (the “2017 SPA”). The 2017 Convertible Notes have a five year maturity and a fixed annual interest rate of 6%. The initial year of interest expense will be paid to the note holders on the first anniversary of each note's issuance and quarterly thereafter. Principal is due in full on each note's maturity date.

The conversion rate of the notes was originally fixed at $0.50 per share as determined at the close of business on May 31, 2017 and subsequently modified on November 30, 2017 to $0.333 per share. Investors making investments of less than $500,000 were granted warrants to purchase an aggregate number of shares of common stock equal to 10% of the number of shares issuable upon the conversion of the notes and investors making investments of $500,000 and greater were granted warrants to purchase an aggregate number of shares of common stock equal to 25% of the number of shares issuable upon the conversion of the notes. Originally, the warrants had a fixed exercise price of $0.50 and a ten-year term from the date of issuance. The conversion price for the warrants was also modified on November 30, 2017 to $0.333 per share. In connection with this amendment, $2,450,000 of face value notes were re-issued, in the fourth quarter of 2017, to reflect a reduction of the conversion price on the notes from $0.50 per share to $0.333 per share. The exercise price of the underlying warrants was also reduced from $0.50 per share to $0.333 per share. The amendment and reissuance of these 2017 Convertible Notes was accounted for as an extinguishment and re-issuance of the replacement notes and warrants in 2017.

The 2017 Convertible Notes were offered in a private placement exempt from registration under Section 4(a)(2) of the Securities Act and Rule 506(c) of Regulation D as promulgated by the Securities and Exchange Commission. The offering was available only to “accredited investors” as defined in Rule 501(a) of Regulation D under the Securities Act.

The Company issued $1,595,000 in 2017 Convertible Notes during the six months ended June 30, 2018 representing 4,789,790 potential common stock shares and 1,120,871 warrants. The Company allocated $374,000 of the proceeds in the first half of 2018 to debt discount based on the computed fair value of the warrants issued and the beneficial conversion feature. 

During the six months ended June 30, 2018, the Company recorded $166,000 in interest expense including amortization of debt discount of $48,000. During the six months ended June 30, 2017, the Company recorded $7,000 in interest expense including  amortization of debt discount of $6,000. 

As of June 30, 2018, the 2017 Convertible Notes had a face value of $4,420,000 and are presented net of unamortized debt discount of $587,000 resulting in a carrying value of $3,833,000. During the quarter ended June 30, 2018, the Company recorded $92,000 in  interest expense including $28,000 of amortization of  debt discount. As of December 31, 2017, the 2017 Convertible Notes had a face value of $2,825,000 and were presented net of unamortized debt discount of $261,000 resulting in a carrying value of $2,564,000.

2016 6% Convertible Notes

Face value December 31, 2016	$	3,000,000
Debt discount at issuance		(2,551,000	)
Amortization of debt discount since inception		789,000
2016 Senior Convertible Notes (net)	$	1,238,000

During 2016, the board of directors authorized and the Company issued, $3 million in 6% Senior Convertible Promissory Notes and Warrants (the “2016 Convertible Notes”) in connection with the August 25, 2016 Securities Purchase Agreement (the “2016 SPA”). The 2016 Convertible Notes have five year maturity dates ranging from August 2021 through December 2021 and a fixed annual interest rate of 6%. The initial year of interest expense was paid to the note holders on the first anniversary of each note's issuance and will be paid quarterly thereafter. Principal is due in full on each note's maturity date.

The conversion rate of the notes was fixed at $0.25 per share as determined at the close of business on August 25, 2016. The investors were granted warrants to purchase an aggregate number of shares of common stock equal to 10% of the number of shares issuable upon the conversion of the notes. The warrants have a fixed exercise price of $0.25 and a ten-year term from the date of issuance. The notes were offered in a private placement exempt from registration under Section 4(a)(2) of the Securities Act and Rule 506(c) of Regulation D as promulgated by the Securities and Exchange Commission. The offering was available only to “accredited investors” as defined in Rule 501(a) of Regulation D under the Securities Act.  

In connection with the issuance of the 2016 Convertible Notes, the Company granted 1,200,000 warrants with an exercise price of $0.25 per share and 10 year terms. The Company incurred $28,000 in debt issuance costs in connection with the issuance of the Convertible Notes. In accordance with FASB ASU 2015-03 Interest-Imputation of Interest (Subtopic 835-30), these debt issuance costs have been presented as a direct deduction from the carrying amount of the Convertible Note liability and reflected as a component of debt discount which is amortized and included in interest expense over the five-year term of the Convertible Notes.

12

The Company allocated $2,551,000 of the proceeds from the 2016 Notes to debt discount based on the computed fair value of the warrants, the beneficial conversion feature and the debt issuance costs on the date of investment. As of June 30, 2018, these notes have a face value of $3,000,000 and are presented net of unamortized debt discount of $1,762,000 related to warrants, beneficial conversion feature and debt issuance costs resulting in a carrying value of $1,238,000. As of December 31, 2017, the Convertible Notes had a face value of $3,000,000 and were presented net of unamortized debt discount of $2,001,000 related to warrants, beneficial conversion feature and debt issuance costs resulting in a carrying value of $999,000.  

During the three months ended June 30, 2018, the Company recorded $165,000 in interest expense including amortization of debt discount of $120,000. During the six months ended June 30, 2018 the Company recorded $328,000 in interest expense including amortization of debt discount of $238,000.  During the three months ended June 30, 2017, the Company recorded $158,000 in interest expense including $113,000 in amortization of debt discount.  During the six month period ended June 30, 2017 the Company recorded $314,000 in interest expense including $225,000 in amortization of debt discount.

NOTE 5 – SOFTWARE

The Company invested in software for the CURA System during 2015. These assets are amortized over an estimated useful life of 3 years. Amortization expense recognized for the six months ended June 30, 2018 and 2017 was $63,000 in each period. Amortization expense recognized for the three months ended June 30, 2018 and 2017 was $32,000 in both periods.

The net value of capitalized software at June 30, 2018 and at December 31, 2017 was $40,000 and $102,000, respectively. Future amortization expense is expected to be $29,000 in 2018 and $11,000 in 2019.

NOTE 6 - PROPERTY AND EQUIPMENT

At June 30, 2018 and December 31, 2017 property and equipment consist of the following:

	June 30, 2018			December 31, 2017
Office equipment	$	249,000		$	249,000
Shop equipment		231,000			231,000
Leasehold improvements		253,000			253,000
		733,000			733,000
Less accumulated depreciation		(634,000	)		(608,000	)
Net property and equipment	$	99,000		$	125,000

Depreciation expense for the six months ended June 30, 2018 and 2017 was $25,000 and $29,000 respectively.   Depreciation expense for the three months ended June 30, 2018 and 2017 was $13,000 and $14,000, respectively. 

NOTE 7- BUSINESS SEGMENTS

The Company has two operating business segments. The CURA business operates in the fatigue management industry and the Aegis business is focused in the power and hydraulic industry.

Segment information for the three months ended June 30, 2018 for the Company’s business segments follows: 

	CURA			Aegis			Corporate			Total
Revenue	$	8,000		$	-		$	-		$	8,000
Loss on Revenue		(25,000	)		-			-			(25,000	)
Total Costs and Expenses		373,000			160,000			325,000			858,000
Loss from operations		(398,000	)		(160,000	)		(325,000	)		(883,000	)
Other expense		-			-			(259,000	)		(259,000	)
Net loss	$	(398,000	)	$	(160,000	)	$	(584,000	)	$	(1,142,000	)
Stock based compensation	$	5,000		$	26,000		$	4,000		$	35,000
Depreciation and amortization	$	37,000		$	5,000		$	2,000		$	44,000
Capital expenditures	$	-		$	-		$	-		$	-
Assets at June 30, 2018	$	1,810,000		$	65,000		$	144,000		$	2,019,000

13

Segment information for the six months ended June 30, 2018 for the Company’s business segments follows: 

	CURA			Aegis			Corporate			Total
Revenue	$	16,000		$	-		$	-		$	16,000
Loss on revenue		(54,000	)		-			-			(54,000	)
Total costs and expenses		896,000			291,000			701,000			1,888,000
Loss from operations		(950,000	)		(291,000	)		(701,000	)		(1,942,000	)
Other expense		-			-			(495,000	)		(495,000	)
Net loss	$	(950,000	)	$	(291,000	)	$	(1,196,000	)	$	(2,437,000	)
Stock based compensation	$	(11,000	)	$	28,000		$	20,000		$	37,000
Depreciation and amortization	$	74,000		$	10,000		$	4,000		$	88,000
Capital expenditures	$	-		$	-		$	-		$	-
Assets at June 30, 2018	$	1,810,000		$	65,000		$	144,000		$	2,019,000

Segment information for the three months ended June 30, 2017 for the Company’s business segments follows: 

	CURA			Aegis			Corporate			Total
Revenue	$	8,000		$	-		$	-		$	8,000
Loss on Revenue		(29,000	)		-			-			(29,000	)
Total Costs and Expenses		666,000			137,000			394,000			1,197,000
Loss from operations		(695,000	)		(137,000	)		(394,000	)		(1,226,000	)
Other expense		-			-			(164,000	)		(164,000	)
Net loss	$	(695,000	)	$	(137,000	)	$	(558,000	)	$	(1,390,000	)
Stock based compensation	$	2,000		$	2,000		$	25,000		$	29,000
Depreciation and amortization	$	38,000		$	5,000		$	3,000		$	46,000
Capital expenditures	$	97,000		$	34,000		$	-		$	131,000
Assets at June 30, 2017	$	308,000		$	71,000		$	128,000		$	507,000

Segment information for the six months ended June 30, 2017 for the Company’s business segments follows: 

	CURA			Aegis			Corporate			Total
Revenue	$	17,000		$	-		$	-		$	17,000
Loss on revenue		(57,000	)		-			-			(57,000	)
Total costs and expenses		1,425,000			269,000			821,000			2,515,000
Loss from operations		(1,482,000	)		(269,000	)		(821,000	)		(2,572,000	)
Other expense		-			-			(319,000	)		(319,000	)
Net loss	$	(1,482,000	)	$	(269,000	)	$	(1,140,000	)	$	(2,891,000	)
Stock based compensation	$	78,000		$	4,000		$	50,000		$	132,000
Depreciation and amortization	$	75,000		$	11,000		$	6,000		$	92,000
Capital expenditures	$	108,000		$	34,000		$	-		$	142,000
Assets at June 30, 2017	$	308,000		$	71,000		$	128,000		$	507,000

NOTE 8 - PREFERRED and COMMON STOCK 

Common Stock 

We have authorized 400,000,000 shares of common stock, with a par value of $0.01 per share. 

During the six months ended June 30, 2018 we issued 870,000 shares of common stock in connection with various conversion notices received from a Series C, C-2 and C-3 convertible preferred stockholders. During the six months ended June 30, 2017, the Company issued 1,113,000 shares of common stock in connection with conversion notices received from convertible preferred stockholders.

Preferred Stock 

Our certificate of incorporation permits the Company to issue up to 100,000,000 shares of $.01 par value preferred stock.

14

Class A Preferred Stock    

At June 30, 2018 and December 31, 2017, there were 468,221 outstanding shares of Class A Preferred stock, of which 8,709 shares resulted from the settlement of dividends due to conversion, and those shares no longer accrue dividends. The value of dividends payable upon the conversion of the remaining 459,512 outstanding shares of Class A Preferred stock was $2,438,000 at June 30, 2018 and $2,346,000 at December 31, 2017.  

In the event of a liquidation, dissolution and winding up of the Company, and subject to the liquidation rights and privileges of our Class C Preferred stockholders, Class A Preferred stockholders have a liquidation preference with respect to all accumulated and unsettled dividends. The value of the Class A Preferred stockholders’ liquidation preference was $2,438,000 and $2,346,000 at June 30, 2018 and December 31, 2017, respectively. In the event of liquidation, dissolution or winding up of the Company, unpaid accumulated dividends on the Class A Preferred are payable in Class A Preferred at a rate of 1 share of Class A Preferred for each $4.00 of dividends. 

Class B Preferred Stock  

At June 30, 2018 and December 31, 2017, there were 67,500 outstanding shares of Class B Preferred stock. The value of dividends payable upon the conversion of the outstanding shares of Class B Preferred stock was $437,000 at June 30, 2018 and $420,000 at December 31, 2017.  

In the event of liquidation, dissolution and winding up of the Company, and subject to the liquidation rights and privileges of our Class C Preferred stockholders and our Class A Preferred stockholders, Class B Preferred stockholders have a liquidation preference with respect to all accumulated and unsettled dividends. The value of the Class B Preferred stockholders’ liquidation preference was $437,000 and $420,000 at June 30, 2018 and December 31, 2017, respectively. In the event of a liquidation, dissolution or winding up of the Company, unpaid accumulated dividends on the Class B Preferred are payable in Class B Preferred shares at a rate of 1 share of Class B Preferred for each $5.00 of dividends. 

Series C Preferred Stock  

At June 30, 2018 and December 31, 2017 respectively, there were 15,687,500 and 15,937,500 shares of Series C Preferred stock outstanding. The value of the Series C Preferred stockholders’ liquidation preference was $6,275,000 at June 30, 2018 and $6,375,000 at December 31, 2017.

The Series C Preferred shares have a liquidation preference at their stated value per share of $0.40 that is senior to our common stock, and the Company’s Class A Non-Voting Cumulative Convertible Preferred Shares and Class B Non-Voting Cumulative Convertible Preferred Shares. The liquidation preference is payable upon a liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, or upon a deemed liquidation of the Company.

The Series C Preferred shares have no right to receive dividends and have no redemption right. The Series C Preferred shares vote with the common stock on an as-converted basis. 

Series C-2 Preferred Stock   

At June 30, 2018 and December 31, 2017 respectively, there were 24,500,000 and 25,000,000 shares of Preferred C-2 stock outstanding. The value of the Series C-2 Preferred stockholders’ liquidation preference was $4,900,000 at June 30, 2018 and $5,000,000 as of December 31, 2017.  

The Series C-2 Preferred Shares are not entitled to receive preferred dividends and have no redemption right, but are entitled to participate, on an as converted basis; with holders of outstanding shares of common stock in dividends and distributions on liquidation after all preferred shares have received payment in full of any preferred dividends or liquidation preferences. The Series C-2 Preferred Shares vote with the common stock on an as-converted basis. We may not, without approval of the holders of at least two-thirds of the Series C-2 Preferred Shares, (i) create any class or series of stock that is pari passu or senior to the Series C-2 Preferred Shares, (ii) create any class or series of stock that would share in the liquidation preference of the Series C-2 Preferred Shares or that is entitled to dividends payable other than in common stock or Series C-2 Preferred Shares of its own series, (iii) acquire any equity security or pay any dividend, except dividends on a class or series of stock that is junior to the Series C Preferred Shares, payable in such junior stock, (iv) reissue any Series C-2 Preferred Shares, (v) declare or pay any dividend that would impair the payment of the liquidation preference of the Series C-2 Preferred Shares, (vi) authorize or issue any additional Preferred Shares, (vii) change the Certificate of Incorporation to adversely affect the rights of the holders of the Series C-2 Preferred Shares, or (viii) authorize, commit to or consummate any liquidation, dissolution or winding up in which the liquidation preference of the Series C-2 Preferred Shares would not be paid in full.   

Series C-3 Preferred Stock

The Company issued 6,042,000 shares of Series C-3 Voting Convertible Preferred Stock in a private placement transaction during 2016, generating net proceeds of $1,495,000 after related legal costs.  During the six months ended June 30, 2018 and 2017 we issued 120,000 and 1,050,000 shares of common stock, respectively, in connection with conversion notices received from Series C-3 convertible preferred stockholders.  

15

NOTE 9 - STOCK OPTIONS  

2016 Stock Option Plan   At the 2016 Annual Meeting the shareholders approved the 2016 Stock Option Plan (the “2016 Plan”) which provides for the grant of up to 3,000,000 common stock options to provide equity incentives to directors, officers, employees and consultants. Two types of options may be granted under the 2016 Plan: non-qualified stock options and incentive stock options.

2011 Stock Option Plan    In 2011, shareholders approved the 2011 Stock Option Plan (the “2011 Plan”) which provides for the grant of up to 3,000,000 common stock options to provide equity incentives to directors, officers, employees and consultants. Two types of options may be granted under the 2011 Plan: non-qualified stock options and incentive stock options.

Under the Company’s stock option plans, non-qualified stock options may be granted to our officers, directors, employees and outside consultants. Incentive stock options may be granted only to our employees, including officers and directors who are also employees. In the case of non-qualified stock options, the exercise price may be less than the fair market value of our stock on the date of grant. Stock option grants to non-employees are revalued at each reporting date to reflect the expense over the vesting period. In the case of incentive stock options, the exercise price may not be less than such fair market value and in the case of an employee who owns more than 10% of our common stock, the exercise price may not be less than 110% of such market price. Options generally are exercisable for ten years from the date of grant, except that the exercise period for an incentive stock option granted to an employee who owns more than 10% of our stock may not be greater than five years.

During the six months ended June 30, 2018, we granted a total of 1,067,500 stock options to employees and non-employee consultants. These included stock options granted at exercise prices ranging from $0.23 to $.35 per share, exercisable for 10 years that generally vest at a rate of 25% on each anniversary of the grant.

The expense recognized for options that are granted to consultants (i.e., non-employees) reflect fair value, based on updated valuation assumptions using the Black-Scholes valuation model at each measurement period. Such expense is apportioned over the requisite service period of the consultant, which is concurrent with the vesting dates of the various tranches.

Summary   For the three months ended June 30, 2018 and 2017, cost related to stock option awards amounted to $35,000 and $29,000, respectively. For the six months ended June 30, 2018 and 2017, cost related to stock option awards amounted to $37,000 and $132,000, respectively.

During the six months ended June 30, 2018, option expense was reduced by approximately $82,000 as a result of option forfeitures resulting from employee turnover during the period. There were no forfeitures, cancellations or option exercises during the six month period ended June 30, 2017.

As of June 30, 2018, there was approximately $246,000 of total unrecognized compensation costs related to outstanding stock options, which are expected to be recognized over a weighted average of 1.1 years.

The weighted average grant date fair value of stock options granted during the six months ended June 30, 2018 and 2017 was $0.25 and $0.76, respectively. The total grant date fair value of stock options vested during the six months ended June 30, 2018 and 2017 was approximately $259,000 and $3,000, respectively.  

The fair value of each option granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

	2018		2017
Expected term (years)		6.3		6.6
Expected forfeiture rate		0%		0%
Risk-free rate		2.6%		2.1%
Volatility		130%		130%
Dividend yield		0%		0%

The average risk-free interest rate is based on the U.S. treasury security rate in effect as of the grant date. We determined expected volatility using the historical closing stock price. The expected life was generally determined using the simplified method as we do not believe we have sufficient historical stock option exercise experience on which to base the expected term. 

The following summarizes the activity of all of our outstanding stock options as of June 30, 2018:

	Shares			Weighted Average Exercise Price		Average Remaining Contractual Term (years)		Aggregate Intrinsic Value
Outstanding at January 1, 2018		9,682,000		$	.54
Granted		1,067,500			.24
Exercised		-			-
Canceled or expired		(391,875	)		.57
Outstanding at June 30, 2018		10,357,625		$	.51		3.9	$	170,000
Exercisable at June 30, 2018		6,643,500		$	.60		3.3	$	15,000

16

As of June 30, 2018, there were 10,357,625 stock options outstanding under the Company’s stock option plans, 6,643,500 of which were vested at that date; leaving 2,542,375 options available for future grant under the plans. As of June 30, 2018, the exercise prices of outstanding stock options ranged from $.22 per share to $1.58 per share.

NOTE 10 - WARRANTS

The following summarizes the activity of our outstanding warrants as of June 30, 2018:

						Weighted
			Weighted			Average
			Average			Remaining		Aggregate
			Exercise			Contractual		Intrinsic
	Shares		Price			Term		Value
Outstanding at January 1, 2018		5,214,836	$	.57	(A)
Granted		1,430,871		.32
Exercised		-		-
Canceled or expired		-		-
Outstanding at June 30, 2018		6,645,707	$	.50	(A)	6.8	(B)	$	103,000
Exercisable at June 30, 2018		6,020,707	$	.48		6.3	(C)	$	102,000

(A)	The weighted average exercise price for warrants outstanding as of June 30, 2018 and January 1, 2018 excludes 1,750,000 warrants in each period with no determined exercise price.
(B)	The weighted average remaining contractual term for warrants outstanding as of June 30, 2018 and December 31, 2017 excludes 743,500 warrants with no expiration date.
(C)	The weighted average remaining contractual term for warrants exercisable as of June 30, 2018, and December 31, 2017 excludes 118,500 warrants with no expiration date.

NOTE 11 - RELATED PARTY TRANSACTIONS

As of June 30, 2018, the Company has $1,902,000 aggregate principal amount of senior convertible notes held by five members of its board of directors. The Company also has $1,170,000 aggregate principal amount of senior convertible notes held by an investor that is deemed an affiliate through the ownership of the majority of our Series C and C-2 Preferred Stock. (See Note 6 regarding the 2017 Convertible Note.)

We occupy a leased facility for our corporate headquarters building, located in Rochester, New York, which consists of both executive offices and manufacturing space. The facility is owned by a partnership in which a Company director is associated.

NOTE 12 - SUBSEQUENT EVENTS

2017 Convertible Notes

Subsequent to June 30, 2018, a 2017 note-holder converted $50,000 in notes into 150,150 common shares.  On July 19, 2018, the Company's board approved a resolution to complete the 2017 Convertible Note and Warrant offering.  Total investments received on the 2017 Notes aggregated $4,420,500 and included the issuance of 2,307,207 common stock warrants.

2018 Convertible Notes

Subsequent to June 30, 2018, the Company issued $225,000 in 2018 Convertible Notes including the issuance of 90,000 warrants related to these notes. Included in these amounts is the issuance of $25,000 in notes to the Company’s Chief Executive Officer and the issuance of 10,000 warrants.  On July 19, 2018, the Company's board approved a resolution to complete the 2018 Convertible Note and Warrant offering.  Total investments received on the 2018 Notes aggregated $625,000 and included the issuance of 400,000 common stock warrants.

July 2018 Convertible Notes   

On July 19, 2018, the Company's board approved a resolution to offer up to $2.5 million in non-interest bearing convertible notes and warrants (the "July 2018 Notes") in connection with the July 24, 2018 Securities Purchase Agreement (the "July 2018 SPA").  The July 2018 Notes have a five year maturity and no interest rate.  The conversion rate for the July 2018 Notes was set at a fixed rate of $0.25 per share. Investors making investments less than $500,000 will be granted 10% warrants to purchase an aggregate number of shares of common stock equal to 10% of the number of shares issuable upon the conversion of the notes and investors making investments of $500,000 or greater will be granted warrants to purchase an aggregate number of shares of common stock equal to 25% of the number of shares issuable upon the conversion of the notes.  The warrants have a fixed exercise price of $0.25 per share and a ten year term from the date of issuance. The July 2018 Notes will be offered in a private placement exempt from registration under Section 4(a)(2) of the Securities Act and Rule 506(c) of Regulation D as promulgated by the Securities and Exchange Commission. The offering is available only to "accredited investors' as defined by Rule 501(a) of Regulation D under the Securities Act.

The Company has issued $250,000 in July 2018 Notes and 100,000 warrants since the authorization of this offering.

17

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. This report contains certain forward-looking statements that are based on the beliefs of management as well as assumptions made by and information currently available to management. The statements contained in this report relating to matters that are not historical facts are forward-looking statements that involve risks and uncertainties, including, but not limited to, future demand for our products and services, the successful commercialization of our products, general domestic and global economic conditions, government and environmental regulations, competition and customer strategies, changes in our business strategy or development plans, capital deployment, business disruptions, including those caused by fires, raw material supplies, environmental regulations, and other risks and uncertainties, certain of which are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ materially from those forward-looking statements set forth herein. When used in this report, the words “anticipate”, “believe”, “estimate” or “expect” or words of similar import are intended to identify forward-looking statements. For further discussion of certain of the matters described above and other risks and uncertainties, see below and in “Risk Factors” in Part 1 Item 1A of our 2017 annual report on Form 10K.

Undue reliance should not be placed on our forward-looking statements. Except as required by law, we disclaim any obligation to update any factors or to publicly announce the results of any revisions to any of the forward-looking statements contained in this quarterly report on Form 10-Q to reflect new information, future events or other developments.

The following discussion and analysis should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and Notes thereto appearing elsewhere in this Form 10-Q.

Overall Business Strategy 

CurAegis Technologies, Inc. (“CurAegis”, “the Company”) was incorporated as a New York business corporation in September 1996 under the name Torvec, Inc. The Company’s name was changed to CurAegis Technologies, Inc. in 2016 in connection with the establishment of its two business divisions. The CURA (Circadian User Risk Assessment) division is engaged in the fatigue management business, and the Aegis division is engaged in the power and hydraulic business.

The Company develops and markets advanced technologies in the areas of safety, wellness and power. The Company is focused on the commercialization of a wellness and safety system (the CURA System) and a uniquely designed hydraulic pump that will be smaller, lighter, less expensive, and more efficient than current technology. The Company has not had any significant revenue-producing operations.  

The Company has created the CURA System to market products that reduce fatigue risk in the workplace and help individuals manage their sleep and improve alertness. The CURA System consists of the following capabilities: 

● real-time alertness monitoring utilizing the CURA app,

● the Group Wellness Index and

● the Z-Coach wellness program. 

The Aegis hydraulic pump technology has been designed to bring to the marketplace a unique concept in hydraulic pumps and motors that will be: 

● smaller, lighter and less expensive than conventional pumps and motors,

● more efficient,

● as reliable,

● price competitive, and

● unique in its ability to scale larger, allowing more powerful pumps and motors.

It is important to note, regarding both the CURA and Aegis products, that the cycle time from the initiation of the sales process to revenue realization can be highly variable especially for a start-up entity. In addition to the activities to be undertaken by us to implement our plan of operation detailed below, we may expand and/or refocus our marketing activities depending upon future circumstances and developments.

Information regarding the Company and all of our inventions, including regular updates on technological and business developments, can be found on our website www.curaegis.com. The website and its contents are not incorporated by reference into this report. 

CURA Division: the myCadian ™ watch, the CURA System, and Z-Coach e-learning 

The Company’s CURA division is developing a proprietary technology and suite of products designed to (i) measure the decrease in a person’s alertness and (ii) to train individuals on how to improve alertness levels. The CURA System will enable the user and third parties to anticipate and avert undesired or disastrous situations caused by the degradation of alertness. With the information provided from the CURA software analytics, employees can work with Z-Coach, our proprietary sleep training and education solution, to correct sleep issues and improve overall wellness.  

18

CurAegis has engaged sleep study experts and neurologists to assist with the analysis and validation of our new technologies. The Company believes a solutions approach can be created to indicate a “degradation of alertness” and thus give immediate and important information to the user and other parties. Action taken upon a warning of a change in alertness will lead to a better and safer environment. The CURA system is designed to be a real-time alertness and emergency monitoring system that addresses sleep and fatigue management solutions. This is especially important when an individual’s alertness is essential in properly performing tasks, fulfilling responsibilities and averting disasters.  The Company has filed for patent protection for these inventions.   

The CURA Platform is designed to predict and detect a degradation of alertness in a user and reveal sleep and fatigue problems. The CURA Platform was expanded during the first quarter of 2018 to support other wearable technology and includes an API (Application Programming Interface) to facilitate safety reporting for corporate customers. The CURA Platform will include:

● a proprietary tool that combines signal processing and pattern recognition to guide users and third parties about the alertness of the wearer,

● a risk assessment that identifies the degradation of alertness potentially affecting the wearer’s ability to perform tasks,

● a comprehensive assessment for wellness, alertness and sleep,

● real-time reporting that distills complex data into actionable information on mobile and desktop platforms,

● predictive reporting for a user to take action when alertness begins to wane - before fatigue becomes dangerous,

● flexible settings to provide employers a customized tool within existing safety definitions and to create protocols for a unique environment, and

● pricing that makes it affordable across a broad-based workforce.

Management developed marketing and sales programs in support of the CURA sales soft-launch that occurred in May 2018.

The Company has invested in controlled clinical studies at the Sleep and Chronobiology Laboratory at the University of Colorado-Boulder and at the University of Rochester Medical Center. These studies have been used to validate our actigraphy data collection as well as calibrate our proprietary technologies and algorithms. 

The Z-Coach tool is a critical component of the CURA System and was created by highly respected fatigue management scientists. We acquired Z-Coach in 2015. Z-Coach learning topics include: Risks and Costs of Fatigue, Fundamentals of Sleep, Fatigue Mitigation and Countermeasures. Z-Coach participants gain an awareness of the dangers inherent in the lack of sleep and learn to utilize lifestyle tools to make changes to improve their health, mood, productivity and safety. The Z-Coach modules have been designed for a range of industry professionals, including aviation, trucking and busing industry and for corporate workers. These Z-Coach modules are a key component to the CURA™ System.

Aegis Division: Hydraulic Pump

On May 4, 2018, the Company signed a Memorandum of Understanding (the "MOU") with a major hydraulics manufacturer to assess the Aegis pump/motor technology.  This MOU includes a jointly developed testing protocol for technology evaluation. The MOU allows the manufacturer thirty days after testing to notify the Company of their intent to initiate negotiations for an exclusive relationship. The Company plans to send a team of Aegis engineers to one of the manufacturer's facilities in the third quarter of 2018 to observe the testing procedures outlined in the protocol.  The manufacturer will be sending a team of engineers and senior executives to observe and monitor the testing.  The Company believes the Aegis pump/motor technology will significantly change the hydraulics industry in the future.

The development of our hydraulic pump has taken on added significance in light of U.S. government emissions regulations for off road diesel engines. To help achieve these standards, companies are attempting to run diesel engines, and their hydraulic pumps, at lower rotational speeds. This requires larger displacement hydraulic pumps to be installed to compensate for the decrease in rotational speed. Among other advantages, the Aegis hydraulic technology allows a larger displacement pump to fit into the same or smaller footprint than that of existing pumps. This enables manufacturers to keep the current equipment layout without the need for expensive modifications to accommodate larger hydraulic pumps.  

Our Aegis engineering team has completed a production prototype and is working with leaders in the pump industry to align the prototype capability with specific customer applications. The Company reached significant milestones in the design and testing of this production prototype. The Company is currently evaluating market opportunities that could result in an agreement with a market leader in the hydraulic industry. Engineering testing, design and expansion of functionalities is continuing.

We have invested in software, test equipment and personnel to enhance our development efforts and began a design of the hydraulic pump to improve the overall performance while maintaining the advantages we have in size and weight. We have built our own testing facility, which would have otherwise taken place at a third-party testing facility. Our engineer and design team has progressively made adjustments to the valve and piston technology and each change has resulted in an improvement in the measured efficiency of the pump. We have filed for patent protection for our novel non-rotating group pump concept, and we are also working on additional patents as a result of engineering breakthroughs in our design process.   

19

Results of Operations for the three months ended June 30, 2018 and 2017

Revenue, Cost of Revenue and Loss on Revenue

	For the three months ended June 30,						Variance
	2018			2017
Revenue	$	8,000		$	8,000		$	-
Cost of revenue		33,000			37,000			(4,000	)
Loss on revenue	$	(25,000	)	$	(29,000	)	$	(4,000	)

The Company recorded $8,000 in revenue during both of the three months ended June 30, 2018 and June 30, 2017 from the sale of Z-Coach subscriptions. During the second quarter of 2018, twenty three Z-Coach Aviation subscriptions were sold to five customers. As of June 30, 2018, and December 31, 2017, the Company has deferred revenue of $19,000 and $5,000, respectively attributed to Z-Coach subscription revenue that will be recognized ratably as our performance obligations are satisfied. The Company did not have revenue from sales of CURA system units in the three months ended June 30, 2018 or June 30, 2017.

The Company recorded $33,000 in cost of revenue during the three month period ended June 30, 2018 and $37,000 in the three month period ended June 30, 2017. The cost of revenue includes: (i) software amortization and hosting fees incurred to provide the Z-Coach product to subscribers. Software amortization is based upon the straight-line amortization of the capitalized software over an estimated useful life of 36 months.

The Z-Coach modules have been designed for a range of industry professionals, including aviation, trucking and busing industry and for corporate workers. Z-Coach provides fatigue safety training over a twelve month subscription period. The user has unlimited access to this tool during the subscription period. Customers are billed at the acceptance of the subscription and revenue is recognized ratably over the subscription period as our performance obligations are satisfied and when collection is reasonably assured. 

Engineering and Development Costs and Expenses

	For the three months ended June 30,				Variance
	2018		2017		Incr (decr)
Wages and benefits	$	181,000	$	222,000	$	(41,000	)
Professional fee and advisors		71,000		84,000		(13,000	)
Parts and shop supplies		26,000		123,000		(97,000	)
Computer and software maintenance		10,000		13,000		(3,000	)
Depreciation and amortization		11,000		11,000		-
Other costs and expenses		2,000		6,000		(4,000	)
		301,000		459,000		(158,000	)
Stock-based compensation		28,000		8,000		20,000
Total Engineering and Development	$	329,000	$	467,000	$	(138,000	)

Engineering and development expenses for the three months ended June 30, 2018 amounted to $329,000 as compared to $467,000 in the three months ended June 30, 2017. Non-cash stock-based compensation attributable to stock options for the three months ended June 30, 2018 was $28,000 compared to non-cash stock-based compensation attributable to stock options of $8,000 for the three months ended June 30, 2017. The increase in stock compensation expense is new options granted during the second quarter of 2018 offset by employee turnover in the second quarter of 2018.

The decrease in engineering and development costs associated with wages and parts and shop supplies reflects the advanced stage of development for the CURA and AEGIS products. As the Company get closer to product commercialization and development milestones are achieved, the engineering efforts become more focused resulting in lower cost of wages and parts and shop supplies. The Company will continue to invest in the CURA and Aegis product development efforts during 2018. 

20

General and Administrative Costs and Expenses

	For the three months ended June 30,				Variance
	2018		2017		Incr (decr)
Wages and benefits	$	305,000	$	407,000	$	(102,000	)
Professional fees and advisors		69,000		141,000		(72,000	)
Facilities and occupancy		35,000		34,000		1,000
Insurance		26,000		28,000		(2000	)
Conferences and travel		13,000		38,000		(25,000	)
Shareholder support		19,000		23,000		(4,000	)
Depreciation and amortization		2,000		3,000		(1,000	)
Other costs and expenses		53,000		35,000		18,000
		522,000		709,000		(187,000	)
Stock-based compensation		7,000		21,000		(14,000	)
Total General and Administrative	$	529,000	$	730,000	$	(201,000	)

General and administrative expense for the three months ended June 30, 2018 amounted to $529,000 compared to $730,000 in the three months ended June 30, 2017. Non-cash stock-based compensation expense for the three months ended June 30, 2018 was $7,000 compared to $21,000 for the three months ended June 30, 2017. Excluding the non-cash stock-based compensation expense, general and administrative expense for the three months ended June 30, 2018 amounted to $522,000 compared to $709,000 in the three months ended June 30, 2017. The decrease of $201,000 in the second quarter of 2018 is attributed to employee turnover and decreases in professional fees and advisors.  

Non-operating Income and Expense

	For the three months ended June 30,						Variance
	2018			2017
Interest expense	$	(259,000	)	$	(165,000	)	$	(94,000	)
Other income		-			1,000			(1,000	)
	$	(259,000	)	$	(164,000	)	$	(95,000	)

During the three months ended June 30, 2018, the Company recognized $109,000 in interest expense on the 6% convertible notes and $150,000 of amortization on debt discount classified as interest expense related to convertible notes. At June 30, 2018 and June 30, 2017 the Company had $7,821,000 and $3,400,000, respectively in convertible notes outstanding.

Net Loss for the three months ended June 30, 2018 and 2017

The net loss for the three months ended June 30, 2018 was $1,142,000, compared with a net loss in the three months ended June 30, 2017 of $1,390,000. The net loss attributable to common stockholders for the three months ended June 30, 2018 was $1,196,000 as compared to $1,452,000 for the three months ended June 30, 2017. The weighted average basic and diluted common shares outstanding amounted to 49,571,000 and 47,810,000 for each of the three months ended June 30, 2018 and 2017, respectively. Basic and diluted loss per common share for each of the three months ended June 30, 2018 and 2017 was $0.02 and $0.03.

Results of Operations for the six months ended June 30, 2018 and 2017

Revenue, Cost of Revenue and Loss on Revenue

	For the six months ended June 30,						Variance
	2018			2017
Revenue	$	16,000		$	17,000		$	(1,000	)
Cost of revenue		70,000			74,000			(4,000	)
Loss on revenue	$	(54,000	)	$	(57,000	)	$	(3,000	)

The Company recorded $16,000 in revenue during the six months ended June 30, 2018. Z-Coach sales aggregated $12,000 and CURA pilot sales aggregated $4,000 during the first half of 2018. During the first half of 2018, one hundred and ninety Z-Coach Aviation subscriptions were sold to seven customers. As of June 30, 2018, and December 31, 2017, the Company has deferred revenue of $19,000 and $5,000, respectively attributed to Z-Coach subscription revenue that will be recognized ratably as our performance obligations are satisfied.

The Company recorded $70,000 in cost of revenue during the three month period ended June 30, 2018 and $74,000 in the six month period ended June 30, 2017. The cost of revenue includes: (i) software amortization and hosting fees incurred to provide the Z-Coach product to subscribers and (ii) product costs incurred in the delivery of pilot programs shipped during the period related to the CURA system. Software amortization is based upon the straight-line amortization of the capitalized software over an estimated useful life of 36 months.

21

The Z-Coach modules have been designed for a range of industry professionals, including aviation, trucking and busing industry and for corporate workers. Z-Coach provides fatigue safety training over a twelve month subscription period. The user has unlimited access to this tool during the subscription period. Customers are billed at the acceptance of the subscription and revenue is recognized ratably over the subscription period as our performance obligations are satisfied and when collection is reasonably assured. 

Engineering and Development Costs and Expenses

	For the six months ended June 30,				Variance
	2018		2017		Incr (decr)
Wages and benefits	$	431,000	$	497,000	$	(66,000	)
Professional fee and advisors		200,000		209,000		(9,000	)
Parts and shop supplies		48,000		177,000		(129,000	)
Computer and software maintenance		22,000		28,000		(6,000	)
Depreciation and amortization		21,000		23,000		(2,000	)
Other costs and expenses		5,000		10,000		(5,000	)
		727,000		944,000		(217,000	)
Stock-based compensation		7,000		16,000		(9,000	)
Total Engineering and Development	$	734,000	$	960,000	$	(226,000	)

Engineering and development expenses for the six months ended June 30, 2018 amounted to $734,000 as compared to $960,000 in the six months ended June 30, 2017. Non-cash stock-based compensation attributable to stock options for the six months ended June 30, 2018 was $7,000, reflecting forfeitures related to employee turnover experienced during the period. Non-cash stock-based compensation attributable to stock options was $16,000 for the six months ended June 30, 2017.  The decrease in engineering and development costs associated with wages and supplies reflects the advanced stage of development for the CURA and AEGIS products. As the Company get closer to product commercialization and development milestones are achieved, the engineering efforts become more focused resulting in lower cost of wages and parts and shop supplies. The Company will continue to invest in the CURA and Aegis product development efforts during 2018. 

General and Administrative Costs and Expenses

	For the six months ended June 30,				Variance
	2018		2017		Incr (decr)
Wages and benefits	$	683,000	$	812,000	$	(129,000	)
Professional fees and advisors		175,000		316,000		(141,000	)
Facilities and occupancy		78,000		74,000		4,000
Insurance		46,000		37,000		9,000
Conferences and travel		24,000		70,000		(46,000	)
Shareholder support		37,000		51,000		(14,000	)
Depreciation and amortization		4,000		6,000		(2,000	)
Other costs and expenses		77,000		73,000		4,000
		1,124,000		1,439,000		(315,000	)
Stock-based compensation		30,000		116,000		(86,000	)
Total General and Administrative	$	1,154,000	$	1,555,000	$	(401,000	)

General and administrative expense for the six months ended June 30, 2018 amounted to $1,154,000 compared to $1,555,000 in the six months ended June 30, 2017. Non-cash stock-based compensation expense for the six months ended June 30, 2018 was $30,000 compared to $116,000 for the six months ended June 30, 2017. Excluding the non-cash stock-based compensation expense, general and administrative expense for the six months ended June 30, 2018 amounted to $1,124,000 compared to $1,439,000 in the six months ended June 30, 2017. The decrease of $401,000 in the second quarter of 2018 reflects the reduction in headcount and related stock option forfeitures, and decreases in professional fees and advisors.  

22

Non-operating Income and Expense

	For the six months ended June 30,						Variance
	2018			2017				Incr (decr)
Interest expense	$	(496,000	)	$	(321,000	)	$	(175,000	)
Other income		1,000			2,000			(1,000	)
	$	(495,000	)	$	(319,000	)	$	(176,000	)

During the six months ended June 30, 2018, the Company recognized $207,000 in interest expense on the 6% convertible notes and $289,000 of amortization on debt discount classified as interest expense related to convertible notes. As of June 30, 2018, the company has $7,820,500 in face value of 6% convertible notes outstanding compared to $5,825,000 at December 31, 2017.

Net Loss for the six months ended June 30, 2018 and 2017

The net loss for the six months ended June 30, 2018 was $2,437,000, compared with a net loss in the six months ended June 30, 2017 of $2,891,000. The net loss attributable to common stockholders for the six months ended June 30, 2018 was $2,545,000 as compared to $3,015,000 for the six months ended June 30, 2017. The weighted average basic and diluted common shares outstanding amounted to 49,302,000 and 47,591,000 for each of the six months ended June 30, 2018 and 2017, respectively. Basic and diluted loss per common share for each of the six months ended June 30, 2018 and 2017 was $0.05 and $0.06.

Preferred stock dividends accrued totaled $108,000 in the six months ended June 30, 2018 and $124,000 in June 30, 2017.

Liquidity and Capital Resources  

As of June 30, 2018, cash on-hand totaled $89,000, a net decrease of $105,000 since the beginning of the year. During the six months ended June 30, 2018 we used $2,096,000 of cash in operating activities. A net loss of $2,437,000 was adjusted for $414,000 in non-cash expenses for depreciation, amortization, stock-based compensation, and $73,000 in changes in working capital components.  The decrease in cash used in operations in the six months of 2018 compared to 2017 was driven by the change in net loss from 2017 to 2018. In the six months of 2017, the net loss of $2,891,000 was adjusted for $455,000 in non-cash expenses for depreciation, amortization and stock-based compensation and $234,000 in changes in components of working capital.

The Company invested $142,000 in capitalized software and property and equipment in the six months of 2017; there was no capital investment in the first six months of 2018. 

During the six months ended June 30, 2018, the Company generated $1,991,000 in net cash from financing activities resulting from the issuance of convertible notes. During the six months ended June 30, 2017, the Company generated $402,000 in cash from financing activities from issuance of convertible notes and from the exercise of a common stock warrant.

Current Cash Outlook and Management Plans 

As of June 30, 2018, we have cash on hand of $89,000, negative working capital of $102,000, a stockholders’ deficit of $5,318,000 and an accumulated deficit of $83,278,000. During six months ended June 30, 2018 we raised $1,995,000 in gross proceeds through the issuance of convertible notes and warrants, the proceeds of which have been used to support the ongoing development and marketing of our core technologies and product initiatives.

Management estimates that the 2018 cash needs, based on its current development and product plans, will range from $4.0 to $4.5 million. As of June 30, 2018, the Company’s cash on hand is not sufficient to cover the Company’s future working capital requirements. This raises substantial doubt as to the Company’s ability to continue as a going concern. Management continues to use its best efforts to develop financing opportunities to fund the development and commercialization of the CURA and Aegis products.

Since inception, we have financed our operations by the sale of our securities and debt financings. We need to raise additional funds to meet our working capital needs, to fund expansion of our business, to complete development, testing and marketing of our products, or to make strategic acquisitions or investments. No assurance can be given that necessary funds will be available for us to finance our development on acceptable terms, if at all. Furthermore, such additional financings may involve dilution to our shareholders or may require that we relinquish rights to certain of our technologies or products. In addition, we may experience operational difficulties and delays due to working capital restrictions. If adequate funds are not available from additional sources of financing, we will have to delay or scale back our growth plans. 

The Company’s ability to fund its current and future commitments from its available cash depends on a number of factors. These factors include the Company’s ability to (i) launch and generate sales from the CURA division; (ii) generate revenue from the licensing or sale of our hydraulic technologies or; (iii) decrease engineering and development and administrative expenses. even if these and other factors are not met, the Company will need to raise funds in order to meet its working capital needs and pursue its growth strategy. Although there can be no such assurances, management believes that sources for these additional funds will be available through either current or future investors.    

23

Critical Accounting Policies  

Revenue Recognition  

The Company has two sources of revenue: (i) from the sale of CURA System products and (ii) from stand-alone Z-Coach subscriptions. Revenue from the sale of CURA System products is recognized upon the shipment of myCadian devices to a customer and upon the company’s satisfaction of all performance obligations as described in customer agreements. The Z-Coach Program provides fatigue training over an annual subscription period of twelve months. The Z-Coach Program allows the user unlimited access during the annual subscription period. Customers are billed at the acceptance of the subscription, and revenue is recognized ratably over the subscription period as our performance obligations are satisfied and when collection is reasonably assured. Our collection terms provide customers standard terms of net 30 days. Future performance obligations are reflected in deferred revenue.

Income Taxes

We account for income taxes using the asset and liability method, the objective of which is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting and the tax basis of our assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. A valuation allowance related to deferred tax assets is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized.

We account for uncertain tax positions using a more-likely-than-not recognition threshold based on the technical merits of the tax position taken. Tax benefits that meet the more-likely-than-not recognition threshold should be measured as the largest amount of tax benefits, determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement in the financial statements. It is our policy to recognize interest and penalties related to income tax matters as general and administrative expenses. As of June 30, 2018, and December 31, 2017, there were no accrued interest or penalties related to uncertain tax positions.

Stock-Based Compensation  

FASB ASC 718-10 requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense over the requisite service period (generally the vesting period) in the consolidated financial statements based on their fair values on the grant date. The impact of forfeitures is recognized as incurred. In addition, the realization of tax benefits in excess of amounts recognized for financial reporting purposes will be recognized as a financing activity in accordance with FASB ASC 718-10.  

No tax benefits were attributed to the stock-based compensation expense because a valuation allowance was maintained for substantially all net deferred tax assets. We elected to adopt the alternative method of calculating the historical pool of windfall tax benefits as permitted by FASB ASC 718-10-65. This is a simplified method to determine the pool of windfall tax benefits that is used in determining the tax effects of stock compensation in the results of operations and cash flow reporting for awards that were outstanding as of the adoption of FASB ASC 718-10.

FASB ASC 505-50, “Equity-Based Payments to Non-Employees,” requires all share-based payments to non-employees, including grants of stock options, to be recognized in the consolidated financial statements as expense over the service period of the consulting arrangement or until performance conditions are expected to be met. Using a Black-Scholes valuation model, we periodically reassess the fair value of non-employee options as service conditions are met, which generally aligns with the vesting period of the options, and we adjust the expense recognized in the consolidated financial statements accordingly.

FASB ASC 718-20 requires that modifications of the terms or conditions of equity awards be treated as an exchange of the original award for a new award.  Incremental compensation cost is measured as the excess, if any, of the fair value of the modified award over the fair value of the original award immediately before its terms are modified. 

Safe Harbor Cautionary Statement Regarding Private Securities Litigation Reform Act of 1995

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. This report contains and incorporates by reference certain forward-looking statements that are based on the beliefs of management as well as assumptions made by and information currently available to management. The statements contained and incorporated by reference in this report relating to matters that are not historical facts are forward-looking statements that involve risks and uncertainties, including, but not limited to, future demand for our products and services, the successful commercialization of our products, general domestic and global economic conditions, government and environmental regulations, competition and customer strategies, changes in our business strategy or development plans, capital deployment, business disruptions, including those caused by fires, raw material supplies, technical failures, environmental regulations, and other risks and uncertainties, certain of which are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ materially from those forward-looking statements set forth herein. When used in this report, the words “anticipate”, “believe”, “estimate” or “expect” or words of similar import are intended to identify forward-looking statements.

24

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 Not Applicable.

 Item 4. CONTROLS AND PROCEDURES

 Disclosure controls and procedures  

Evaluation of Disclosure Controls and Procedures 

Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded, as of June 30, 2018, that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), as of the end of such period, are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Changes in Internal Control Over Financial Reporting 

There have been no significant changes in our internal control over financial reporting during the quarter ended June 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings 

None.

Item 1A. Risk Factors 

There have no significant changes in our internal control over financial reporting during the six months ended June 30, 2018 that have materially affected, or are reasonable likely to materially affect, our internal control over financial reporting.

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

During the three months ended June 30, 2018, and thereafter through the date of filing of this Form 10Q, other than sales of securities previously reported on a Form 10Q or Current Report on Form 8-K filed on July 13, 2018, the Company issued and sold the following securities without registration under the Securities Act of 1933, as amended (the "Securities Act"):

     a)  $195,000 aggregate principal amount of 2017 Convertible Notes;

     b)  $625,000 aggregate principal amount of 2018 Convertible Notes; and

     c)  $250,000 aggregate principal amount of senior convertible promissory notes (the "Convertible Note") and warrants, described below.

On July 19, 2018, the Company's board of directors approved the offering and sale of up to $2.5 million aggregate principal amount of Convertible Notes pursuant to a securities purchase agreement, date July 24, 2018 (the "July 2018 SPA").  The Convertible Notes have a five year maturity and do not bear interest.  The Convertible Notes are convertible into common stock at a conversion price of $0.25 per share, subject to adjustment.  Investors purchasing less than $500,000 principal amount of Convertible Notes will receive warrants to purchase an aggregate number of shares of common stock equal to 10% of the number of shares issuable upon the conversion of the Convertible Notes, and investors purchasing at least $500,000 principal amount of Convertible Notes will receive warrants to purchase an aggregate number of  shares of common stock equal to 25% of the number of shares issuable upon conversion of the Convertible Notes.  The warrants have a fixed exercise price of $0.25 per share and a ten year term from the date of issuance.

The use of proceeds associated with the Convertible Notes is to support the ongoing development and marketing of our core technologies and product initiatives, and for general working capital purposes.  The Convertible Notes are being offered in a private placement exempt from registration under Section 4(a)(2) of the Securities Act and Rule 506(c) of Regulation D as promulgated by the Securities and Exchange Commission.  The offering is available only to "accredited investors" as defined in Rule 501(a) of Regulation D.  The descriptions of the Convertible Notes, the July 2018 SPA, and the warrants are qualified in their entirety by reference to Exhibits attached hereto, which are incorporated by reference herein.

Item 3. Defaults Upon Senior Securities 

None.

Item 4. Mine Safety Disclosures 

Not Applicable.

Item 5. Other Information

None.

25

Item 6. Exhibits

The following Exhibits, as applicable, are attached to this Quarterly Report (Form 10-Q). The Exhibit Index is found on the page immediately succeeding the signature page and the Exhibits follow on the pages immediately succeeding the Exhibit Index.

10.1	Form of Convertible Notes Securities Purchase Agreement dated July 24,2018
10.2	Form of Convertible Note
10.3	Form of Common Stock Purchase Warrant
31.1	Rule 13a-14(a)/15d-14(a) Certifications – CEO
31.2	Rule 13a-14/15d-14 Certifications – CFO
32	Section 1350 Certifications
100	XBRL-related documents
	None.
101	The following materials from CurAegis Technologies, Inc.’s Quarterly Report on Form 10-Q for the period ended June 30, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations for the three and six month periods ended June 30, 2018 and 2017 (ii) Condensed Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017, (iii) Condensed Consolidated Statements of Cash Flows for the six month periods ended June 30, 2018 and 2017, and (iv) Notes to Condensed Consolidated Financial Statements*
	* Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

26

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	CURAEGIS TECHNOLOGIES, INC.
Dated: August 7, 2018	By:	/s/ Richard A. Kaplan
		Richard A. Kaplan,
		Chief Executive Officer

Dated: August 7, 2018	By:	/s/ Kathleen A. Browne
		Kathleen A. Browne,
		Chief Financial and Accounting Officer

27

EX-10.1

Exhibit 10.1

SECURITIES PURCHASE AGREEMENT 

THIS SECURITIES PURCHASE AGREEMENT (this “Agreement”) is made and entered into as of JULY 24, 2018 by and between CurAegis Technologies, Inc., a New York corporation (the “Company”), each purchaser identified on Schedule A hereto (each an “Initial Purchaser” and, collectively, the “Initial Purchasers”), and each other purchaser executing a counterpart signature page to this Agreement (each an “Additional Purchaser” and, collectively, the “Additional Purchasers”). The Initial Purchasers and Additional Purchasers are sometimes referred to in this Agreement, individually, as a “Purchaser” and, collectively, as the “Purchasers”.

RECITALS

A.     The Purchasers desire to purchase from the Company, and the Company desires to sell to the Purchasers, senior convertible promissory notes of the Company in the aggregate principal amount up to Two Million Five Hundred Thousand Dollars ($2,500,000), in the form attached hereto as Exhibit A (individually, a “Note” and collectively, the “Notes”), together with warrants in the form attached hereto as Exhibit B (individually, a “Warrant” and collectively, the “Warrants”), to purchase in the aggregate up to that number shares of the Company’s common stock, par value $0.01 per share (“Common Stock”), equal to ___% of the number of shares of Common Stock initially issuable on conversion of the Notes.

B.     The Company and the Purchasers are executing and delivering this Agreement in reliance upon the exemption from securities registration afforded by Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), and Rule 506 of Regulation D (“Regulation D”) as promulgated by the United States Securities and Exchange Commission (the “SEC”) under the Securities Act.

NOW THEREFORE, in consideration of the foregoing recitals, the covenants and agreements set forth below, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Purchasers and the Company hereby agree as follows:

Section 1.     Certain Definitions. For purposes of this Agreement, the following terms shall have the meanings given thereto:

“Accredited Investor Questionnaire” means the accredited investor questionnaire attached hereto as Exhibit C.

“Affiliate” of a Person shall mean with respect to such a Person or entity, any Person or entity which directly or indirectly Controls, is Controlled by, or is under common Control with such Person or entity.

“Claim” shall mean any and all liens, claims, options, charges, pledges, security interests, voting agreements, voting trusts, encumbrances, rights or restrictions of any nature.

“Control” (including the terms “controlled by” and “under common control with”) means the possession, directly or indirectly, or as trustee or executor, of the power to direct or cause the direction of the management policies of a Person, whether through the ownership of stock, as trustee or executor, by contract or credit arrangement or otherwise.

1

“Conversion Shares” means the shares of Common Stock issuable upon conversion of the Notes.

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

“Investors Rights Agreement” means that Amended and Restated Investors’ Rights Agreement dated as of March 28, 2014 by and between the Company and the Series C/C-2 Investors.

“Knowledge” means the actual knowledge of Richard A. Kaplan, Kathleen A. Browne and Keith Gleasman.

“Legal Requirements” means all foreign, federal, state, municipal and local statutes, laws, ordinances, judgments, decrees, orders, rules, regulations, policies and guidelines;

“Material Adverse Effect” means any event, change or effect that is or would reasonably be expected to be materially adverse to the assets, liabilities, condition (financial or other), business or, results of operations of the Company and its Subsidiaries, taken as a whole, other than any event, change or effect relating to or resulting from: (a) the announcement or other disclosure of this Agreement or the transactions contemplated herein; (b) conditions or changes in the general economic, business or financial environment which do not affect the Company and its Subsidiaries or the industries in which the Company and its Subsidiaries operates in a disproportionate manner; (c) an act of terrorism or an outbreak or escalation of hostilities or war (whether declared or not declared) or any natural disasters or any national or international calamity or crisis affecting the United States; (d) actions taken by the Purchasers that are contemplated by this Agreement or the performance of obligations under this Agreement; (e) changes in Legal Requirements which do not affect the Company and its Subsidiaries or the industries in which the Company and its Subsidiaries operates in a disproportionate manner; or (f) changes in United States generally accepted accounting principles (“GAAP”) which do not affect the Company disproportionately.

“Permitted Encumbrances” means (a) real estate taxes, assessments and other governmental levies, fees, or charges imposed that are (i) not due and payable as of the Closing Date or (ii) being contested by appropriate proceedings; (b) mechanics’ liens and similar liens for labor, materials, or supplies provided for amounts that are (i) not delinquent or (ii) being contested by appropriate proceedings (and, in either event, are not material); (c) zoning, building codes, and other land use laws regulating the use or occupancy of real property or the activities conducted thereon that are imposed by any governmental authority having jurisdiction over real property; (d) liens, security interest or other encumbrances for any indebtedness of the Company or its Subsidiaries; and (e) easements, covenants, conditions, restrictions and other similar matters affecting title to real property and other encroachments and title and survey defects that do not or would not materially impair the use or occupancy of such real property in the operation of the business of the Company and its Subsidiaries taken as a whole.

“Person” means an individual, corporation, partnership, association, trust, any unincorporated organization or any other entity.

“Preferred Stock” means the Company’s preferred stock, par value $0.01 per share.

2

“Purchase Price” means the purchase price payable by the Purchaser to the Company for the Securities which, which respect to each Purchaser, shall be equal to the original principal amount of the Note purchased by such Purchaser.

“Rule 144” means Rule 144 promulgated by the SEC pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the SEC having substantially the same effect as such Rule.

“SEC Reports” means all reports, schedules, forms, statements and other documents required to be filed with the SEC by the Company since December 31, 2017, through and including through the date hereof, with the SEC pursuant to the reporting requirements of the Exchange Act, including all exhibits included or incorporated by reference therein and financial statements and schedules thereto and documents included or incorporated by reference therein.

“Securities” means the Notes and the Warrants.

“Series C/C-2 Investors” means the holders of the Company’s Series C Voting Convertible Preferred Stock and Series C-2 Voting Convertible Preferred Stock.

“Subsidiary” of a Person means any corporation more than fifty (50%) percent of whose outstanding voting securities, or any partnership, limited liability company joint venture or other entity more than fifty percent (50%) of whose total equity interest, is directly or indirectly owned by such Person.

“Transaction Documents” means this Agreement, the Notes, the Warrants and each other agreement, document and instrument executed in connection with the transactions contemplated hereby.

“Warrant Shares” means the shares of Common Stock issuable upon exercise of a Warrant.

“Underlying Shares” means the Conversion Shares and the Warrants Shares.

Section 2.     Purchase of Securities.

2.1      Purchase and Sale. On the terms and subject to the conditions set forth in this Agreement and in the Notes and Warrants, the Company agrees to sell the Securities to the Purchasers and the Purchasers agree to purchase the Securities from the Company.

2.2       Initial Closing.

(a)      The initial closing of the purchase and sale of the Securities (the “Initial Closing”) will take place on the date hereof (the “Initial Closing Date”) at the offices of Woods Oviatt Gilman, LLP, legal counsel to the Company (“Company Counsel”), at Two State Street, Rochester New York 14614, or remotely by exchange of electronic copies as the Company and the Initial Purchasers shall mutually agree.

3

(b)       At the Initial Closing, the Company shall deliver to each Initial Purchaser (against such Initial Purchaser’s deliveries set forth in Section 2.2(c)):

(i)      a Note, duly executed by the Company, payable to such Initial Purchaser in the principal amount set forth opposite such Initial Purchaser’s name on Schedule A; and

(ii)     a Warrant, duly executed by the Company, issued in the name of such Initial Purchaser to purchase the number of Warrant Shares set forth opposite such Initial Purchaser’s name on Schedule A.

(c)       At the Initial Closing, each Initial Purchaser shall deliver to the Company (against the Company’s deliveries set forth in Section 2.2(b)):

(i)      the Purchase Price set forth opposite such Initial Purchaser’s name on Schedule A by wire transfer of immediately available funds to the account designated by the Company in writing for such purpose; and

(ii)     an Accredited Investor Questionnaire, completed and duly executed by the Initial Purchaser, together with the information specified therein necessary for the Company to verify that the Initial Purchaser is an “accredited investor” as defined in Regulation D.

2.3       Subsequent Closings.

(a)      After the Initial Closing, at any time and from time to time up to the date that is one (1) year after the Initial Closing, at one or more subsequent closings (each a “Subsequent Closing”), the Company may sell to any Additional Purchaser acceptable to the Company in its sole discretion additional Securities so long as the aggregate principal amount of all Notes issued and sold pursuant to this Agreement and that certain Securities Purchase Agreement, dated ____________, 2018 (the “Prior Purchase Agreement”), between the Company and the investor listed therein, does not exceed $2,500,000. Each Subsequent Closing shall occur on a date and at a time mutually acceptable to the Company and the Additional Purchaser or Purchasers then purchasing Securities and at the offices of Company Counsel or remotely by exchange of electronic copies as the Company and the Initial Purchasers shall mutually agree.

(b)      At each Subsequent Closing, the Company shall deliver to each Additional Purchaser then purchasing Securities (against such Additional Purchaser’s deliveries set forth in Section 2.3(c):

(i)     a Note, duly executed by the Company, payable to such Additional Purchaser in the principal amount equal to the Purchase Price set forth on such Additional Purchaser’s counterpart signature page to this Agreement; and

(ii)     a Warrant, duly executed by the Company, issued in the name of such Additional Purchaser to purchase the number of shares of Common Stock equal to 10% of the number of shares of Common Stock initially issuable on conversion of such Additional Purchaser’s Note.

4

(c)      At each Subsequent Closing, each Additional Purchaser then purchasing Securities shall deliver to the Company (against the Company’s deliveries set forth in Section 2.3(b)):

(i)      a counterpart signature page to this Agreement, completed and duly executed by the Additional Purchaser;

(ii)     the Purchase Price set forth on such Additional Purchaser’s counterpart signature page to this Agreement, by wire transfer of immediately available funds to the account designated by the Company in writing for such purpose; and

(ii)     an Accredited Investor Questionnaire, completed and duly executed by the Additional Purchaser, together with the information specified therein necessary for the Company to verify that the Additional Purchaser is an “accredited investor” as defined in Regulation D.

2.4      Use of Proceeds. All funds paid to Company under this Agreement will be deposited in Company’s operating account and used as working capital and for general corporate purposes.

Section 3.     Purchaser’s Representations and Warranties. In order to induce the Company to enter into this Agreement and to sell and issue the Securities to the Purchasers, each Purchaser, severally and not jointly, represents and warrants to the Company that:

3.1      Power or Capacity. The Purchaser, if an entity, has all required corporate or other power and authority or, if an individual, the legal capacity to enter into and perform this Agreement and the other Transaction Documents and to carry out the transactions contemplated hereby and thereby, including the purchase of the Securities.

3.2       Authorization.

(a)     The execution, delivery and performance of this Agreement and the other Transaction Documents and the purchase of the Securities have been duly authorized by all necessary corporate or other action of the Purchaser.

(b)     This Agreement and the other Transaction Documents are valid and binding obligations of the Purchase, enforceable in accordance with their respective terms.

3.3     Investment Status. The Purchaser is purchasing the Securities, and will, upon conversion of such Purchaser’s Note and exercise or such Purchaser’s Warrant, acquire the Underlying Shares for its own account, for investment only and not with a view to, or any present intention of, effecting a distribution of such securities or any part thereof except pursuant to a registration or an available exemption under applicable Legal Requirements. The Purchaser acknowledges that neither the Securities nor the Underlying Shares have been registered under the Securities Act or the securities laws of any state or other jurisdiction and cannot be disposed of unless they are subsequently registered under the Securities Act and any applicable state laws or an exemption from such registration is available.

3.4     Accredited Investor. The Purchaser is and will be on each date which such Purchaser converts a Note or exercises a Warrant, an “accredited investor” as defined in Regulation D and one or more of the categories set forth in the Accredited Investor Questionnaire delivered by the Purchaser correctly and in all respects describes the Purchaser, and the Purchaser has so indicated by checking the applicable box or boxes corresponding to the applicable category or categories in his Accredited Investor Questionnaire. The Purchaser acknowledges that the exemption from registration requirements of the Securities Act relied upon by the Company in offering and selling the Securities requires that the Company take reasonable steps to verify that each Purchaser is an accredited investor and that, accordingly, the Company will require certain information, as described in the Accredited Investor Questionnaire, from the Purchaser for that purpose.

5

3.5    Investment Experience. The Purchaser acknowledges that it has, by reason of its business and financial experience, knowledge, sophistication and experience in financial and business matters and in making investment decisions of the type contemplated by this Agreement that it is capable of (i) evaluating the merits and risks of an investment in the Securities and making an informed investment decision in connection therewith; (ii) protecting its own interest; and (iii) bearing the economic risk of such investment for an indefinite period of time for Securities which are not transferable or freely tradable.

3.6     Opportunities for Additional Information. The Purchaser acknowledges that he has had the opportunity to ask questions of and receive answers from, or obtain additional information from, the executive officers of the Company concerning the financial and other affairs of the Company, and to the extent deemed necessary in light of the Purchaser’s personal knowledge of the Company’s affairs, the Purchaser has asked such questions and received in writing answers to the full satisfaction of the Purchaser, and the Purchaser desires to invest in the Company. Specifically, but not by way of limitation, the Purchaser acknowledges the Company’s publicly available filings made periodically with the SEC, which filings are available at www.sec.gov and which filings the Purchaser acknowledges reviewing or having had the opportunity of reviewing. The Purchaser acknowledges that the purchase of the Securities involves a high degree of risk and is subject to many uncertainties. These risks and uncertainties may adversely affect the Company’s business, operating results and financial condition. In such an event, the trading price for the Common Stock could decline substantially and Purchaser could lose all or part of its investment. Purchaser is urged to review the risks identified under the Risk Factors section of Company’s Form 10-K for the year ended December 31, 2017, as filed with the SEC on March 16, 2018.

3.7     Rule 144. The Purchaser understands that the Securities and the Underlying Shares must be held indefinitely unless they are registered under the Securities Act or an exemption from registration is available. The Purchaser understands and acknowledges that the Company has neither filed a registration statement with the SEC or any state authorities nor agreed to do so, nor contemplates doing so in the future for the transactions contemplated by this Agreement or the other Transaction Documents. The Purchaser acknowledges that he is familiar with Rule 144 of the rules and regulations of the SEC, as amended, promulgated pursuant to the Securities Act, and that he has been advised that Rule 144 permits resales only under certain circumstances. The Purchaser understands that to the extent that Rule 144 is not available, the Purchaser will be unable to sell any Securities or Underlying Shares without either registration under the Securities Act or the existence of another exemption from such registration requirement.

3.8     No Shorting. The Purchaser has not engaged in any short sales of the Common Stock or instructed any third parties to engage in any short sales of the Common Stock on his behalf prior to the Closing Date. The Purchaser covenants and agrees that it will not be in a net short position with respect to the shares of Common Stock. For purposes of this Section 3.8, a “net short position” means a sale of Common Stock by a Purchaser that is marked as a short sale and that is made at a time when there is no equivalent offsetting long position in Common Stock held by the Purchaser.

6

3.9     Residence. If the Purchaser is an individual, then the Purchaser resides in the state or province identified in the address of the Purchaser, in the case of an Initial Purchaser, on Schedule A and, in the case of an Additional Purchaser, on its counterpart signature page to this Agreement. If the Purchaser is a partnership, corporation, limited liability company or other entity, then the office or offices of the Purchaser at which its principal place of business is located is the address of the Purchaser, in the case of an Initial Purchaser, on Schedule A and, in the case of an Additional Purchaser, on its counterpart signature page to this Agreement.

3.10     General. The Purchaser understands that the Securities are being offered and sold in reliance on a transactional exemption from the registration requirement of Federal and state securities laws and the Company is relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgments and understandings of the Purchaser set forth herein in order to determine the applicability of such exemptions and the suitability of the Purchaser to acquire the Securities.

3.11     Investment Banking; Brokerage Fees. The Purchaser has not incurred or become liable for any investment banking fees, brokerage commissions, broker’s or finder’s fees or similar compensation (exclusive of professional fees to lawyers and accountants) in connection with the transactions contemplated by this Agreement.

3.12     Exculpation Among Purchasers. The Purchaser acknowledges that it is not relying upon any Person, other than the Company and its officers and directors, in making its investment or decision to invest in the Company. The Purchaser agrees that neither any Purchaser nor the respective controlling Persons, officers, directors, partners, agents, or employees of any Purchaser shall be liable to any other Purchaser for any action heretofore taken or omitted to be taken by any of them in connection with the purchase of the Securities.

4.         Company’s Representations and Warranties. The Company represents and warrants to each Purchaser that:

4.1       Organization and Corporate Power.

(a)     The Company is a corporation duly organized, validly existing and in good standing under the laws of New York and is duly qualified or registered to do business as a foreign corporation in each jurisdiction in which the failure to be so duly qualified or registered has had, or could have, a Material Adverse Effect.

(b)     The Company has all required corporate power and authority to carry on its business as presently conducted, to enter into and perform this Agreement and the other Transaction Documents and to carry out the transactions contemplated hereby and thereby, including the issuance of the Securities.

7

(c)     True, complete and correct copies of the Certificate of Incorporation and the Company’s By-Laws have been filed with the Company Reports, in each case as amended and in effect as of the date hereof (the “Charter Documents”), have been filed as exhibits to the SEC Reports.

4.2       Authorization and Non-Contravention.

(a)     This Agreement and the other Transaction Documents are valid and binding obligations of the Company, enforceable in accordance with their respective terms.

(b)     The execution, delivery and performance of this Agreement and the other Transaction Documents, the issuance and delivery of the Securities, and, upon conversion of the Notes and the exercise of the Warrants, the issuance and delivery of the Underlying Shares, respectively, have been duly authorized by all necessary corporate or other action of the Company.

(c)     The execution and delivery of this Agreement and the other Transaction Documents, the issuance and delivery of the Notes and Warrants, and, upon conversion of the Notes and the exercise of the Warrants, the issuance and delivery of the Underlying Shares, and the performance of the transactions contemplated by this Agreement and the other Transaction Documents, do not and will not: (i) violate or result in a violation of, conflict with or constitute or result in a violation of (whether after the giving of notice, lapse of time or both) any provision of the Charter Documents; (ii) subject to the consent and waiver of the Series C/C-2 Investors under the Investors Rights Agreement described in Section 6.1(d), conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any agreement, credit facility, debt or other instrument (evidencing a Company debt or otherwise) or other understanding to which the Company or any Subsidiary is a party or by which any property or asset of the Company or any Subsidiary is bound; or (iii) violate, conflict with or result in a violation of, or constitute a default (whether after the giving of notice, lapse of time or both) under, any provision of any Legal Requirement; except in the case of each of clauses (ii) and (iii), such as would not have a Material Adverse Effect.

(d)     The Company is not required to obtain any consent, waiver, authorization or order of, give any notice to, or make any filing or registration with, any court or other federal, state, local or other governmental authority in connection with the execution, delivery and performance by the Company of the Transaction Documents, other than the filing of any Form D required to be filed with the SEC and such other filings as are required to be made under applicable federal and state securities laws.

4.3     The Securities. Upon delivery to each Purchaser at the applicable Closing of the Note and Warrant to be purchased by such Purchaser, and upon the Company’s receipt of the Purchase Price payable by such Purchaser, (i) such Purchaser will become the sole record, legal and beneficial owner of (A) such Note, (B) such Warrant and (C) upon conversion of such Note, and the exercise of such Warrant and payment of the exercise price therefor, the Underlying Shares, and the Purchaser will have good and marketable title to the Securities and the Underlying Shares and each shall pass to such Purchaser, free and clear of any Claims, except for the restrictions on transfer created by this Agreement and applicable securities laws; and (ii) the Note and the Warrant to be issued to such Purchaser at the Closing have been duly authorized by all necessary corporate action and shall be validly issued and outstanding, fully paid and non-assessable. The Conversion Shares, when issued upon the terms and subject to the conditions set forth in this Agreement and the Note, and the Warrant Shares, when issued upon the terms and subject to the conditions set forth in this Agreement and the Warrant, will be duly authorized by all necessary corporate action and validly issued and outstanding, fully paid and non-assessable, free and clear of all Claims of any kind and the holders (other than restrictions on transfer created by this Agreement and applicable securities laws) shall be entitled to all rights accorded to a holder of Common Stock.

8

4.4       Capitalization.

(a)     As of July 19, 2018, immediately prior to the consummation of the Initial Closing, the authorized capital stock of the Company consists of

(i) 400,000,000 shares of Common Stock, of which (A) 49,849,546 shares are currently outstanding, (B) 43,991,546 shares are reserved for issuance upon conversion of the outstanding Preferred Stock (defined below), (C) 7,045,707 shares are reserved for issuance upon the exercise of Common Stock purchase warrants other than the Warrants, (D) 2,957,625 shares reserved for issuance upon the exercise of options outstanding under the 2011 Stock Option Plan, (E) 42,375 shares reserved for issuance upon the future grant of options under the 2011 Stock Option Plan, (F) 500,000 shares reserved for issuance upon the exercise of options outstanding under the 2016 Stock Option Plan, (G) 2,500,000 shares are reserved for issuance pursuant to the 2016 Stock Option Plan in respect of future awards under such plan, (H) 6,900,000 shares are reserved for issuance upon the exercise of non-plan options,(I) up to 12,000,000 shares reserved for issuance upon the conversion of convertible notes sold by the Company between August 25, 2016 and December 23, 2016, (J) up to 13,274,775 shares reserved for issuance upon the conversion of convertible notes sold by the Company between May 31, 2017 and May 21, 2018, (K) up to 2,500,000 shares reserved for issuance upon the conversion of convertible notes sold by the Company between May 7, 2018 and July 18, 2018, and (L) no other shares are reserved for issuance for any purpose, and

(ii) 100,000,000 shares of Preferred Stock, of which (a) 3,300,000 shares are designated as “Class A Non-Voting Cumulative Convertible Preferred Stock”, of which 468,221 shares are issued and outstanding and which shares are convertible into 468,221 shares of Common Stock, (b) 300,000 shares are designated as “Class B Non-Voting Cumulative Convertible Preferred Stock”, of which 67,500 shares are issued and outstanding and which shares are convertible into 67,500 shares of Common Stock, (c) 15,687,500 shares are designated as “Series C Voting Convertible Preferred Stock”, all of which are issued and outstanding and which shares are convertible into 15,687,500 shares of Common Stock, (d) 24,500,000 shares are designated as “Series C-2 Voting Convertible Preferred Stock”, all of which are issued and outstanding and which shares are convertible into 24,500,000 shares of Common Stock, and (e) 10,000,000 shares are designated as “Series C-3 Voting Convertible Preferred Stock” (the “Series C-3 Preferred Stock”), of which 3,26,000 shares are issued and outstanding. Such issued and outstanding shares of Series C-3 Preferred Stock are convertible into 3,308,000 shares of Common Stock. The Company is not a party to a “rights plan”, or “poison pill” agreement.

9

(b)     As of the date hereof immediately prior to the consummation of the Initial Closing, except as set forth above there are no outstanding options, warrants, or other rights to purchase any shares capital stock of the Company and no outstanding securities convertible into or exercisable or exchangeable for, any shares of capital stock of the Company. Except for the obligations of the Company to issue and sell the Securities pursuant this Agreement, there are no commitments, agreements or arrangements of any kind relating to the issuance of any shares of capital stock of the Company or securities convertible into or exercisable or exchangeable for, any shares of capital stock of the Company.

(c)     All of the outstanding shares of capital stock of the Company have been duly and validly authorized and issued, fully paid and non-assessable, and have been offered, issued, sold and delivered in compliance with applicable federal and state securities laws.

(d)     Except as provided in the Investors Rights Agreement, there are (i) no preemptive rights, rights of first refusal, put or call rights or obligations with respect to the issuance, sale or redemption of the Company’s capital stock or any interests therein, or (ii) no rights to have the Company’s capital stock registered for sale to the public in connection with the laws of any jurisdiction and (iii) no documents, instruments or agreements relating to the voting of the Company’s voting securities or restrictions on the transfer of the Company’s capital stock.

4.5      Subsidiaries; Investments. Except as disclosed in the SEC Reports, the Company does not have any Subsidiaries and does not own or control, directly or indirectly, any interest in any other corporation, partnership, trust, joint venture, limited liability company, association or other business entity. The Company is not a participant in any joint venture, partnership or similar arrangement. Each of the Subsidiaries of the Company is wholly owned, directly or indirectly, by the Company and there are no outstanding subscriptions, options, warrants, commitments, preemptive rights, agreements, arrangements or commitments of any kind relating to the issuance or sale of, or outstanding securities convertible into or exercisable or exchangeable for, any shares of capital stock of any class or other equity interests of any such Subsidiary.

4.6       SEC Reports; Financial Statements.

(a)     The Company has filed all reports required to be filed by it under the Securities Act and the Exchange Act, including pursuant to Section 13(a) or 15(d) of the Exchange Act, for the two years preceding the date hereof on a timely basis or has received a valid extension of such time of filing and has filed any such SEC Reports prior to the expiration of any such extension. The SEC Reports incorporated by reference herein include without limitation the Form 10-K for the fiscal year ended December 31, 2017, including the audited financial statements included therein.

(b)     As of their respective dates, the SEC Reports or any amendments thereof, complied in all material respects with the requirements of the Exchange Act applicable to the SEC Reports, and none of the SEC Reports or to the extent such reports were amended, at the time they were filed with the SEC, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading.

10

(c)     As of their respective dates, except as set forth therein or in the notes thereto, the financial statements contained in the SEC Reports and the related notes (the “Financial Statements”) complied as to form in all material respects with all applicable accounting requirements and the published rules and regulations of the SEC with respect thereto. The Financial Statements: (i) were prepared in accordance with GAAP, consistently applied during the periods involved (except (A) as may be otherwise indicated in the notes thereto or (B) in the case of unaudited interim statements, to the extent that they may not include footnotes, may be condensed or summary statements or may conform to the SEC’s rules and instructions for Reports on Form 10-Q), (ii) fairly present in all material respects the consolidated financial position of the Company and its consolidated Subsidiaries as of the dates thereof and the consolidated results of their operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal and recurring year-end audit adjustments) and (iii) are in all material respects in accordance with the books of account and records of the Company and its consolidated Subsidiaries (except as may be otherwise noted therein).

4.7     No Material Adverse Changes. Since the date of the latest audited financial statements included within the SEC Reports, (a) there has been no event, occurrence or development that has had or that would reasonably be expected to result in a Material Adverse Effect, (b) the Company has not incurred any liabilities (contingent or otherwise) other than (i) trade payables and accrued expenses incurred in the ordinary course of business consistent with past practice and (ii) liabilities not required to be reflected in the Company’s financial statements pursuant to GAAP or required to be disclosed in filings made with the SEC, and (c) the Company has not altered its method of accounting.

4.8     Transactions with Affiliates. Since January 1, 2018, there has been no transaction, or series of related transactions, agreements, arrangements or understandings, nor is there any proposed transaction, or series of related transactions, agreements, arrangements or understandings, that would be required to be disclosed under Item 404 of Regulation S-K promulgated by the SEC under the Securities Act that have not been disclosed in the SEC Reports.

4.9       Regulatory Material Permits. The Company and the Subsidiaries possess all certificates, authorizations and permits issued by the appropriate federal, state, local or foreign regulatory authorities necessary to conduct their respective businesses as described in the SEC Reports, except where the failure to possess such permits would not have or reasonably be expected to result in a Material Adverse Effect (“Material Permits”), and neither the Company nor any Subsidiary has received any notice of proceedings relating to the revocation or modification of any Material Permit.

4.10      Title to Assets. The Company and the Subsidiaries have good and marketable title in all personal property owned by them that is material to the business of the Company and the Subsidiaries, taken as a whole, in each case free and clear of all Claims, except for Permitted Encumbrances. The Company owns no real property. Any real property and facilities held under lease by the Company and the Subsidiaries are held by them under valid, subsisting and enforceable leases with which the Company and the Subsidiaries are in material compliance.

11

4.11      Tax Matters. The Company and its Subsidiaries have filed all required tax returns and reports that are now required to be filed by them in connection with any federal, state and local tax, duty or charge levied, assessed or imposed upon the Company, its Subsidiaries or their respective assets, including unemployment and, social security, and real estate taxes. The Company and its Subsidiaries have paid all taxes which are now due and payable, or, with respect to those taxes which are being contested in good faith, the Company and its Subsidiaries have made an appropriate reserve on their respective financial statements for the same. No taxing authority has asserted or assessed any additional tax liabilities against the Company and its Subsidiaries which are outstanding on this date, and the Company and its Subsidiaries have filed for any extension of time for the payment of any tax or the filing of any tax return or report.

4.12     Intellectual Property.

(a)     To the Knowledge of the Company, the Company and its Subsidiaries have, or have rights to use, all patents, patent applications, trademarks, trademark applications, service marks, trade names, copyrights, licenses and other similar rights that are necessary or material for use in connection with their respective businesses as described in the SEC Reports and which the failure to so have could have or reasonably be expected to result in a Material Adverse Effect (collectively, the “Intellectual Property Rights”). To the Knowledge of the Company, all such Intellectual Property Rights are enforceable.

(b)     No third party has claimed or, to the Knowledge of the Company, has reason to claim that any Person employed by or affiliated with the Company has (i) violated or may be violating any of the terms or conditions of such Person’s employment, non-competition, non-disclosure or similar agreement with such third party; (ii) disclosed or may be disclosing or utilized or may be utilizing any trade secret or proprietary information or documentation of such third party or (iii) interfered or may be interfering in the employment relationship between such third party and any of its employees. To the Company’s Knowledge, no Person employed by or affiliated with the Company has used or proposes to use any trade secret or any information or documentation proprietary to any other Person in connection with the Company’s business.

4.13    Litigation. There is no litigation or governmental or administrative proceeding or investigation pending or, to the Knowledge of the Company, threatened against the Company or any of its Subsidiaries affecting their properties or assets of the Company.

4.14    Employees. Neither the Company nor its Subsidiaries have any collective bargaining arrangements or agreements covering any of their employees. Except as disclosed in the SEC Documents, neither the Company nor its Subsidiaries have any employment contract, or any other similar contract relating to the right of any officer, employee or consultant to be employed or engaged by the Company or such Subsidiary.

4.15    Compliance with Legal Requirements. The Company complies and has at all times complied in all material respects with all applicable Legal Requirements, and the Company has not received notice from any governmental authority or any other Person of any alleged violation or noncompliance.

4.16    Insurance Coverage. The Company and the Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which the Company and the Subsidiaries are engaged. To the Company’s Knowledge, the Company will be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business without a significant increase in cost.

12

4.17    Investment Banking; Brokerage. There are no claims for investment banking fees, brokerage commissions, broker’s or finder’s fees or similar compensation in connection with the transactions contemplated by this Agreement payable by the Company or based on any arrangement or agreement made by or on behalf of the Company.

4.18     Private Placement. Assuming the accuracy of the each Purchaser’s representations and warranties set forth in Section 3, no registration under the Securities Act is required for the offer and sale of the Securities by the Company to the Purchaser as contemplated hereby.

4.19     Investment Company. The Company is not, and is not an Affiliate of, an “investment company” within the meaning of the Investment Company Act of 1940, as amended.

4.20    Disclaimer. EXCEPT AS EXPRESSLY SET FORTH IN THIS SECTION 4, THE COMPANY MAKES NO OTHER REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AT LAW OR IN EQUITY, IN RESPECT OF ANY OF ITS ASSETS, LIABILITIES OR OPERATIONS.

5.         Restrictions on Transfer and Resale; Legends.

5.1       Restrictions on Transfer and Resale. Each Purchaser agrees that he shall not pledge, hypothecate, sell, transfer, assign or otherwise dispose of part or all of the Notes, the Warrants or the Underlying Shares until:

(a)      a registration statement under the Securities Act (or any other form appropriate for the purpose under the Securities Act or any form replacing any such form) with respect to the Notes, the Warrants or the Underlying Shares, as applicable, or any part thereof proposed to be so disposed of shall be then effective and such disposition shall have been appropriately qualified in accordance with any other applicable securities law; or

(b)      all of the following shall occur:

(i)     the Purchaser shall have furnished the Company with a reasonably detailed explanation of the proposed disposition including, without limitation, the name of proposed purchaser, the purchase price and payment terms for the Notes, the Warrants or the Underlying Shares, as applicable;

(ii)     if reasonably requested by the Company, the Purchaser shall have furnished the Company with an opinion of the Purchaser’s counsel in form and substance reasonably satisfactory to the Company or other evidence reasonably satisfactory to the Company to the effect that the proposed transfer complies with applicable provisions of the Securities Act and any applicable blue sky laws and will not require registration of such Shares or any part thereof under the Securities Act or qualification of such Notes, the Warrants or the Underlying Shares, as applicable, or any part thereof under any other securities law, provided that the Company will not require such a legal opinion (x) in any transaction in compliance with Rule 144; or (y) in any transaction in which the Purchaser distributes Notes, the Warrants or the Underlying to an Affiliate of the Purchaser for no consideration; provided that each transferee agrees in writing to be subject to the terms of this Section 5.1.

13

5.2       Legends. Each certificate representing the Underlying Shares which may be issued by the Company shall bear the following legends:

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.

6.        Closing Conditions and Deliverables.

6.1      Company Conditions. The obligation of the Company to consummate the transactions contemplated hereunder at the applicable Closing with any Purchaser is subject to the satisfaction or waiver by the Company, on or before the applicable Closing, of the following conditions:

(a)     The representations and warranties of such Purchaser contained in Section 3 shall be true, complete and correct in all respects as of the date hereof and, as of the applicable Closing Date as though such representations and warranties had been made on and as of such date.

(b)     Such Purchaser shall have performed and complied in all material respects with all agreements contained herein, and in any other Transaction Document which are required to be performed or complied with by them prior to or at the time of the applicable Closing Date.

(c)     Except for notices or filings required or permitted to be filed after the applicable Closing Date with federal and state securities commissions, the Company shall have obtained the written consent or approval of, or shall have filed any applicable notice or filing with, each Person whose consent or approval is required, or with whom a notice or filing is required, in connection with the transactions contemplated hereunder.

(d)     The Company shall have obtained the consent of the Series C/C-2 Investors under the Investors Rights Agreement to the sale and issuance of the Securities and the waiver of the Series C/C-2 Investors to their rights of first refusal under the Investors Rights Agreement with respect to the sale and issuance of the Securities and such consent and waiver shall remain in full force and effect.

(e)     No Proceeding shall be pending or, to the knowledge of Company, threatened by any third party or by or before any court or governmental agency in which it is sought to restrain or prohibit or to obtain damages or other relief in connection with the consummation of the transactions contemplated hereby.

14

6.2      Purchaser Conditions. The obligation of each Purchaser to consummate the transactions contemplated hereunder at the applicable Closing is subject to the satisfaction or waiver by such Investor, on or before the applicable Closing, of the following conditions:

(a)     The representations and warranties of the Company contained in Section 4 shall be true, complete and correct in all material respects as of the date hereof and, as of the applicable Closing Date as though such representations and warranties had been made on and as of such date.

(b)     The Company shall have performed and complied in all material respects with all agreements contained herein which are required to be performed or complied with by them prior to or at the time of the applicable Closing Date.

(c)     No Proceeding shall be pending or, to the Knowledge of Company, threatened by any third party or by or before any court or governmental agency in which it is sought to restrain or prohibit or to obtain damages or other relief in connection with the consummation of the transactions contemplated hereby.

7.      Indemnification. Each Purchaser, severally and not jointly, hereby agrees to indemnify the Company, and the officers, directors, agents and employees thereof harmless against all liability, costs or expenses (including reasonable attorneys’ fees) arising by reason of or in connection with any misrepresentation or any breach of the representations and warranties of such Purchaser contained in this Agreement, or arising as a result of the sale or distribution of the Securities or the Common Stock issuable upon conversion of the Notes or exercise of the Warrants, by the undersigned in violation of the Securities Act, the Exchange Act or any other applicable law, either federal or state.

8.        Miscellaneous.

8.1      Signature Pages; Additional Investors. Any Additional Purchaser committing to purchase Securities from the Company, and to whom the Company will sell Securities subject to the terms and conditions of this Agreement, shall execute a counterpart signature page hereto by which the Additional Purchaser agrees to be bound by the terms hereof. If the Company, in its sole discretion, agrees to sell and issue additional Securities after the Initial Closing, any Person to whom the Company will sell, and who is committing to purchase, Securities shall become a party to this Agreement by executing and delivering an additional counterpart signature page to this Agreement, and thereafter shall be deemed a “Purchaser” for all purposes hereunder. No action or consent by the Purchasers shall be required for such joinder to this Agreement by such Additional Purchaser. In the case of each Additional Purchaser who first purchases Securities after the date of this Agreement, the date as of which such Additional Purchaser became party to this Agreement shall be the date of the Subsequent Closing at which such Additional Purchaser’s Securities are issued.

8.2     No Offer. This Agreement does not constitute an offer to any prospective purchaser of Securities, and no agreement exists or shall exist between the Company and any Purchaser, unless and until the Company and that Purchaser have exchanged the respective deliverables under Section 2.2 or Section 2.3.

15

8.3     Further Assurances. At such time and from time to time on and after the date hereof upon request by the Purchasers or the Company, the other will execute, acknowledge and deliver, or will cause to be done, executed, acknowledged and delivered, all such further acts, certificates and assurances that may be reasonably required for the conveying, transferring, assigning, delivering, purchasing and confirming to the Purchasers or the Company all of the Securities or to otherwise carry out the purposes of this Agreement and the agreements, documents and instruments contemplated hereby.

8.4     Complete Agreement. This Agreement and the Transaction Documents sets forth the entire agreement and understanding of the parties concerning the subject matter herein and supersedes all prior agreements and understandings concerning such subject matter. No representation, promise, inducement or statement of intention has been made by or on behalf of any party hereto, or any related party, that is not set forth in this Agreement or the documents referred to herein. The Purchasers acknowledge and agree that the Company is making no representations, warranties and covenants in connection with the purchase and sale of the Notes except as expressly set forth in this Agreement.

8.5      Survival. The representations and warranties contained herein shall survive and remain in full force and effect after the applicable Closing for one (1) year.

8.6     Effect of Waiver. The failure of a party hereto at any time or from time to time to require performance of another party’s obligations under this Agreement shall in no manner affect such party’s right to enforce any provision of this Agreement at a subsequent time, and the waiver by a party hereto of any right arising out of any breach shall not be construed as a waiver of any right arising out of any other or subsequent breach.

8.7     Amendment and Waiver. Any provision of this Agreement may be amended or the observance of any provision may be waived, and the exercise of any right or remedy may be forborne upon the consent of the Company and Purchasers representing a majority of the outstanding Securities. Any amendment or waiver effected in accordance with this Section 8.7 shall be binding upon each Purchaser and each transferee of the Securities and the Underlying Shares, regardless of whether he, she or it has given its written consent. Notwithstanding the foregoing, if any amendment or waiver materially and adversely treats one or more Purchasers in a manner that is disproportionate to such treatment of all other Purchasers, such amendment or waiver shall also require the written consent of the Purchasers disproportionately treated. This Section 8.7 may not be amended without the written consent of the Company and all Purchasers. Written notice of any amendment, waiver or forbearance under this Section 8.7 shall be given to the record holders of the Securities.

16

8.8     Notices. Any notice or other communication required or permitted under this Agreement shall be in writing and shall be deemed to have been duly given (i) upon personal delivery; or (ii) on the third day following depositing the same in the United States mail, certified or registered, return receipt requested with postage prepaid, or (iii) on the first day following delivery to a nationally recognized United States overnight courier service, fee prepaid, to the parties at their addresses set forth below: (or such other address as a party may designate by notice in accordance with this Section):

if to the Company, to:

CurAegis Technologies, Inc.

1999 Mt. Read Boulevard, Building 3

Rochester, New York 14615

Attention: Chief Executive Officer

With a copy to (which shall not constitute notice):

Woods Oviatt Gilman LLP

2 State Street

700 Crossroads Building

Rochester, NY 14614

Attention: Gordon E. Forth

if to an Initial Purchaser, to the address set forth on Schedule A and, if to an Additional Purchaser, the address set forth on the Additional Purchaser’s counterpart signature page to this Agreement.

8.9     Expenses. The Company and the Investors shall each pay their own expenses incident to the Transaction Documents and the preparation for, and consummation of, the transactions provided for herein and therein.

8.10     Interpretation. When a reference is made to a Section, Exhibit or Schedule, such reference shall be to a Section, Exhibit or Schedule of or to this Agreement unless otherwise indicated. Whenever the words “include,” “includes” or “including” are used in this Agreement, they shall be deemed to be followed by the words “without limitation.” Unless the context requires otherwise, words using the singular or plural number also include the plural or singular number, respectively, and the use of any gender herein shall be deemed to include the other genders. References to “dollars” or “$” are to U.S. dollars. The terms “hereof,” “herein,” “hereby,” “hereto” and derivative or similar words refer to this entire Agreement. This Agreement was prepared jointly by the parties hereto and no rule that it be construed against the drafter will have any application in its construction or interpretation. The headings contained in this Agreement are inserted for convenience only and shall not be considered in interpreting or construing any of the provisions contained in this Agreement.

8.11     Governing Law and Venue. This Agreement shall be construed in accordance with and governed by the laws of the State of New York without reference to conflict of laws principles that would result in the application of the law of any other jurisdiction. The parties hereto agree that all legal proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Agreement shall be commenced exclusively in the state and federal courts sitting in Monroe County, State of New York. The parties hereto irrevocably submit to the exclusive jurisdiction of the state and federal courts sitting in the State of New York, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is improper or is an inconvenient venue for such proceeding.

17

8.12     Titles and Headings; Construction. The Section headings contained in this Agreement are for convenient reference only, and shall not in any way affect the meaning or interpretation of this Agreement. All pronouns and any variations thereof used herein shall be deemed to refer to the masculine, feminine, singular, or plural as the identity of the person or persons may require. This Agreement shall be construed without regard to any presumption or other rule requiring construction hereof against the party causing this Agreement to be drafted.

8.13     Benefit. Except for the rights to indemnification under Section 7, nothing in this Agreement, expressed or implied, is intended to confer on any person other than the parties hereto or their respective successors or assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement.

8.14     Counsel. Each party to this Agreement acknowledges that Woods Oviatt Gilman LLP acted solely as counsel to the Company in connection with the Transaction Documents and the transactions contemplated hereby and thereby and that he, she or it retained or had sufficient opportunity to retain independent legal counsel and other advisors in connection with the Transaction Documents and the transactions contemplated hereby and thereby.

8.15     Parties in Interest. All representations, covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto shall bind and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto and, in particular, shall inure to the benefit of and be enforceable by the holder or holders at the time of any of the Notes.

8.16     Severability. If any provision of this Agreement shall be held invalid or unenforceable by competent authority, such provision shall be construed so as to be limited or reduced to be enforceable to the maximum extent compatible with the law as it shall then appear. The total invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions hereof and this Agreement shall be construed in all respects as if such invalid or unenforceable provision were omitted.

8.17     Counterparts. This Agreement may be executed simultaneously in one or more counterparts, each one of which shall be deemed an original, but all of which together shall constitute one and the same instrument. A signed copy of this Agreement delivered by facsimile, e-mail or other means of electronic transmission shall be deemed to have the same legal effect as delivery of an original signed copy of this Agreement.

[signature page follows]

18

IN WITNESS WHEREOF the Company and the Initial Purchasers have executed this Agreement as of the date first written above.

CURAEGIS TECHNOLOGIES, INC.
By:	___________________________
Name: Kathleen A. Browne
Title: Chief Financial Officer
INITIAL PURCHASERS:
___________________________________

19

[Additional Purchaser Counterpart Signature Page to Securities Purchase Agreement]

The undersigned Additional Purchaser hereby executes the Securities Purchase Agreement and hereby irrevocably authorizes this signature page to be attached thereto.

INDIVIDUALS SIGN BELOW:

______________________________	Print Purchaser’s Name
Purchaser’s Signature*
Date:           , 2018

LIMITED LIABILITY COMPANIES, CORPORATIONS, PARTNERSHIPS, TRUSTS AND OTHER ENTITIES SIGN BELOW:

Name of Entity: ________________________________________________________________________________________________________

By: ________________________________

Title: _______________________________

Date: __________________________

 Amount of Purchase Price: $ 

ALL ADDITIONAL PURCHASERS COMPLETE THE ADDRESS SECTION

Principal Residence Address:	Mailing Address, if different from
	Residence Address

Electronic Mail:

20

Schedule A

Initial Purchasers

Name Address Principal Amount of Note Warrant Shares

21

Exhibit A

Form of Convertible Promissory Note

22

Exhibit B

Form of Common Stock Purchase Warrant

23

Exhibit C

Accredited Investor Questionnaire

24

EX-10.2

Exhibit 10.2

THIS NOTE AND THE SECURITIES ISSUABLE UPON THE CONVERSION HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, HYPOTHECATED, DONATED OR OTHERWISE TRANSFERRED WITHOUT COMPLIANCE WITH THE REGISTRATION OR QUALIFICATION PROVISIONS OF APPLICABLE FEDERAL AND STATE SECURITIES LAWS OR WITHOUT DELIVERING AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.

CURAEGIS TECHNOLOGIES, INC.

CONVERTIBLE PROMISSORY NOTE

$ _______      , 2018            

FOR VALUE RECEIVED, CURAEGIS TECHNOLOGIES, INC., a New York corporation (the “Company”), promises to pay to                                         (“Investor”), or its registered assigns, in lawful money of the United States of America the principal sum of                                                      _______________________THOUSAND Dollars ($       ) (the “Principal Amount”), or such lesser amount as shall equal the outstanding principal amount hereof, and no interest shall accrue on the unpaid principal balance of this Note. All unpaid principal, together with any then unpaid and accrued interest and other amounts payable hereunder, shall be due and payable, if not earlier converted, on JULY 24, 2023 (the “Maturity Date”). This Note is one of the “Notes” issued pursuant to that Securities Purchase Agreement dated JULY 24, 2018 (as amended, modified or supplemented, the “Securities Purchase Agreement”), between the Company and the Investors (as defined in the Securities Purchase Agreement). The maximum principal amount of all of the Notes shall not exceed, in aggregate, Two Million Five Hundred Thousand Dollars ($2,500,000).

The Investor hereby appoints and authorizes any combination of the Investors (as defined in the Securities Purchase Agreement) who, collectively, represent a majority of the outstanding principal under all of the Notes (together, the “Requisite Investors”) to take all actions and exercise all rights on the Investor’s behalf under this Note, in the sole and absolute discretion of the Requisite Investors, without the requirement of receiving consent from the Investor, but with the requirement of delivering written notice to the Company in accordance with the provisions of Section 14 hereof at least five (5) days prior to the taking of any such action or the exercise of any such right, except that the Requisite Investors shall not, without the Investor’s prior written consent, (a) exercise any such right as to the Investor which would increase or decrease the Principal Amount or the interest rate or (b) exercise any such right as to the Investor unless the exercise thereof applies equally to all of the Investors in the same relative fashion. In no event shall any interest charged, collected or reserved under this Note exceed the maximum rate then permitted by applicable law and if any such payment is paid by the Company, then such excess sum shall be credited by the Investors as a payment of principal.

The following is a statement of the rights of Investor and the conditions to which this Note is subject, and to which Investor, by the acceptance of this Note, agrees:

1.         Definitions. As used in this Note, the following capitalized terms have the following meanings:

(a)     “Company” includes the corporation initially executing this Note and any Person which shall succeed to or assume the obligations of the Company under this Note.

(b)     “Common Stock” means the Company’s common stock, par value $0.01 per share.

(c)     “Conversion Price” means $0.25, subject to adjustment as set forth in Section 6.

(d)     “Event of Default” has the meaning given in Section 4 hereof.

(e)     “Investor” shall mean the Person specified in the introductory paragraph of this Note or any Person who shall at the time be the registered holder of this Note.

(f)      “Issuance Date” means the date first written above.

(g)     “Obligations” shall mean and include all loans, advances, debts, liabilities and obligations, howsoever arising, owed by the Company to Investor of every kind and description (whether or not evidenced by any note or instrument and whether or not for the payment of money), now existing or hereafter arising under or pursuant to the terms of this Note, the Securities Purchase Agreement, including, all interest, fees, charges, expenses, attorneys’ fees and costs and accountants’ fees and costs chargeable to and payable by the Company hereunder and thereunder, in each case, whether direct or indirect, absolute or contingent, due or to become due, and whether or not arising after the commencement of a proceeding under Title 11 of the United States Code (11 U. S. C. Section 101 et seq.), as amended from time to time (including post-petition interest) and whether or not allowed or allowable as a claim in any such proceeding.

(h)     “Person” shall mean and include an individual, a partnership, a corporation (including a business trust), a joint stock company, a limited liability company, an unincorporated association, a joint venture or other entity or a governmental authority.

(i)      “Securities Act” shall mean the Securities Act of 1933, as amended.

(j)      “Securities Purchase Agreement” has the meaning given in the introductory paragraph hereof.

2.         Interest. No interest shall accrue on this Note.

3.        Prepayment. The Company may, on at least ten (10) days’ prior written notice to the Investor, prepay this Note in whole or in part at any time or from time to time without penalty or premium by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment. The Investor shall have all rights available to it pursuant to this Note, including conversion rights, through the date of such prepayment.

2

4.        Events of Default. The occurrence of any of the following shall constitute an “Event of Default” under this Note and the other Notes issued under the Securities Purchase Agreement:

(a)     the Company fails to pay the principal amount of this Note, or any other amount due under this Note, when due and such failure continues for five (5) days;

(b)     the Company fails to observe or perform in any material respect any of its covenants or obligations contained in the Note or the Securities Purchase Agreement and such failure continues for more than thirty (30) days after delivery of written notice thereof;

(c)     any representation or warranty made or deemed made by the Company to the Investor in the Securities Purchase Agreement is incorrect in any material respect on the date as of which such representation or warranty was made or deemed made;

(d)     the Company makes an assignment for the benefit of creditors; (ii) an order, judgment or decree is entered adjudicating the Company as bankrupt or insolvent; (iii) any order for relief with respect to the Company is entered under the U.S. Bankruptcy Code or any other applicable bankruptcy or insolvency law; (iv) the Company petitions or applies to any tribunal for the appointment of a custodian, trustee, receiver or liquidator of the Company commences any proceeding relating to it under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction; or (v) any such petition or application in (iv) above is filed, or any such proceeding is commenced, against the Company and either (x) the Company by any act indicates its approval thereof, consents thereto or acquiesces therein or (y) such petition, application or proceeding is not dismissed within sixty (60) days;

(e)     any indebtedness of the Company for borrowed money (other than indebtedness under the Notes) in excess of $100,000 in aggregate principal amount is accelerated as a result of a default or breach under any agreement for such borrowed money, including but not limited to loan agreements, or material breach under any real property lease agreements and capital equipment lease agreements, by which the Company is bound or obligated, which breach is not cured by the Company within sixty (60) days of delivery of written notice thereof; or

(f)     a final judgment for the payment of money in excess of $100,000 shall be filed against the Company and the same shall remain undischarged for a period of 30 days during which execution shall not be effectively stayed, or any judgment, writ, assessment, warrant of attachment, or execution or similar process shall be issued or levied against a substantial part of the property of the Company and such judgment, writ, or similar process shall not be released, stayed, vacated or otherwise dismissed within thirty (30) days after issue or levy.

5.       Rights of Investor upon Default. Upon the occurrence of any Event of Default (other than an Event of Default described in Section 4(b)) and at any time thereafter during the continuance of such Event of Default, the Investor may, by written notice to the Company, declare all outstanding Obligations to be immediately due and payable without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived, anything contained herein or in the Securities Purchase Agreement to the contrary notwithstanding. Upon the occurrence of any Event of Default described in Section 4(d), immediately and without notice, all outstanding Obligations shall automatically become immediately due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived, anything contained herein or in the Securities Purchase Agreement to the contrary notwithstanding.

3

6.          Conversion.

(a)     The Investor may, at the Investor’s option, at any time while any Principal Amounts remains outstanding, convert the then-outstanding Principal Amount or any portion thereof (the “Conversion Amount”), into the number of fully paid and non-assessable shares of Common Stock (the “Conversion Shares”) determined by dividing the Conversion Amount by the Conversion Price then in effect. The Investor may exercise the right to convert all or any portion of the Conversion Amount by delivering to the Company (i) an executed and completed notice of conversion in the form attached to this Note as Exhibit A (the “Notice of Conversion”) to the Company and (ii) this Note. The business day on which a Notice of Conversion and this Note are delivered to the Company in accordance with the provisions hereof shall be deemed a “Conversion Date.” The Company will transmit the certificates representing Conversion Shares issuable upon such conversion of this Note to the Investor via express courier within a reasonable time after the Conversion Date. No fractional shares shall be issued upon conversion of this Note. The amount of any of the Conversion Amount which is less than a whole share of Common Stock shall be paid to the Investor in cash. Any delay due to such circumstance shall not be an event of default under this Note.

(b)       The Principal Amount of this Note, and any accrued interest thereon, shall be reduced by the Principal Amount indicated on the Notice of Conversion upon the proper receipt by the Investor of the Conversion Shares due upon such Notice of Conversion.

(c)        The Conversion Price shall be adjusted as follows:

(i)     If the Company shall at any time after the Issuance Date subdivide its outstanding shares of Common Stock into a greater number of shares of Common Stock, the Conversion Price in effect immediately prior to such subdivision shall be proportionately decreased, and conversely, in case the outstanding shares of Common Stock shall be combined into a smaller number of shares of Common Stock, the Conversion Price in effect immediately prior to such combination shall be proportionately increased.

(ii)     If the Company shall at any time or from time to time after the Issuance Date makes, or fixes a record date for the determination of Investors of Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock, then and in each such event the Conversion Price shall be proportionately reduced; provided, however, that if such record date is fixed and such dividend is not fully paid, or if such distribution is not fully made on the date fixed therefor, the Conversion Price shall be recomputed to reflect that such dividend was not fully paid or that such distribution was not fully made.

4

(d)          If Company at any time or from time to time after the Issuance Date makes, or fixes a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of Company other than shares of Common Stock, then and in each such event provision shall be made so that Investor shall receive upon exercise of the conversion right of this Note, in addition to the number of shares of Common Stock receivable thereupon, the amount of securities of Company which Investor would have received had the Conversion Amount of this Note been exercised on the date of such event and had it thereafter, during the period from the date of such event to and including the date of conversion or purchase, retained such securities receivable during such period.

(e)           If the Common Stock issuable upon the conversion of this Note or option to purchase is changed into the same or a different number of shares of any class or classes of stock, whether by recapitalization, reclassification or otherwise (other than a transaction described elsewhere in this Section 6), then, and in any such event, each Investor shall have the right thereafter, upon conversion of this Note or purchase pursuant to option to receive the kind and amount of stock and other securities and property receivable upon such reorganization or other change, in an amount equal to the amount that Investor would have been entitled to had it immediately prior to such reorganization, reclassification or change converted this Note, but only to the extent this Note is actually converted, all subject to further adjustment as provided herein

7.       Waiver and Amendment. Any provision of this Note may be amended, waived or modified upon the written consent of the Company and the Requisite Investors. No such waiver or consent in any one instance shall be construed to be a continuing waiver or a waiver in any other instance unless it expressly so provides.

8.         No Rights as a Stockholder. This Note does not by itself entitle the Investor to any voting rights or other rights as a stockholder of the Company. In the absence of conversion of this Note, no provisions of this Note, and no enumeration herein of the rights or privileges of the Investor, shall cause the Investor to be a stockholder of the Company for any purpose.

9.         Governing Law. This Note and all actions arising out of or in connection with Note shall be governed by and construed in accordance with the laws of the State of New York, without regard to the conflicts of law provisions of the State of New York or of any other state. The parties hereto agree that all proceedings concerning the interpretations, enforcement and defense of this Note shall be commenced exclusively in the state and federal courts sitting in Monroe County, State of New York. The parties hereto irrevocably submit to the exclusive jurisdiction of the state and federal courts sitting in the State of New York, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is improper or is an inconvenient venue for such proceeding

10.        Successors and Assigns. Subject to the restrictions on transfer and assignment described in Section 11 and Section 12, the rights and obligations of the Company and Investor shall be binding upon and benefit the successors, assigns, heirs, administrators and transferees of the parties.

5

11.       Transfer of this Note or Securities Issuable on Conversion Hereof. With respect to any offer, sale or other disposition of this Note or securities into which such Note may be converted, Investor will give written notice to the Company prior thereto, describing briefly the manner thereof, together with a written opinion of Investor’s counsel, or other evidence if reasonably satisfactory to the Company, to the effect that such offer, sale or other distribution may be effected without registration or qualification (under any federal or state law then in effect). Upon receiving such written notice and reasonably satisfactory opinion, if so requested, or other evidence, the Company, as promptly as practicable, shall notify Investor that Investor may sell or otherwise dispose of this Note or such securities, all in accordance with the terms of the notice delivered to the Company. If a determination has been made pursuant to this Section 11 that the opinion of counsel for Investor, or other evidence, is not reasonably satisfactory to the Company, the Company shall so notify Investor promptly after such determination has been made. Each Note thus transferred and each certificate representing the securities thus transferred shall bear a legend as to the applicable restrictions on transferability in order to ensure compliance with the Securities Act, unless in the opinion of counsel for the Company such legend is not required in order to ensure compliance with the Securities Act. The Company may issue stop transfer instructions to its transfer agent in connection with such restrictions. Subject to the foregoing, transfers of this Note shall be registered upon registration books maintained for such purpose by or on behalf of the Company as provided in the Securities Purchase Agreement. Prior to presentation of this Note for registration of transfer, the Company shall treat the registered holder hereof as the owner and holder of this Note for the purpose of receiving all payments of principal and interest hereon and for all other purposes whatsoever, whether or not this Note shall be overdue and the Company shall not be affected by notice to the contrary.

12.        Assignment by the Company. The rights, interests or obligations hereunder may not be assigned, by operation of law or otherwise, in whole or in part, by the Company without the prior written consent of each of the Investors.

13.       Notices. All notices and other communications given or made pursuant to this Note shall be in writing and shall be deemed effectively given (a) upon personal delivery to the party to be notified; (b) when sent by confirmed electronic mail or facsimile if sent during normal business hours of the recipient, and if not so confirmed, then on the next business day; (c) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (d) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the Investor at the address set forth on the books and records of the Company or at such other place as may be designated by the Investor in writing to the Company in accordance with the provisions of this Section 13, and to the Company at the Company’s principal place of business, or to such e-mail address, facsimile number or address as subsequently modified by written notice in accordance with the provisions of this Section 13.

14.       Pari Passu Notes. Investor acknowledges and agrees that the payment of all or any portion of the outstanding principal amount of this Note and all interest hereon shall be pari passu in right of payment and in all other respects to the other Notes issued pursuant to the Securities Purchase Agreement or pursuant to the terms of such Notes. In the event Investor receives payments in excess of its pro rata share of the Company’s payments to the Investors of all of the Notes, then Investor shall hold in trust all such excess payments for the benefit of the holders of the other Notes and shall pay such amounts held in trust to such other holders upon demand by such holders.

6

15.         Payment. Payment shall be made in lawful tender of the United States.

16.       Default Rate; Usury. During any period in which an Event of Default has occurred and is continuing, the Company shall pay interest on the unpaid principal balance hereof at a default rate per annum of five percent (5%). In the event any interest is paid on this Note which is deemed to be in excess of the then legal maximum rate, then that portion of the interest payment representing an amount in excess of the then legal maximum rate shall be deemed a payment of principal and applied against the principal of this Note.

17.        Expenses; Waivers. If action is instituted to collect this Note, the Company promises to pay all costs and expenses, including, without limitation, reasonable attorneys’ fees and costs, incurred in connection with such action. The Company hereby waives notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor and all other notices or demands relative to this instrument.

[Signature Page Follows]

7

IN WITNESS WHEREOF, the Company has caused this Note to be issued as of the date first written above.

CURAEGIS TECHNOLOGIES, INC

By:

Name:   Kathleen A. Browne

Title:     Chief Financial Officer

[SIGNATURE PAGE TO CONVERTIBLE PROMISSORY NOTE]

EXHIBIT A

NOTICE OF CONVERSION

Reference is made to that Convertible Promissory Note dated ________, 2018 (the “Note”) in the original principal amount of $_______________ issued to the undersigned by CurAegis Technologies, Inc., a New York corporation (the “Company”). Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to them in the Note.

Pursuant to Section 6 of the Note, the undersigned hereby irrevocably elects to convert $[______________] in Principal Amount of the Note outstanding on the date hereof into shares of Common Stock (“Conversion Shares”) at the Conversion Price in effect on the date hereof and on the terms and subject to the conditions set forth in Section 6 of the Note.

If the Conversion Shares are to be issued in the name of a Person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto. No fee will be charged to undersigned for any conversion except as provided herein.

Name:

Signature:

Date:

Exact name in which Conversion Shares should be issued:

Address to which certificates representing Conversion Shares should be delivered:

EX-10.3

Exhibit 10.3

THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, HYPOTHECATED, DONATED OR OTHERWISE TRANSFERRED WITHOUT COMPLIANCE WITH THE REGISTRATION OR QUALIFICATION PROVISIONS OF APPLICABLE FEDERAL AND STATE SECURITIES LAWS OR WITHOUT DELIVERING AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. 

Date   , 2018         

CURAEGIS TECHNOLOGIES, INC.

COMMON STOCK PURCHASE WARRANT

VOID AFTER 5:00 P.M., EASTERN TIME,

ON THE EXPIRATION DATE

FOR VALUE RECEIVED, CURAEGIS TECHNOLOGIES, INC., a New York corporation (the “Company”), hereby agrees to sell upon the terms and on the conditions hereinafter set forth, at any time commencing on the date hereof but no later than 5:00 p.m., Eastern Time, on ____________, 2028 (the “Expiration Date”), to ___________________________________ or his registered assigns (the “Holder”), under the terms as hereinafter set forth, ____________________ (____________) fully paid and non-assessable shares of the Company’s common stock, par value $.01 per share (the “Common Stock”), at a purchase price per share equal to $0.25 (the “Exercise Price”), pursuant to the terms and conditions set forth in this Common Stock Purchase Warrant (this “Warrant”). The number of shares of Common Stock issued upon exercise of this Warrant (“Warrant Shares”) and the Exercise Price are subject to adjustment in certain events as hereinafter set forth.

This Warrant is issued pursuant to that certain Securities Purchase Agreement among the Holder, certain other persons and the Company, dated as of JULY 24, 2018.

1.         Exercise of Warrant.

(a)     The Holder may exercise this Warrant according to the terms and conditions set forth herein by delivering to the Company, at the address set forth in Section 9 prior to 5:00 p.m., Eastern Time, on the Expiration Date (i) this Warrant, (ii) the Subscription Form attached hereto as Exhibit A (the “Subscription Form”) (having then been duly executed by the Holder), (iii) cash, a certified check or a bank draft in payment of the purchase price, in lawful money of the United States of America, for the number of Warrant Shares specified in the Subscription Form.

(b)     This Warrant may be exercised in whole or in part so long as any exercise in part hereof would not involve the issuance of fractional Warrant Shares. If exercised in part, the Company shall deliver to the Holder a new Warrant, identical in form to this Warrant, in the name of the Holder, evidencing the right to purchase the number of Warrant Shares as to which this Warrant has not been exercised, which new Warrant shall be signed by the Chairman, Chief Executive Officer or President of the Company. The term Warrant as used herein shall include any subsequent Warrant issued as provided herein.

(c)     No fractional Warrant Shares or scrip representing fractional Warrant Shares shall be issued upon the exercise of this Warrant. In lieu of such fractional Warrant Shares, the Company shall pay cash in an amount equal to the Exercise Price multiplied by the applicable fraction.

(d)     In the event of any exercise of the rights represented by this Warrant, a certificate or certificates for Warrant Shares so purchased, registered in the name of the Holder on the stock transfer books of the Company, shall be delivered to the Holder within a reasonable time after such rights shall have been so exercised. The person or entity in whose name any certificate for Warrant Shares is issued upon exercise of the rights represented by this Warrant shall for all purposes be deemed to have become the holder of record of such Warrant Shares immediately prior to the close of business on the date on which the Warrant was surrendered and payment of the Exercise Price and any applicable taxes was made, irrespective of the date of delivery of such certificate, except that, if the date of such surrender and payment is a date when the stock transfer books of the Company are closed, such person shall be deemed to have become the holder of such shares at the opening of business on the next succeeding date on which the Company’s stock transfer books are open. Except as provided in Section 4 hereof, the Company shall pay any and all documentary stamp or similar issue or transfer taxes payable in respect of the issue or delivery of Warrant Shares on exercise of this Warrant.

2.         Disposition of Warrant Shares and Warrant.

(a)     The Holder hereby acknowledges that: (i) this Warrant and any Warrant Shares purchased pursuant hereto are not being registered (A) under the Securities Act of 1933 (the “Securities Act”) on the ground that the issuance of this Warrant is exempt from registration under Section 4(a)(2) of the Securities Act as not involving any public offering, or (B) under any applicable state securities law because the issuance of this Warrant does not involve any public offering; and (ii) that the Company’s reliance on the registration exemption under Section 4(a)(2) of the Securities Act and under applicable state securities laws is predicated in part on the representations hereby made to the Company by the Holder. The Holder represents and warrants that he, she, or it is acquiring this Warrant and will acquire Warrant Shares for investment for his own account, with no present intention of dividing his participation with others or reselling or otherwise distributing this Warrant or Warrant Shares.

(b)     The Holder hereby agrees that it will not sell, transfer, pledge or otherwise dispose of (collectively, “Transfer”) all or any part of this Warrant and/or Warrant Shares unless and until (A) the securities to be transferred are eligible for transfer under Rule 144 under the Securities Act, (B) there is in effect a registration statement under the Securities Act covering the proposed transaction, or (C) he shall have first have given notice to the Company describing such Transfer and furnished to the Company (i) a statement from the transferee, whereby the transferee represents and warrants that he, she, or it is acquiring this Warrant and will acquire Warrant Shares, as applicable, for investment for his own account, with no present intention of dividing his participation with others or reselling or otherwise distributing this Warrant or Warrant Shares, as applicable, and either (ii) an opinion, reasonably satisfactory to counsel for the Company, of counsel (skilled in securities matters, selected by the Holder and reasonably satisfactory to the Company) to the effect that the proposed Transfer may be made without registration under the Securities Act and without registration or qualification under any state law, or (iii) an interpretative letter from the U.S. Securities and Exchange Commission to the effect that no enforcement action will be recommended if the proposed sale or transfer is made without registration under the Act. It is agreed that, provided an opinion of counsel is not required by the Company’s transfer agent, (i) the Company shall not require opinions of counsel for transactions made pursuant to Rule 144 except in unusual circumstances, and (ii) no registration statement or opinion of counsel shall be necessary for a transfer without consideration by a Holder to an Affiliate of such Holder or without consideration by a Holder which is (A) a partnership to its partners or retired partners in accordance with partnership interests, (B) a corporation to its shareholders in accordance with their interest in the corporation, (C) a limited liability company to its members or former members in accordance with their interests in the limited liability company, (D) an individual Holder to such Holder’s Immediate Family Member or a trust for the benefit of the individual Holder or an Immediate Family Member thereof. As used in this Section 2(b), “Affiliate,” as used in this Section, means, with respect to any specified person, any other person who, directly or indirectly, controls, is controlled by, or is under common control with such person, including without limitation any general partner, managing member, officer or director of such person, and “Immediate Family Member” means, with respect to a specified person, such person’s child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relationships.

2

(c)     If, at the time of issuance of Warrant Shares, no registration statement is in effect with respect thereto under applicable provisions of the Securities Act and Rule 144 or another similar exemption under the Securities Act is not available for the sale of all of such Warrant Shares without limitation during a three-month period without registration, the Company may, at its election, require that (i) the Holder provide written reconfirmation of the Holder’s investment intent to the Company, and (ii) any stock certificate evidencing Warrant Shares shall bear legends reading substantially as follows:

“THE SALE, TRANSFER, PLEDGE OR OTHER DISPOSITION OF THE SHARES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO CERTAIN RESTRICTIONS SET FORTH IN THE WARRANT PURSUANT TO WHICH THESE SHARES WERE PURCHASED FROM THE COMPANY. COPIES OF SUCH RESTRICTIONS ARE ON FILE AT THE PRINCIPAL OFFICES OF THE COMPANY. NO TRANSFER OF SUCH SHARES OR OF THIS CERTIFICATE (OR OF ANY SHARES OR OTHER SECURITIES (OR CERTIFICATES THEREFOR) ISSUED IN EXCHANGE FOR OR IN RESPECT OF SUCH SHARES) SHALL BE EFFECTIVE UNLESS AND UNTIL THE TERMS AND CONDITIONS SET FORTH IN THE WARRANT HAVE BEEN COMPLIED WITH.”

“THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 (THE “ACT”) OR AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER OF THIS CERTIFICATE THAT REGISTRATION IS NOT REQUIRED UNDER THE ACT.”

3

In addition, so long as the foregoing legend may remain on any stock certificate evidencing Warrant Shares, the Company may maintain appropriate “stop transfer” orders with respect to such certificates and the shares represented thereby on its books and records and with those to whom it may delegate registrar and transfer functions.

3.        Reservation of Shares. The Company hereby agrees that at all times there shall be reserved for issuance upon the exercise of this Warrant such number of shares of the Common Stock as shall be required for issuance upon exercise of this Warrant. The Company further agrees that all Warrant Shares will be duly authorized and will, upon issuance and payment of the exercise price therefor, be validly issued, fully paid and non-assessable, free from all taxes, liens, charges and encumbrances with respect to the issuance thereof, other than taxes, if any, in respect of any transfer occurring contemporaneously with such issuance and other than transfer restrictions imposed by federal and state securities laws.

4.        Exchange, Transfer or Assignment of Warrant. Subject to Section 2, this Warrant is exchangeable, without expense, at the option of the Holder, upon presentation and surrender hereof to the Company or at the office of its stock transfer agent, if any, for other Warrants of the Company (“Warrants”) of different denominations, entitling the Holder or Holders thereof to purchase in the aggregate the same number of Warrant Shares purchasable hereunder. Subject to Section 2, upon surrender of this Warrant to the Company or at the office of its stock transfer agent, if any, with the Assignment Form attached hereto as Exhibit B (the “Assignment Form”) duly executed and funds sufficient to pay any transfer tax, the Company shall, without charge, execute and deliver a new Warrant in the name of the assignee named in the Assignment Form and this Warrant shall promptly be canceled. Subject to Section 2, this Warrant may be divided or combined with other Warrants that carry the same rights upon presentation hereof at the office of the Company or at the office of its stock transfer agent, if any, together with a written notice specifying the names and denominations in which new Warrants are to be issued and signed by the Holder hereof.

5.         Capital Adjustments. This Warrant is subject to the following further provisions:

(a)     Recapitalization, Reclassification and Succession. If any recapitalization of the Company or reclassification of its Common Stock or any merger or consolidation of the Company into or with a corporation or other business entity, or the sale or transfer of all or substantially all of the Company’s assets or of any successor corporation’s assets to any other corporation or business entity (any such corporation or other business entity being included within the meaning of the term “successor corporation”) shall be effected, at any time while this Warrant remains outstanding and unexpired, then, as a condition of such recapitalization, reclassification, merger, consolidation, sale or transfer, lawful and adequate provision shall be made whereby the Holder of this Warrant thereafter shall have the right to receive upon the exercise hereof as provided in Section 1 and in lieu of the Warrant Shares immediately theretofore issuable upon the exercise of this Warrant, such shares of capital stock, securities or other property as may be issued or payable with respect to or in exchange for the number of outstanding shares of Common Stock equal to the number of Warrant Shares immediately theretofore issuable upon the exercise of this Warrant had such recapitalization, reclassification, merger, consolidation, sale or transfer not taken place, and in each such case, the terms of this Warrant shall be applicable to the shares of stock or other securities or property receivable upon the exercise of this Warrant after such consummation.

4

(b)     Subdivision or Combination of Shares. If the Company at any time while this Warrant remains outstanding and unexpired shall subdivide or combine its Common Stock, the number of Warrant Shares purchasable upon exercise of this Warrant shall be proportionately adjusted.

(c)     Stock Dividends and Distributions. If the Company at any time while this Warrant is outstanding and unexpired shall issue or pay the holders of its Common Stock, or take a record of the holders of its Common Stock for the purpose of entitling them to receive, a dividend payable in, or other distribution of, Common Stock, then the number of Warrant Shares purchasable upon exercise of this Warrant shall be adjusted to the number of shares of Common Stock that Holder would have owned immediately following such action had this Warrant been exercised immediately prior thereto.

(d)     Price Adjustments. Whenever the number of Warrant Shares purchasable upon exercise of this Warrant is adjusted pursuant to Sections 5(a), 5(b) or 5(c), the Exercise Price shall be proportionately adjusted.

(e)     Certain Shares Excluded. The number of shares of Common Stock outstanding at any given time for purposes of the adjustments set forth in this Section 5 shall exclude any shares then directly or indirectly held in the treasury of the Company.

6.         Notice to Holders.

(a)        Notice of Record Date. In case:

(i)     the Company shall take a record of the holders of its Common Stock (or other stock or securities at the time receivable upon the exercise of this Warrant) for the purpose of entitling them to receive any dividend (other than a cash dividend payable out of earned surplus of the Company) or other distribution, or any right to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right;

(ii)     of any capital reorganization of the Company, any reclassification of the capital stock of the Company, any consolidation with or merger of the Company into another corporation, or any conveyance of all or substantially all of the assets of the Company to another corporation; or

(iii)     of any voluntary dissolution, liquidation or winding-up of the Company;

then, and in each such case, the Company will mail or cause to be mailed to the Holder hereof at the time outstanding a notice specifying, as the case may be, (i) the date on which a record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, or (ii) the date on which such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up is to take place, and the time, if any, is to be fixed, as of which the holders of record of Common Stock (or such stock or securities at the time receivable upon the exercise of this Warrant) shall be entitled to exchange their shares of Common Stock (or such other stock or securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, conveyance, dissolution or winding-up. Such notice shall be mailed at least twenty (20) calendar days prior to the record date therein specified, or if no record date shall have been specified therein, at least twenty (20) days prior to such specified date.

5

(b)     Certificate of Adjustment. Whenever any adjustment shall be made pursuant to Section 5 hereof, the Company shall promptly make available and have on file for inspection a certificate signed by its Chairman, Chief Executive Officer, President or a Vice President, setting forth in reasonable detail the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated and the Exercise Price and number of Warrant Shares purchasable upon exercise of this Warrant after giving effect to such adjustment.

7.        Loss, Theft, Destruction or Mutilation. Upon receipt by the Company of evidence satisfactory to it, in the exercise of its reasonable discretion, of the ownership and the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, of indemnity reasonably satisfactory to the Company and, in the case of mutilation, upon surrender and cancellation thereof, the Company will execute and deliver in lieu thereof, without expense to the Holder, a new Warrant of like tenor dated the date hereof.

8.        Warrant Holder Not a Shareholder. The Holder of this Warrant, as such, shall not be entitled by reason of this Warrant to any rights whatsoever as a shareholder of the Company, including but not limited to voting rights.

9.          Notices. Any notice provided for in this Warrant must be in writing and must be either personally delivered, mailed by first class mail (postage prepaid and return receipt requested), or sent by reputable overnight courier service (charges prepaid) to the recipient at the address below indicated:

  If to the Company:

  CurAegis Technologies, Inc.

  1999 Mt. Read Boulevard, Building 3

  Rochester, New York 14615

  Attention: Chief Executive Officer

  If to the Holder:

  To the address of such Holder set forth on the books and records of the Company,

or such other address or to the attention of such other person as the recipient party shall have specified by prior written notice to the sending party. Any notice under this Warrant will be deemed to have been given (a) if personally delivered, upon such delivery, (b) if mailed, five days after deposit in the U.S. mail, or (c) if sent by reputable overnight courier service, one business day after such services acknowledges receipt of the notice.

6

10.        Choice of Law. THIS WARRANT IS ISSUED UNDER AND SHALL FOR ALL PURPOSES BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO ITS CONFLICTS OF LAW RULES.

[Signature Page Follows]

7

IN WITNESS WHEREOF, the Company has duly caused this Warrant to be executed on the date first written above. 

CURAEGIS TECHNOLOGIES, INC.

By:

Name: Kathleen A. Browne

Title:   Chief Financial Officer

[SIGNATURE PAGE TO COMMON STOCK PURCHASE WARRANT]

Exhibit A

Subscription form

CurAegis Technologies, Inc.

1999 Mt. Read Boulevard, Building 3

Rochester, New York 14615

Attention: Chief Executive Officer

The undersigned hereby (1) irrevocably elects to exercise his or its rights to purchase ____________ shares of Company’s common stock, par value $0.01 per share (“Common Stock”), issuable upon exercise of the attached Warrant, and (2) makes payment in full of the purchase price therefore by enclosure of cash, a certified check or bank draft, and (3) requests that certificates for such shares of Common Stock be issued in the name of:

(Please print the Warrant holder’s name, address and Social Security/Tax Identification Number)

________________________________________________

________________________________________________

________________________________________________

and (4) if such number of shares of Common Stock shall not be all the shares receivable upon exercise of the attached Warrant, requests that a new Warrant for the balance of the shares covered by the attached Warrant be registered in the name of, and delivered to:

(Please print name, address and Social Security/Tax Identification Number)

________________________________________________

________________________________________________

________________________________________________

In lieu of receipt of a fractional share of Common Stock, the undersigned will receive a check representing payment therefor.

Dated: _____________________	_________________________________
	PRINT WARRANT HOLDER NAME
	____________________________________
	Name: ____________________________
	Title: _____________________________

EXHIBIT B

ASSIGNMENT FORM

CurAegis Technologies, Inc.

1999 Mt. Read Boulevard, Building 3

Rochester, New York 14615

Attention: Chief Executive Officer

FOR VALUE RECEIVED,                                                                                hereby sells, assigns and transfers unto

(Please print assignee’s name, address and Social Security/Tax Identification Number)

________________________________________________

________________________________________________

________________________________________________

the right to purchase the common stock, par value $0.01 per share, of CurAegis Technologies, Inc., a New York corporation (the “Company”), represented by this Warrant to the extent of shares as to which such right is exercisable and does hereby irrevocably constitute and appoint ____________________________, Attorney, to transfer the same on the books of the Company with full power of substitution in the premises.

Dated: _____________________	_________________________________
	PRINT WARRANT HOLDER NAME
	___________________________________
	Name: ____________________________
	Title: _____________________________

EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, Richard A. Kaplan, Chief Executive Officer of CURAEGIS TECHNOLOGIES, INC., hereby certifies that:

1.	I have reviewed this quarterly report on Form 10-Q of CURAEGIS TECHNOLOGIES, INC.
2.	Based on my knowledge, this 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 report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.	Designed such internal controls over financial reporting, or caused such internal controls over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based upon such evaluation; and
d.	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 7, 2018	/s/ Richard A. Kaplan
	Richard A. Kaplan
	Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, Kathleen A. Browne, Principal Accounting Officer of CURAEGIS TECHNOLOGIES, INC., hereby certifies that:

1. I have reviewed this quarterly report on Form 10-Q of CURAEGIS TECHNOLOGIES, INC.

2. Based on my knowledge, this 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 report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal controls over financial reporting, or caused such internal controls over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based upon such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 7, 2018	/s/ Kathleen A. Browne
	Kathleen A. Browne
	Principal Accounting Officer

EX-32

EXHIBIT 32 

Certificate pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of CURAEGIS TECHNOLOGIES, INC. (“CURAEGIS TECHNOLOGIES, INC.”) on Form 10-Q for the period ending June 30, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Richard A. Kaplan, chief executive officer and principal accounting officer, of CURAEGIS TECHNOLOGIES, INC. certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of CURAEGIS TECHNOLOGIES, INC.

August 7, 2018	/s/ Richard A. Kaplan
	Richard A. Kaplan
	Chief Executive Officer
August 7, 2018	/s/ Kathleen A. Browne  Kathleen A. Browne  Principal Accounting Officer

Issuer Statement

A signed original of this written statement required by Section 906 has been provided to CURAEGIS TECHNOLOGIES, INC., and will be retained by CURAEGIS TECHNOLOGIES, INC. and furnished to the Securities and Exchange Commission or its staff upon request.

XML

Document And Entity Information - shares	6 Months Ended
	Jun. 30, 2018	Aug. 06, 2018
Document Information [Line Items]
Entity Registrant Name	CurAegis Technologies, Inc.
Entity Central Index Key	0001063197
Trading Symbol	crgs
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Well-known Seasoned Issuer	No
Entity Common Stock, Shares Outstanding (in shares)		49,999,696
Document Type	10-Q
Document Period End Date	Jun. 30, 2018
Document Fiscal Year Focus	2018
Document Fiscal Period Focus	Q2
Amendment Flag	false

XML

Condensed Consolidated Balance Sheets (Current Period Unaudited) - USD ($)	Jun. 30, 2018	Dec. 31, 2017
Current Assets:
Cash	$ 89,000	$ 194,000
Accounts receivable	1,000	8,000
Inventory (net)	1,741,000	1,744,000
Prepaid expenses and other current assets	49,000	27,000
Total current assets	1,880,000	1,973,000
Software (net)	40,000	102,000
Property and equipment (net)	99,000	125,000
Total non-current assets	139,000	227,000
Total Assets	2,019,000	2,200,000
Current Liabilities:
Accounts payable	249,000	167,000
Liability for inventory held at vendor	1,462,000	1,678,000
Other current liabilities	85,000	103,000
Accrued interest	165,000	87,000
Deferred revenue	19,000	5,000
Capital lease obligation - current	2,000	2,000
Total current liabilities	1,982,000	2,042,000
Capital lease obligation, non-current	2,000	3,000
Senior convertible notes (net)	5,353,000	3,563,000
Total Liabilities	7,337,000	5,608,000
Commitments
Stockholders' Deficit:
Common stock, $.01 par value, 400,000,000 shares authorized; shares issued and outstanding at June 30, 2018 and December 31, 2017: 49,849,546 and 48,979,546 respectively	498,000	490,000
Additional paid-in capital	77,021,000	76,494,000
Accumulated deficit	(83,278,000)	(80,841,000)
Total Stockholders' Deficit	(5,318,000)	(3,408,000)
Total Liabilities and Stockholders' Deficit	2,019,000	2,200,000
Preferred Class C [Member]
Stockholders' Deficit:
Preferred stock, value	157,000	159,000
Series C2 Preferred Stock [Member]
Stockholders' Deficit:
Preferred stock, value	245,000	250,000
Series C3 Preferred Stock [Member]
Stockholders' Deficit:
Preferred stock, value	33,000	34,000
Preferred Class A [Member]
Stockholders' Deficit:
Preferred stock, value	5,000	5,000
Preferred Class B [Member]
Stockholders' Deficit:
Preferred stock, value	$ 1,000	$ 1,000

XML

Condensed Consolidated Balance Sheets (Current Period Unaudited) (Parentheticals) - $ / shares	Jun. 30, 2018	Dec. 31, 2017
Preferred stock, shares authorized (in shares)	100,000,000	100,000,000
Preferred stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized (in shares)	400,000,000	400,000,000
Common stock, shares issued (in shares)	49,849,546	48,979,546
Common stock, shares outstanding (in shares)	49,849,546	48,979,546
Preferred Class C [Member]
Preferred stock, cumulative dividend per share (in dollars per share)	$ 0	$ 0
Preferred stock, shares issued (in shares)	15,687,500	15,937,500
Preferred stock, shares outstanding (in shares)	15,687,500	15,937,500
Series C2 Preferred Stock [Member]
Preferred stock, cumulative dividend per share (in dollars per share)	$ 0	$ 0
Preferred stock, shares issued (in shares)	24,500,000	25,000,000
Preferred stock, shares outstanding (in shares)	24,500,000	25,000,000
Series C3 Preferred Stock [Member]
Preferred stock, cumulative dividend per share (in dollars per share)	$ 0	$ 0
Preferred stock, shares issued (in shares)	3,268,000	3,388,000
Preferred stock, shares outstanding (in shares)	3,268,000	3,388,000
Preferred Class A [Member]
Preferred stock, cumulative dividend per share (in dollars per share)	$ 0.40	$ 0.40
Preferred stock, shares issued (in shares)	468,221	468,221
Preferred stock, shares outstanding (in shares)	468,221	468,221
Preferred Class B [Member]
Preferred stock, cumulative dividend per share (in dollars per share)	$ 0.50	$ 0.50
Preferred stock, shares issued (in shares)	67,500	67,500
Preferred stock, shares outstanding (in shares)	67,500	67,500

XML

Condensed Consolidated Statements of Operations (Unaudited) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Revenue	$ 8,000	$ 8,000	$ 16,000	$ 17,000
Cost of Revenue	33,000	37,000	70,000	74,000
Loss on Revenue	(25,000)	(29,000)	(54,000)	(57,000)
Engineering and development:
E&D costs, excluding stock-based compensation	301,000	459,000	727,000	944,000
Stock-based compensation	28,000	8,000	7,000	16,000
Total engineering and development	329,000	467,000	734,000	960,000
General and administrative:
G&A costs, excluding stock-based compensation	522,000	709,000	1,124,000	1,439,000
Stock-based compensation	7,000	21,000	30,000	116,000
Total general and administrative	529,000	730,000	1,154,000	1,555,000
Total costs and expenses	858,000	1,197,000	1,888,000	2,515,000
Loss from operations	(883,000)	(1,226,000)	(1,942,000)	(2,572,000)
Interest expense	(259,000)	(165,000)	(496,000)	(321,000)
Other income		1,000	1,000	2,000
Non-operating (expense)	(259,000)	(164,000)	(495,000)	(319,000)
Loss before income taxes	(1,142,000)	(1,390,000)	(2,437,000)	(2,891,000)
Income taxes
Net Loss	(1,142,000)	(1,390,000)	(2,437,000)	(2,891,000)
Preferred stock dividends	54,000	62,000	108,000	124,000
Net Loss attributable to common stockholders	$ (1,196,000)	$ (1,452,000)	$ (2,545,000)	$ (3,015,000)
Net Loss per common share attributable to common stockholders
Basic and Diluted (in dollars per share)	$ (0.02)	$ (0.03)	$ (0.05)	$ (0.06)
Weighted average number of shares of common stock:
Basic and Diluted (in shares)	49,571,000	47,810,000	49,302,000	47,591,000

XML

Condensed Consolidated Statement of Changes in Stockholders' Deficit (Unaudited) - USD ($)	Conversion of Preferred C to Common Share [Member] Preferred Stock [Member] Series C Preferred Stock [Member]	Conversion of Preferred C to Common Share [Member] Preferred Stock [Member] Series C2 Preferred Stock [Member]	Conversion of Preferred C to Common Share [Member] Preferred Stock [Member] Series C3 Preferred Stock [Member]	Conversion of Preferred C to Common Share [Member] Preferred Stock [Member] Preferred Class A [Member]	Conversion of Preferred C to Common Share [Member] Preferred Stock [Member] Preferred Class B [Member]	Conversion of Preferred C to Common Share [Member] Common Stock [Member]	Conversion of Preferred C to Common Share [Member] Additional Paid-in Capital [Member]	Conversion of Preferred C to Common Share [Member] Retained Earnings [Member]	Conversion of Preferred C to Common Share [Member]	Conversion of Preferred C2 to Common Stock [Member] Preferred Stock [Member] Series C Preferred Stock [Member]	Conversion of Preferred C2 to Common Stock [Member] Preferred Stock [Member] Series C2 Preferred Stock [Member]	Conversion of Preferred C2 to Common Stock [Member] Preferred Stock [Member] Series C3 Preferred Stock [Member]	Conversion of Preferred C2 to Common Stock [Member] Preferred Stock [Member] Preferred Class A [Member]	Conversion of Preferred C2 to Common Stock [Member] Preferred Stock [Member] Preferred Class B [Member]	Conversion of Preferred C2 to Common Stock [Member] Common Stock [Member]	Conversion of Preferred C2 to Common Stock [Member] Additional Paid-in Capital [Member]	Conversion of Preferred C2 to Common Stock [Member] Retained Earnings [Member]	Conversion of Preferred C2 to Common Stock [Member]	Conversion of Preferred C3 to Common Stock [Member] Preferred Stock [Member] Series C Preferred Stock [Member]	Conversion of Preferred C3 to Common Stock [Member] Preferred Stock [Member] Series C2 Preferred Stock [Member]	Conversion of Preferred C3 to Common Stock [Member] Preferred Stock [Member] Series C3 Preferred Stock [Member]	Conversion of Preferred C3 to Common Stock [Member] Preferred Stock [Member] Preferred Class A [Member]	Conversion of Preferred C3 to Common Stock [Member] Preferred Stock [Member] Preferred Class B [Member]	Conversion of Preferred C3 to Common Stock [Member] Common Stock [Member]	Conversion of Preferred C3 to Common Stock [Member] Additional Paid-in Capital [Member]	Conversion of Preferred C3 to Common Stock [Member] Retained Earnings [Member]	Conversion of Preferred C3 to Common Stock [Member]	Preferred Stock [Member] Series C Preferred Stock [Member]	Preferred Stock [Member] Series C2 Preferred Stock [Member]	Preferred Stock [Member] Series C3 Preferred Stock [Member]	Preferred Stock [Member] Preferred Class A [Member]	Preferred Stock [Member] Preferred Class B [Member]	Common Stock [Member]	Additional Paid-in Capital [Member]	Retained Earnings [Member]	Series C3 Preferred Stock [Member]	Total
Balance (in shares)																												15,937,500	25,000,000	3,388,000	468,221	67,500	48,979,546
Balance (in shares) at Dec. 31, 2017																												15,937,500	25,000,000	3,388,000	468,221	67,500	48,979,546
Balance at Dec. 31, 2017																												$ 159,000	$ 250,000	$ 34,000	$ 5,000	$ 1,000	$ 490,000	$ 76,494,000	$ (80,841,000)		$ (3,408,000)
Conversion Preferred Shares to Common (in shares)	(250,000)					250,000					(500,000)				500,000						(120,000)			120,000												120,000
Conversion Preferred Shares to Common	$ (2,000)					$ 2,000					$ (5,000)				$ 5,000						$ (1,000)			$ 1,000
Stock-based compensation																																		37,000			37,000
Issuance of warrants with convertible note																																		431,000			431,000
Beneficial conversion feature on convertible note																																		59,000			59,000
Net Loss																																			(2,437,000)		(2,437,000)
Balance (in shares)																												15,937,500	25,000,000	3,388,000	468,221	67,500	48,979,546
Balance at Jun. 30, 2018																												$ 157,000	$ 245,000	$ 33,000	$ 5,000	$ 1,000	$ 498,000	$ 77,021,000	$ (83,278,000)		$ (5,318,000)
Balance (in shares)																												15,687,500	24,500,000	3,268,000	468,221	67,500	49,849,546

XML

Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($)	6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017
Cash flows from operating activities:
Net loss	$ (2,437,000)	$ (2,891,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	88,000	92,000
Amortization of discount reported as interest	289,000	231,000
Stock-based compensation	37,000	132,000
Changes in working capital items:
Accounts receivable	7,000	4,000
Inventory	3,000	24,000
Prepaid expenses and other current assets	(22,000)	8,000
Accounts payable and other current liabilities	(75,000)	205,000
Deferred revenue	14,000	(7,000)
Net cash used in operating activities	(2,096,000)	(2,202,000)
Cash flows from investing activities:
Purchase of property, equipment and software		(142,000)
Net cash used in investing activities		(142,000)
Cash flows from financing activities:
Proceeds from issuance of senior convertible note (net)	1,991,000	392,000
Proceeds from exercise of common stock warrant		10,000
Net cash provided by financing activities	1,991,000	402,000
Net decrease in cash	(105,000)	(1,942,000)
Cash at beginning of period	194,000	2,009,000
Cash at end of period	89,000	67,000
Supplemental Disclosures:
Cash used for payment of interest	$ 128,000

XML

Note 1 - The Company and Basis of Presentation

6 Months Ended

Jun. 30, 2018

Notes to Financial Statements

Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block]

NOTE

1

- THE COMPANY AND BASIS OF PRESENTATION

CurAegis Technologies, Inc. (“CurAegis”, “the Company”) was incorporated as a New York business corporation in

September 

1996

under the name Torvec, Inc. The Company’s name was changed to CurAegis Technologies, Inc. in

2016

in connection with the establishment of its

two

business divisions. The CURA (Circadian User Risk Assessment) division is engaged in the fatigue management business and the Aegis division is engaged in the power and hydraulic business.

The Company develops and markets advanced technologies in the areas of safety, wellness and power. The Company is focused on the commercialization of a wellness and safety system (the CURA System) and a uniquely designed hydraulic pump that will be smaller, lighter, less expensive, and more efficient than current technology. The Company has

not

had any significant revenue-producing operations.  

The Company has created the CURA System to market products that reduce fatigue risk in the workplace and help individuals manage their sleep and improve alertness. The CURA System consists of the following capabilities:

● real-time alertness monitoring utilizing the CURA app,

● the Group Wellness Index, and

● the Z-Coach wellness program. 

Our goal with the Aegis hydraulic pump technology is to bring to the marketplace a unique concept in hydraulic pumps and motors that will be:

● smaller, lighter and less expensive than conventional pumps and motors,

● more efficient,

● as reliable,

● price competitive, and

● unique in its ability to scale larger, allowing more powerful pumps and motors.

It is important to note, regarding both the CURA and Aegis products, that the cycle time from the initiation of the sales process to revenue realization can be highly variable especially as a start-up entity. In addition to the activities to be undertaken to implement our plan of operations, we

may

expand and/or refocus our activities depending upon future circumstances and developments

.

Current Cash Outlook and Management Plans

As of

June 30, 2018,

we have cash on hand of

$89,000,

negative working capital of

$102,000,

a stockholders’ deficit of

$5,318,000

and an accumulated deficit of

$83,278,000.

During the

six

months ended

June 30, 2018

we raised

$1,995,000

in gross proceeds through the issuance of convertible notes and warrants, proceeds of which have been used to support the ongoing development and marketing of our core technologies and product initiatives.

Management estimates that the

2018

cash needs, based on its current development and product plans, will range from

$4.0

to

$4.5

million. As of

June 30, 2018,

the Company’s cash on hand is

not

sufficient to cover the Company’s future working capital requirements. This raises substantial doubt as to the Company’s ability to continue as a going concern. Management continues to use its best efforts to develop financing opportunities to fund the development and commercialization of the CURA and Aegis products.

Since inception, we have financed our operations by the sale of our securities and debt financings. We need to raise additional funds to meet our working capital needs, to fund expansion of our business, to complete development, testing and marketing of our products, or to make strategic acquisitions or investments.

No

assurance can be given that necessary funds will be available for us to finance our development on acceptable terms, if at all. Furthermore, such additional financings

may

involve dilution to our stockholders or

may

require that we relinquish rights to certain of our technologies or products. In addition, we

may

experience operational difficulties and delays due to working capital restrictions. If adequate funds are

not

available from additional sources of financing, we will have to delay or scale back our growth plans. 

The Company’s ability to fund its current and future commitments from its available cash depends on a number of factors. These factors include the Company’s ability to (i) launch and generate sales from the CURA division; (ii) generate revenue from the licensing or sale of our hydraulic technologies; or (iii) decrease engineering and development and administrative expenses. Even if these and other factors are

not

met, the Company will need to raise funds in order to meet its working capital needs and pursue its growth strategy. Although there can be

no

such assurances, management believes that sources for these additional funds will be available through either current or future investors.     

XML

Note 2 - Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2018

Notes to Financial Statements

Significant Accounting Policies [Text Block]

NOTE

2

- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation:

The Company’s unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form

10

-Q and Article

8

-

03

of Regulation S-

X

of the Securities and Exchange Commission (“SEC”). Accordingly, the condensed consolidated financial statements do

not

include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of the Company’s management, all adjustments considered necessary for a fair presentation (consisting of normal recurring adjustments) have been included. The results for interim periods are

not

necessarily indicative of what the results will be for the fiscal year. The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended

December 31, 2017

contained in the Company’s

2017

Annual Report on Form

10

-K filed with the SEC.

Consolidation:

The financial statements include the accounts of the Company, our wholly-owned subsidiary Iso-Torque Corporation, and our majority-owned subsidiary, Ice Surface Development, Inc. (

56%

owned). As of

June 30, 2018,

each of the subsidiaries is non-operational.  All material intercompany transactions and account balances have been eliminated in consolidation.

Use of Estimates:

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. These estimates are subject to a high degree of judgment and potential change. Actual results could differ from those estimates.  

Reclassifications:

Certain reclassifications

may

have been made to prior year balances to conform to the current year’s presentation.

Cash:

We maintain cash at financial institutions which periodically

may

exceed federally insured amounts. We have a corporate credit card program through our primary financial institution, JPMorgan Chase Bank, N.A. In connection with this, the Company granted a security interest to the bank in our money market account to act as collateral for the activity within the corporate card program, up to

$15,000.

Inventory

: Inventory is stated at the lower of cost or net realizable value with cost determined under the average cost method. We record provisions for excess, obsolete or slow-moving inventory based on changes in customer demand, technology developments or other economic factors. The allowance for excess, obsolete or slow-moving inventory was

$6,000

at

June 30, 2018

and

December 31, 2017.

Accounts Receivable

: We carry our accounts receivable at invoice amount less an allowance for doubtful accounts.  On a periodic basis, we evaluate our accounts receivable and establish an allowance for doubtful accounts, based on a history of past write-offs and collections and current credit conditions.  We do

not

accrue interest on past due invoices.  The allowance for doubtful accounts was

zero

at

June 30, 2018

and

December 31, 2017.

Software, Property and Equipment:

Capitalized software, property and equipment are stated at cost. Estimated useful lives are as follows: 

Software (in years)		3
Office equipment (in years)	5	-	7
Leasehold improvements	lesser of useful life or lease term

Depreciation and amortization are computed using the straight-line method. Betterments, renewals and significant repairs that extend the life of the assets are capitalized. Other repairs and maintenance costs are expensed when incurred. When disposed, the cost and accumulated depreciation applicable to assets retired are removed from the accounts and the gain or loss on disposition is recognized in Other income. Depreciation and software amortization expense for the

six

months ended

June 30, 2018

and

2017

amounted to

$88,000

and

$92,000,

respectively. Depreciation and software amortization expense for the

three

months ended

June 30, 2018

and

2017

amounted to

$44,000

and

$46,000,

respectively.

Whenever events or circumstances indicate, our long-lived assets including any intangible assets with finite useful lives are tested for impairment by using the estimated future cash flows directly associated with, and that are expected to arise as a direct result of, the use of the assets. If the carrying amount exceeds the estimated undiscounted cash flows, impairment

may

be indicated. The carrying amount is compared to the estimated discounted cash flows and if there is an excess, such amount is recorded as impairment. During the

six

months ended

June 30, 2018

and

June 30, 2017

no

impairment charges were recorded.

Fair Value of Financial Instruments:

As defined by U.S. GAAP

,

fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A hierarchy for ranking the quality and reliability of the information is used to determine fair values. Assets and liabilities carried at fair value will be classified and disclosed in

one

of the following

three

categories: 

Level

1:

Quoted market prices in active markets for identical assets or liabilities

Level

2:

Observable market based inputs or unobservable inputs that are corroborated by market data

Level

3:

Unobservable inputs that are

not

corroborated by market data 

The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level

1

measurements) and the lowest priority to unobservable inputs (Level

3

measurements). The Financial Accounting Standards Board’s (“FASB”) guidance for the disclosure about fair value of financial instruments requires disclosure of an estimate of the fair value of certain financial instruments. The fair value of financial instruments pursuant to FASB’s guidance for the disclosure about fair value of financial instruments approximated their carrying values at

June 30, 2018

and

December 31, 2017.

The carrying amount of cash, accounts receivable, prepaid expenses and other current assets, accounts payable, deferred revenue and accrued expenses approximates their fair value due to their short maturity. The carrying amount of capital lease obligations approximates fair value because stated or implied interest rates approximate current interest rates that are available for debt with similar terms. The senior convertible notes can be converted into

26,874,775

shares of common stock with an underlying value of

$8,062,000

as of

June 30, 2018

based on the trading price on

June 30, 2018. 

Revenue Recognition and Deferred Revenue:

On

January 1, 2018,

the Company adopted FASB ASC

606,

 "Revenue from Contracts with Customers" and all related amendments for all contracts using the modified retrospective method.  There was

no

impact upon the adoption of ASC

606.

The Company has determined that the adoption of this standard did

not

require a cumulative effect adjustment. The comparative information has

not

been restated and continues to be reported under the accounting standards in effect for those periods. For contracts where performance obligations are satisfied at a point in time, the Company recognizes revenue when the product is shipped to the customer. For contracts where the performance obligation is satisfied over time, as in the Z-Coach sales, the Company recognizes revenue over the subscription period.  Revenue from the sale of the Company's products is recognized net of cash discounts, sales returns and allowances. The Company has

two

sources of revenue: (i) from the sale of CURA System products and (ii) from stand-alone Z-Coach subscriptions.

The Company's net revenue is derived primarily from domestic customers.  For the

six

months ended

June 30, 2018

net revenue from products transferred over time amounted to

$12,000

and net revenue from products transferred at a point in time amounted to

$4,000.

For the

three

months ended

June 30, 2018

and

2017,

net revenue from products transferred over time amounted to

$8,000

in each quarter.  There were

no

sales from products transferred at a point in time during the

second

quarter of

2018.

Revenue from the sale of CURA System products is recognized upon the shipment of myCadian devices to a customer and upon the company’s satisfaction of all performance obligations as described in customer agreements. The Z-Coach Program provides fatigue training over an annual subscription period of

twelve

months. The Z-Coach Program allows the user unlimited access during the annual subscription period. Customers are billed at the acceptance of the subscription, and revenue is recognized ratably over the subscription period as our performance obligations are satisfied and when collection is reasonably assured. Our collection terms provide customers standard terms of net

30

 days. Future performance obligations are reflected in deferred revenue. Revenue earned from the sale of the CURA app since the soft launch in

May 2018

is

not

material.

One customer accounted for

79%

of total Z-Coach subscription sales made during the

six

months ended

June 30, 2018

and another customer accounted for

40%

of the sales made in the

three

months ended

June 30, 2018. 

During the

three

and

six

month periods ended

June 30, 2017,

a single customer accounted for

66%

and

55%,

respectively of the sales made in each respective period.  Our collection terms provide customers standard terms of net

30

 days. Future performance obligations are reflected in deferred revenue.

Engineering and Development and Patents:

Engineering and development costs and patent expenses are charged to operations as incurred. Engineering and development includes personnel-related costs, materials and supplies, depreciation and consulting services.

Patent costs for the

three

months ended

June 30, 2018

and

June 30, 2017

amounted to

$25,000

and

$44,000,

respectively, and are included in general and administrative expenses. Patent costs for the

six

months ended

June 30, 2018

and

June 30, 2017

amounted to

$56,000

and

$74,000,

respectively, and are included in general and administrative expenses.

Stock-based Compensation:

FASB Accounting Standards Codification (“ASC”)

718

-

10

requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense over the service period (generally the vesting period) in the consolidated financial statements based on their fair values on the grant date. The impact of actual forfeitures prior to vesting is considered in the amount recognized. In addition, the realization of tax benefits in excess of amounts recognized for financial reporting purposes will be recognized as a financing activity in accordance with ASC

718

-

10.

No

tax benefits were attributed to the stock-based compensation expense because a valuation allowance was maintained for substantially all net deferred tax assets.   

FASB ASC

505

-

50,

“Equity-Based Payments to Non-Employees,” requires all share-based payments to non-employees, including grants of stock options, to be recognized in the consolidated financial statements as expense generally over the service period of the consulting arrangement or as performance conditions are expected to be met. Using a Black-Scholes valuation model, we periodically reassess the fair value of non-employee options as service conditions are met, which generally aligns with the vesting period of the options, and we adjust the expense recognized in the consolidated financial statements accordingly.

FASB ASC

718

-

20

requires that modifications of the terms or conditions of equity awards be treated as an exchange of the original award for a new award.  Incremental compensation cost is measured as the excess, if any, of the fair value of the modified award over the fair value of the original award immediately before its terms are modified.

Income Taxes:

We account for income taxes using the asset and liability method, the objective of which is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting and the tax basis of our assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. A valuation allowance related to deferred tax assets is recorded when it is more likely than

not

that some portion or all of the deferred tax assets will

not

be realized.  

We account for uncertain tax positions using a more-likely-than-

not

recognition threshold based on the technical merits of the tax position taken. Tax benefits that meet the more-likely-than-

not

recognition threshold should be measured as the largest amount of tax benefits, determined on a cumulative probability basis, which is more likely than

not

to be realized upon ultimate settlement in the financial statements. It is our policy to recognize interest and penalties related to income tax matters as general and administrative expenses. As of

June 30, 2018,

and

December 31, 2017,

there were

no

accrued interest or penalties related to uncertain tax positions.

Loss per Common Share:

FASB’s ASC

260

-

10

(“Earnings Per Share”) requires the presentation of basic earnings per share, which is based on weighted average common stock outstanding, and dilutive earnings per share, which gives effect to options, warrants and convertible securities in periods when they are dilutive. At

June 30, 2018

and

2017

we excluded

87,941,132

and

72,197,708

potential common shares, respectively, relating to convertible preferred stock, convertible notes, options and warrants outstanding from the diluted net loss per common share calculation because their inclusion would be anti-dilutive. In addition, we excluded

625,000

warrants from the diluted net loss per common share calculation at

June 30, 2018

and

2017

as the conditions for their vesting are

not

probable.  

Recent Accounting Pronouncements: 

 In

June 2018,

the FASB issued ASU

No.2018

-

07,

"Compensation - Stock Compensation (Topic

718

) Improvements to Nonemployee Share-Based Payment Accounting." The FASB issued this update as part of its Simplification Initiative. The amendments in this update expand the scope of Topic

718

to include share-based payments for acquiring goods and services from nonemployees.  An entity should apply the requirements of Topic

718

to nonemployee awards except for specific guidance on inputs to an option model and the attribution of cost.  The amendments specify that Topic

718

applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor's own operations by issuing share-based payment awards. The amendments for this update are effective for public companies for fiscal years beginning after

December 15, 2018.

Early adoption is permitted but

no

earlier than the adoption date of Topic

606.

An entity should only remeasure liability-classified awards that have

not

been settled by the date of adoptions and equity classified awards for which a measurement date has

not

been established through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption.  Upon transition, the entity is required to measure these nonemployee awards at fair value as of the adoption date.  The Company believes the adoption of this standard on our consolidated financial statements and related disclosures will

not

be material.

On

February 25, 2016,

the FASB issued ASU

No.

 

2016

-

02,

“Leases,” a comprehensive new lease standard which will supersede previous lease guidance. The standard requires a lessee to recognize in its balance sheet assets and liabilities related to long-term leases that were classified as operating leases under previous guidance. An asset will be recognized related to the right to use the underlying asset and a liability will be recognized related to the obligation to make lease payments over the term of the lease. The standard also requires expanded disclosures surrounding leases. The standard is effective for fiscal periods beginning after

December 15, 2018,

and requires modified retrospective adoption, with early adoption permitted. The Company believes the adoption of this standard on our consolidated financial statements and related disclosures will

not

be material.

XML

Note 3 - Inventory and Related Vendor Liability

6 Months Ended

Jun. 30, 2018

Notes to Financial Statements

Inventory Disclosure [Text Block]

NOTE

3

– INVENTORY AND RELATED VENDOR LIABILITY

The Company had the following inventory held at our manufacturing vendor and on hand as of

June 30, 2018

and

December 31, 2017:

	June 30,			December 31,
	2018			2017
Raw materials	$	1,678,000		$	1,681,000
Finished goods		69,000			69,000
		1,747,000			1,750,000
Less: Reserve for quality		(6,000	)		(6,000	)
Inventory (net)	$	1,741,000		$	1,744,000
Liability for inventory held at vendor	$	1,462,000		$	1,678,000

During

2017,

the Company initiated an agreement with a vendor to manufacture and assemble the myCadian watch. In connection with this agreement, the Company agreed to a cancellation charge for products purchased on behalf of the Company in the instance that the purchase order is subsequently modified, delayed or cancelled. As of

June 30, 2018,

the Company has

$1,678,000

in raw material inventory which were purchased by the vendor on our behalf and a related liability of

$1,462,000

for amounts payable in connection with this agreement.

XML

Note 4 - Senior Convertible Notes and Warrants

6 Months Ended

Jun. 30, 2018

Notes to Financial Statements

Debt Disclosure [Text Block]

NOTE

4

- SENIOR CONVERTIBLE NOTES AND WARRANTS

At

June 30, 2018,

the Company had

$7,821,000

in convertible notes outstanding which have been presented net of unamortized debt discounts of

$2,468,000,

resulting in a carrying value of

$5,353,000

as of

June 30, 2018.

As of

December 31, 2017,

the Company had

$5,825,000

in convertible notes outstanding, presented net of unamortized debt discounts of

$2,262,000

resulting in a carrying value of

$3,563,000

as of

December 31, 2017.

As of

June 30, 2018,

the Company had outstanding

$1,902,000

in convertible notes payable to

five

of our directors and

$1,170,000

in convertible notes payable to an investor that is deemed an affiliate.

2018

Convertible Notes

Face value June 30, 2018	$	400,000
Debt discount at issuance		(120,000	)
Amortization of debt discount since inception		2,000
2018 Senior Convertible Notes (net)	$	282,000

On

May 8, 2018,

the board of directors authorized the issuance of up to 

$1

million in non-interest bearing Senior Convertible Promissory Notes and Warrants (the

“2018

Convertible Notes”) in connection with the

May 8, 2018

Securities Purchase Agreement (the

“2018

SPA”). The

2018

Convertible Notes have 

five

year maturity.

The conversion rate of the notes was fixed at

$0.25

per share as determined at the close of business on

May 8, 2018.

Investors making cumulative investments, in this offering, of less than

$500,000

were granted warrants to purchase an aggregate number of shares of common stock equal to

10%

of the number of shares issuable upon the conversion of the notes and investors making cumulative investments, in this offering, of

$500,000

and greater were granted warrants to purchase an aggregate number of shares of common stock equal to

25%

of the number of shares issuable upon the conversion of the notes. The warrants have a fixed exercise price of

$0.25

and a

ten

-year term from the date of issuance. The notes were offered in a private placement exempt from registration under Section

4

(a)(

2

) of the Securities Act of

1933

 as amended (the "Securities Act") and Rule

506

(c) of Regulation D as promulgated by the Securities and Exchange Commission. The offering was available only to “accredited investors” as defined in Rule

501

(a) of Regulation D under the Securities Act.  

During the

six

months ended

June 30, 2018,

the Company issued

$400,00

face value of

2018

Convertible Notes and granted

310,000

warrants with an exercise price of

$0.25

per share and

10

year terms. The Company incurred approximately

$4,000

in legal costs in connection with the issuance of the

2018

Convertible Notes. In accordance with FASB ASU

2015

-

03

Interest-Imputation of Interest (Subtopic

835

-

30

), these debt issuance costs have been presented as a direct deduction from the carrying amount of the Convertible Note liability and reflected as a component of debt discount which is amortized and included in interest expense over the

five

-year term of the Convertible Notes.

The Company allocated

$120,000

of the proceeds from the

2018

Notes to debt discount based on the computed fair value of the warrants and the debt issuance costs on the date of investment. As of

June 30, 2018,

these notes have a face value of

$400,000

and are presented net of unamortized debt discount of

$118,000

related to warrants, beneficial conversion feature and debt issuance costs resulting in a carrying value of

$282,000.

During the

six

months ended

June 30, 2018,

the Company recorded

$2,000

in interest expense which includes the amortization of debt discount.

2017

6%

Convertible Notes

Face value of 2017 Convertible Notes	$	4,420,000
Debt discount at issuance		(1,897,000	)
2017 extinguishment impact on discount		1,183,000
Amortization of debt discount since inception		127,000
2017 Senior Convertible Notes (net)	$	3,833,000

The board of directors authorized the issuance of up to

$5

million in

6%

Senior Convertible Promissory Notes and Warrants (the

“2017

Convertible Notes”) in connection with the

May 31, 2017

Securities Purchase Agreement (the

“2017

SPA”). The

2017

Convertible Notes have a

five

year maturity and a fixed annual interest rate of

6%.

The initial year of interest expense will be paid to the note holders on the

first

anniversary of each note's issuance and quarterly thereafter. Principal is due in full on each note's maturity date.

The conversion rate of the notes was originally fixed at

$0.50

per share as determined at the close of business on

May 31, 2017

and subsequently modified on

November 30, 2017

to

$0.333

per share. Investors making investments of less than

$500,000

were granted warrants to purchase an aggregate number of shares of common stock equal to

10%

of the number of shares issuable upon the conversion of the notes and investors making investments of

$500,000

and greater were granted warrants to purchase an aggregate number of shares of common stock equal to

25%

of the number of shares issuable upon the conversion of the notes. Originally, the warrants had a fixed exercise price of

$0.50

and a

ten

-year term from the date of issuance. The conversion price for the warrants was also modified on

November 30, 2017

to

$0.333

per share. In connection with this amendment,

$2,450,000

of face value notes were re-issued, in the

fourth

quarter of

2017,

to reflect a reduction of the conversion price on the notes from

$0.50

per share to

$0.333

per share. The exercise price of the underlying warrants was also reduced from

$0.50

per share to

$0.333

per share. The amendment and reissuance of these

2017

Convertible Notes was accounted for as an extinguishment and re-issuance of the replacement notes and warrants in

2017.

The

2017

Convertible Notes were offered in a private placement exempt from registration under Section

4

(a)(

2

) of the Securities Act and Rule

506

(c) of Regulation D as promulgated by the Securities and Exchange Commission. The offering was available only to “accredited investors” as defined in Rule

501

(a) of Regulation D under the Securities Act.

The Company issued

$1,595,000

in

2017

Convertible Notes during the

six

months ended

June 30, 2018

representing

4,789,790

potential common stock shares and

1,120,871

warrants. The Company allocated

$374,000

of the proceeds in the

first

half of

2018

to debt discount based on the computed fair value of the warrants issued and the beneficial conversion feature. 

During the

six

months ended

June 30, 2018,

the Company recorded

$166,000

in interest expense including amortization of debt discount of

$48,000.

During the

six

months ended

June 30, 2017,

the Company recorded

$7,000

in interest expense including  amortization of debt discount of

$6,000.

 

As of

June 30, 2018,

the

2017

Convertible Notes had a face value of

$4,420,000

and are presented net of unamortized debt discount of

$587,000

resulting in a carrying value of

$3,833,000.

During the quarter ended

June 30, 2018,

the Company recorded

$92,000

in  interest expense including

$28,000

of amortization of  debt discount. As of

December 31, 2017,

the

2017

Convertible Notes had a face value of

$2,825,000

and were presented net of unamortized debt discount of

$261,000

resulting in a carrying value of

$2,564,000.

2016

6%

Convertible Notes

Face value December 31, 2016	$	3,000,000
Debt discount at issuance		(2,551,000	)
Amortization of debt discount since inception		789,000
2016 Senior Convertible Notes (net)	$	1,238,000

During

2016,

the board of directors authorized and the Company issued, 

$3

million in

6%

Senior Convertible Promissory Notes and Warrants (the

“2016

Convertible Notes”) in connection with the

August 25, 2016

Securities Purchase Agreement (the

“2016

SPA”). The

2016

Convertible Notes have 

five

year maturity dates ranging from

August 2021

through

December 2021

and a fixed annual interest rate of

6%.

The initial year of interest expense was paid to the note holders on the

first

anniversary of each note's issuance and will be paid quarterly thereafter. Principal is due in full on each note's maturity date.

The conversion rate of the notes was fixed at

$0.25

per share as determined at the close of business on

August 25, 2016.

The investors were granted warrants to purchase an aggregate number of shares of common stock equal to

10%

of the number of shares issuable upon the conversion of the notes. The warrants have a fixed exercise price of

$0.25

and a

ten

-year term from the date of issuance. The notes were offered in a private placement exempt from registration under Section

4

(a)(

2

) of the Securities Act and Rule

506

(c) of Regulation D as promulgated by the Securities and Exchange Commission. The offering was available only to “accredited investors” as defined in Rule

501

(a) of Regulation D under the Securities Act.  

In connection with the issuance of the

2016

Convertible Notes, the Company granted

1,200,000

warrants with an exercise price of

$0.25

per share and

10

year terms. The Company incurred

$28,000

in debt issuance costs in connection with the issuance of the Convertible Notes. In accordance with FASB ASU

2015

-

03

Interest-Imputation of Interest (Subtopic

835

-

30

), these debt issuance costs have been presented as a direct deduction from the carrying amount of the Convertible Note liability and reflected as a component of debt discount which is amortized and included in interest expense over the

five

-year term of the Convertible Notes.

The Company allocated

$2,551,000

of the proceeds from the

2016

Notes to debt discount based on the computed fair value of the warrants, the beneficial conversion feature and the debt issuance costs on the date of investment. As of

June 30, 2018,

these notes have a face value of

$3,000,000

and are presented net of unamortized debt discount of

$1,762,000

related to warrants, beneficial conversion feature and debt issuance costs resulting in a carrying value of

$1,238,000.

As of

December 31, 2017,

the Convertible Notes had a face value of

$3,000,000

and were presented net of unamortized debt discount of

$2,001,000

related to warrants, beneficial conversion feature and debt issuance costs resulting in a carrying value of

$999,000.

 

During the

three

months ended

June 30, 2018,

the Company recorded

$165,000

in interest expense including amortization of debt discount of

$120,000.

During the

six

months ended

June 30, 2018

the Company recorded

$328,000

in interest expense including amortization of debt discount of

$238,000.

  During the

three

months ended

June 30, 2017,

the Company recorded

$158,000

in interest expense including

$113,000

in amortization of debt discount.  During the

six

month period ended

June 30, 2017

the Company recorded 

$314,000

in interest expense including

$225,000

in amortization of debt discount.

XML

Note 5 - Software

6 Months Ended

Jun. 30, 2018

Notes to Financial Statements

Research, Development, and Computer Software Disclosure [Text Block]

NOTE

5

– SOFTWARE

The Company invested in software for the CURA System during 

2015.

These assets are amortized over an estimated useful life of

3

years. Amortization expense recognized for the

six

months ended

June 30, 2018

and

2017

was

$63,000

in each period. Amortization expense recognized for the

three

months ended

June 30, 2018 

and

2017

was

$32,000

in both periods.

The net value of capitalized software at

June 30, 2018

and at

December 31, 2017

was

$40,000

and

$102,000,

respectively. Future amortization expense is expected to be

$29,000

in

2018

and

$11,000

in

2019.

XML

Note 6 - Property and Equipment

6 Months Ended

Jun. 30, 2018

Notes to Financial Statements

Property, Plant and Equipment Disclosure [Text Block]

NOTE

6

- PROPERTY AND EQUIPMENT

At

June 30, 2018

and

December 31, 2017

property and equipment consist of the following:

	June 30, 2018			December 31, 2017
Office equipment	$	249,000		$	249,000
Shop equipment		231,000			231,000
Leasehold improvements		253,000			253,000
		733,000			733,000
Less accumulated depreciation		(634,000	)		(608,000	)
Net property and equipment	$	99,000		$	125,000

Depreciation expense for the

six

months ended

June 30, 2018

and

2017

was

$25,000

and

$29,000

respectively.   Depreciation expense for the

three

months ended

June 30, 2018

and

2017

was

$13,000

and

$14,000,

respectively. 

XML

Note 7 - Business Segments

6 Months Ended

Jun. 30, 2018

Notes to Financial Statements

Segment Reporting Disclosure [Text Block]

NOTE

7

- BUSINESS SEGMENTS

The Company has

two

operating business segments. The CURA business operates in the fatigue management industry and the Aegis business is focused in the power and hydraulic industry.

Segment information for the

three

months ended

June 30

,

2018

for the Company’s business segments follows: 

	CURA			Aegis			Corporate			Total
Revenue	$	8,000		$	-		$	-		$	8,000
Loss on Revenue		(25,000	)		-			-			(25,000	)
Total Costs and Expenses		373,000			160,000			325,000			858,000
Loss from operations		(398,000	)		(160,000	)		(325,000	)		(883,000	)
Other expense		-			-			(259,000	)		(259,000	)
Net loss	$	(398,000	)	$	(160,000	)	$	(584,000	)	$	(1,142,000	)
Stock based compensation	$	5,000		$	26,000		$	4,000		$	35,000
Depreciation and amortization	$	37,000		$	5,000		$	2,000		$	44,000
Capital expenditures	$	-		$	-		$	-		$	-
Assets at June 30, 2018	$	1,810,000		$	65,000		$	144,000		$	2,019,000

Segment information for the

six

months ended

June 30

,

201

8

for the Company’s business segments follows: 

	CURA			Aegis			Corporate			Total
Revenue	$	16,000		$	-		$	-		$	16,000
Loss on revenue		(54,000	)		-			-			(54,000	)
Total costs and expenses		896,000			291,000			701,000			1,888,000
Loss from operations		(950,000	)		(291,000	)		(701,000	)		(1,942,000	)
Other expense		-			-			(495,000	)		(495,000	)
Net loss	$	(950,000	)	$	(291,000	)	$	(1,196,000	)	$	(2,437,000	)
Stock based compensation	$	(11,000	)	$	28,000		$	20,000		$	37,000
Depreciation and amortization	$	74,000		$	10,000		$	4,000		$	88,000
Capital expenditures	$	-		$	-		$	-		$	-
Assets at June 30, 2018	$	1,810,000		$	65,000		$	144,000		$	2,019,000

Segment information for the

three

months ended

June 30, 2017

for the Company’s business segments follows: 

	CURA			Aegis			Corporate			Total
Revenue	$	8,000		$	-		$	-		$	8,000
Loss on Revenue		(29,000	)		-			-			(29,000	)
Total Costs and Expenses		666,000			137,000			394,000			1,197,000
Loss from operations		(695,000	)		(137,000	)		(394,000	)		(1,226,000	)
Other expense		-			-			(164,000	)		(164,000	)
Net loss	$	(695,000	)	$	(137,000	)	$	(558,000	)	$	(1,390,000	)
Stock based compensation	$	2,000		$	2,000		$	25,000		$	29,000
Depreciation and amortization	$	38,000		$	5,000		$	3,000		$	46,000
Capital expenditures	$	97,000		$	34,000		$	-		$	131,000
Assets at June 30, 2017	$	308,000		$	71,000		$	128,000		$	507,000

Segment information for the

six

months ended

June 30,

201

7

for the Company’s business segments follows: 

	CURA			Aegis			Corporate			Total
Revenue	$	17,000		$	-		$	-		$	17,000
Loss on revenue		(57,000	)		-			-			(57,000	)
Total costs and expenses		1,425,000			269,000			821,000			2,515,000
Loss from operations		(1,482,000	)		(269,000	)		(821,000	)		(2,572,000	)
Other expense		-			-			(319,000	)		(319,000	)
Net loss	$	(1,482,000	)	$	(269,000	)	$	(1,140,000	)	$	(2,891,000	)
Stock based compensation	$	78,000		$	4,000		$	50,000		$	132,000
Depreciation and amortization	$	75,000		$	11,000		$	6,000		$	92,000
Capital expenditures	$	108,000		$	34,000		$	-		$	142,000
Assets at June 30, 2017	$	308,000		$	71,000		$	128,000		$	507,000

XML

Note 8 - Preferred and Common Stock

6 Months Ended

Jun. 30, 2018

Notes to Financial Statements

Stockholders' Equity Note Disclosure [Text Block]

NOTE

8

- PREFERRED and COMMON STOCK

Common Stock

 

We have authorized

400,000,000

shares of common stock, with a par value of

$0.01

per share. 

During the

six

months ended

June 30, 2018

we issued

870,000

shares of common stock in connection with various conversion notices received from a Series C, C-

2

and C-

3

convertible preferred stockholders. During the

six

months ended

June 30, 2017,

the Company issued

1,113,000

shares of common stock in connection with conversion notices received from convertible preferred stockholders.

Preferred Stock

 

Our certificate of incorporation permits the Company to issue up to

100,000,000

shares of

$.01

par value preferred stock.

Class A Preferred Stock   

 

At

June 30, 2018

and

December 31, 2017, 

there were

468,221

outstanding shares of Class A Preferred stock, of which

8,709

shares resulted from the settlement of dividends due to conversion, and those shares

no

longer accrue dividends. The value of dividends payable upon the conversion of the remaining

459,512

outstanding shares of Class A Preferred stock was

$2,438,000

at

June 30, 2018

and

$2,346,000

at

December 31, 2017.  

In the event of a liquidation, dissolution and winding up of the Company, and subject to the liquidation rights and privileges of our Class C Preferred stockholders, Class A Preferred stockholders have a liquidation preference with respect to all accumulated and unsettled dividends. The value of the Class A Preferred stockholders’ liquidation preference was

$2,438,000

and

$2,346,000

at

June 30, 2018

and

December 31, 2017,

respectively. In the event of liquidation, dissolution or winding up of the Company, unpaid accumulated dividends on the Class A Preferred are payable in Class A Preferred at a rate of

1

share of Class A Preferred for each

$

4.00

of dividends.

Class B Preferred Stock

 

At

June 30, 2018

and

December 31, 2017,

there were

67,500

outstanding shares of Class B Preferred stock. The value of dividends payable upon the conversion of the outstanding shares of Class B Preferred stock was

$437,000

at

June 30, 2018

and

$420,000

at

December 31, 2017.  

In the event of liquidation, dissolution and winding up of the Company, and subject to the liquidation rights and privileges of our Class C Preferred stockholders and our Class A Preferred stockholders, Class B Preferred stockholders have a liquidation preference with respect to all accumulated and unsettled dividends. The value of the Class B Preferred stockholders’ liquidation preference was

$437,000

and

$420,000

at

June 30, 2018

and

December 31, 2017,

respectively. In the event of a liquidation, dissolution or winding up of the Company, unpaid accumulated dividends on the Class B Preferred are payable in Class B Preferred shares at a rate of

1

share of Class B Preferred for each

$5.00

of dividends. 

Series C Preferred Stock

 

At

June 30, 2018

and

December 31, 2017

respectively, there were

15,687,500

and

15,937,500

shares of Series C Preferred stock outstanding. The value of the Series C Preferred stockholders’ liquidation preference was

$6,275,000

at

June 30, 2018

and

$6,375,000

at

December 31, 2017.

The Series C Preferred shares have a liquidation preference at their stated value per share of

$0.40

that is senior to our common stock, and the Company’s Class A Non-Voting Cumulative Convertible Preferred Shares and Class B Non-Voting Cumulative Convertible Preferred Shares. The liquidation preference is payable upon a liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, or upon a deemed liquidation of the Company.

The Series C Preferred shares have

no

right to receive dividends and have

no

redemption right. The Series C Preferred shares vote with the common stock on an as-converted basis. 

Series C-

2

Preferred Stock

   

At

June 30, 2018

and

December 31, 2017

respectively, there were

24,500,000

and

25,000,000

shares of Preferred C-

2

stock outstanding. The value of the Series C-

2

Preferred stockholders’ liquidation preference was

$4,900,000

at

June 30, 2018

and

$5,000,000

as of

December 31, 2017.  

The Series C-

2

Preferred Shares are

not

entitled to receive preferred dividends and have

no

redemption right, but are entitled to participate, on an as converted basis; with holders of outstanding shares of common stock in dividends and distributions on liquidation after all preferred shares have received payment in full of any preferred dividends or liquidation preferences. The Series C-

2

Preferred Shares vote with the common stock on an as-converted basis. We

may

not,

without approval of the holders of at least

two

-thirds of the Series C-

2

Preferred Shares, (i) create any class or series of stock that is pari passu or senior to the Series C-

2

Preferred Shares, (ii) create any class or series of stock that would share in the liquidation preference of the Series C-

2

Preferred Shares or that is entitled to dividends payable other than in common stock or Series C-

2

Preferred Shares of its own series, (iii) acquire any equity security or pay any dividend, except dividends on a class or series of stock that is junior to the Series C Preferred Shares, payable in such junior stock, (iv) reissue any Series C-

2

Preferred Shares, (v) declare or pay any dividend that would impair the payment of the liquidation preference of the Series C-

2

Preferred Shares, (vi) authorize or issue any additional Preferred Shares, (vii) change the Certificate of Incorporation to adversely affect the rights of the holders of the Series C-

2

Preferred Shares, or (viii) authorize, commit to or consummate any liquidation, dissolution or winding up in which the liquidation preference of the Series C-

2

Preferred Shares would

not

be paid in full.   

Series C-

3

Preferred Stock

The Company issued

6,042,000

shares of Series C-

3

Voting Convertible Preferred Stock in a private placement transaction during

2016,

generating net proceeds of

$1,495,000

after related legal costs.  During the

six

months ended

June 30, 2018

and

2017

we issued

120,000

and

1,050,000

shares of common stock, respectively, in connection with conversion notices received from Series C-

3

convertible preferred stockholders.  

XML

Note 9 - Stock Options

6 Months Ended

Jun. 30, 2018

Notes to Financial Statements

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

NOTE

9

- STOCK OPTIONS

2016

Stock Option Plan   

At the

2016

Annual Meeting the shareholders approved the

2016

Stock Option Plan (the

“2016

Plan”) which provides for the grant of up to

3,000,000

common stock options to provide equity incentives to directors, officers, employees and consultants. Two types of options

may

be granted under the

2016

Plan: non-qualified stock options and incentive stock options.

2011

Stock Option Plan

    In

2011,

shareholders approved the

2011

Stock Option Plan (the

“2011

Plan”) which provides for the grant of up to

3,000,000

common stock options to provide equity incentives to directors, officers, employees and consultants. Two types of options

may

be granted under the

2011

Plan: non-qualified stock options and incentive stock options.

Under the Company’s stock option plans, non-qualified stock options

may

be granted to our officers, directors, employees and outside consultants. Incentive stock options

may

be granted only to our employees, including officers and directors who are also employees. In the case of non-qualified stock options, the exercise price

may

be less than the fair market value of our stock on the date of grant. Stock option grants to non-employees are revalued at each reporting date to reflect the expense over the vesting period. In the case of incentive stock options, the exercise price

may

not

be less than such fair market value and in the case of an employee who owns more than

10%

of our common stock, the exercise price

may

not

be less than

110%

of such market price. Options generally are exercisable for

ten

years from the date of grant, except that the exercise period for an incentive stock option granted to an employee who owns more than

10%

of our stock

may

not

be greater than

five

years.

During the

six

months ended

June 30, 2018,

we granted a total of

1,067,500

stock options to employees and non-employee consultants. These included stock options granted at exercise prices ranging from

$0.23

to

$.35

 per share, exercisable for

10

years that generally vest at a rate of

25%

on each anniversary of the grant.

The expense recognized for options that are granted to consultants (i.e., non-employees) reflect fair value, based on updated valuation assumptions using the Black-Scholes valuation model at each measurement period. Such expense is apportioned over the requisite service period of the consultant, which is concurrent with the vesting dates of the various tranches.

Summary

   For the

three

months ended

June 30, 2018

and

2017,

cost related to stock option awards amounted to

$35,000

and

$29,000,

respectively. For the

six

months ended

June 30, 2018

and

2017,

cost related to stock option awards amounted to

$37,000

and

$132,000,

respectively.

During the

six

months ended

June 30, 2018,

option expense was reduced by approximately

$82,000

as a result of option forfeitures resulting from employee turnover during the period. There were

no

forfeitures, cancellations or option exercises during the

six

month period ended

June 30, 2017.

As of

June 30, 2018,

there was approximately

$246,000

of total unrecognized compensation costs related to outstanding stock options, which are expected to be recognized over a weighted average of

1.1

years.

The weighted average grant date fair value of stock options granted during the

six

months ended

June 30, 2018

and

2017

was

$0.25

 and

$0.76,

respectively. The total grant date fair value of stock options vested during the

six

months ended

June 30, 2018

and

2017

was approximately

$259,000

and

$3,000,

respectively.  

The fair value of each option granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

	2018		2017
Expected term (years)		6.3		6.6
Expected forfeiture rate		0%		0%
Risk-free rate		2.6%		2.1%
Volatility		130%		130%
Dividend yield		0%		0%

The average risk-free interest rate is based on the U.S. treasury security rate in effect as of the grant date. We determined expected volatility using the historical closing stock price. The expected life was generally determined using the simplified method as we do

not

believe we have sufficient historical stock option exercise experience on which to base the expected term. 

The following summarizes the activity of all of our outstanding stock options as of

June 30, 2018:

	Shares			Weighted Average Exercise Price		Average Remaining Contractual Term (years)		Aggregate Intrinsic Value
Outstanding at January 1, 2018		9,682,000		$	.54
Granted		1,067,500			.24
Exercised		-			-
Canceled or expired		(391,875	)		.57
Outstanding at June 30, 2018		10,357,625		$	.51		3.9	$	170,000
Exercisable at June 30, 2018		6,643,500		$	.60		3.3	$	15,000

As of

June 30, 2018,

there were

10,357,625

stock options outstanding under the Company’s stock option plans,

6,643,500

of which were vested at that date; leaving

2,542,375

options available for future grant under the plans. As of

June 30, 2018,

the exercise prices of outstanding stock options ranged from

$.22

per share to

$1.58

per share.

XML

Note 10 - Warrants

6 Months Ended

Jun. 30, 2018

Notes to Financial Statements

Stockholders Equity Note Warrants Or Rights [Text Block]

NOTE

10

- WARRANTS

The following summarizes the activity of our outstanding warrants as of

June 30, 2018:

						Weighted
			Weighted			Average
			Average			Remaining		Aggregate
			Exercise			Contractual		Intrinsic
	Shares		Price			Term		Value
Outstanding at January 1, 2018		5,214,836	$	.57	(A)
Granted		1,430,871		.32
Exercised		-		-
Canceled or expired		-		-
Outstanding at June 30, 2018		6,645,707	$	.50	(A)	6.8	(B)	$	103,000
Exercisable at June 30, 2018		6,020,707	$	.48		6.3	(C)	$	102,000

(A)	The weighted average exercise price for warrants outstanding as of June 30, 2018 and January 1,  2018 excludes 1,750,000 warrants in each period with no determined exercise price.
(B)	The weighted average remaining contractual term for warrants outstanding as of June 30, 2018 and December 31, 2017 excludes 743,500 warrants with no expiration date.
(C)	The weighted average remaining contractual term for warrants exercisable as of June 30, 2018, and December 31, 2017 excludes 118,500 warrants with no expiration date.

XML

Note 11 - Related Party Transactions

6 Months Ended

Jun. 30, 2018

Notes to Financial Statements

Related Party Transactions Disclosure [Text Block]

NOTE

11

- RELATED PARTY TRANSACTIONS

As of

June 30, 2018,

the Company has

$1,902,000

aggregate principal amount of senior convertible notes held by

five

members of its board of directors. The Company also has

$1,170,000

aggregate principal amount of senior convertible notes held by an investor that is deemed an affiliate through the ownership of the majority of our Series C and C-

2

Preferred Stock. (See Note

6

regarding the

2017

Convertible Note.)

We occupy a leased facility for our corporate headquarters building, located in Rochester, New York, which consists of both executive offices and manufacturing space. The facility is owned by a partnership in which a Company director is associated.

XML

Note 12 - Subsequent Events

6 Months Ended

Jun. 30, 2018

Notes to Financial Statements

Subsequent Events [Text Block]

NOTE

12

- SUBSEQUENT EVENTS

2017

Convertible Notes

Subsequent to

June 30, 2018,

a

2017

note-holder converted

$50,000

in notes into

150,150

common shares.  On

July 19, 2018,

the Company's board approved a resolution to complete the

2017

Convertible Note and Warrant offering.  Total investments received on the

2017

Notes aggregated

$4,420,500

and included the issuance of

2,307,207

common stock warrants.

2018

Convertible Notes

Subsequent to

June 30, 2018,

the Company issued

$225,000

in

2018

Convertible Notes including the issuance of

90,000

warrants related to these notes. Included in these amounts is the issuance of

$25,000

in notes to the Company’s Chief Executive Officer and the issuance of

10,000

warrants.  On

July 19, 2018,

the Company's board approved a resolution to complete the

2018

Convertible Note and Warrant offering.  Total investments received on the

2018

Notes aggregated

$625,000

and included the issuance of

400,000

common stock warrants.

July 2018

Convertible Notes

   

On

July 19, 2018,

the Company's board approved a resolution to offer up to

$2.5

million in non-interest bearing convertible notes and warrants (the

"July 2018

Notes") in connection with the

July 24, 2018

Securities Purchase Agreement (the

"July 2018

SPA").  The

July 2018

Notes have a

five

year maturity and

no

interest rate.  The conversion rate for the

July 2018

Notes was set at a fixed rate of

$0.25

per share. Investors making investments less than

$500,000

will be granted

10%

warrants to purchase an aggregate number of shares of common stock equal to

10%

of the number of shares issuable upon the conversion of the notes and investors making investments of

$500,000

or greater will be granted warrants to purchase an aggregate number of shares of common stock equal to

25%

of the number of shares issuable upon the conversion of the notes.  The warrants have a fixed exercise price of

$0.25

per share and a

ten

year term from the date of issuance. The

July 2018

Notes will be offered in a private placement exempt from registration under Section

4

(a)(

2

) of the Securities Act and Rule

506

(c) of Regulation D as promulgated by the Securities and Exchange Commission. The offering is available only to "accredited investors' as defined by Rule

501

(a) of Regulation D under the Securities Act.

The Company has issued

$250,000

in

July 2018

Notes and

100,000

warrants since the authorization of this offering.

XML

Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2018

Accounting Policies [Abstract]

Consolidation, Policy [Policy Text Block]

Consolidation:

The financial statements include the accounts of the Company, our wholly-owned subsidiary Iso-Torque Corporation, and our majority-owned subsidiary, Ice Surface Development, Inc. (

56%

owned). As of

June 30, 2018,

each of the subsidiaries is non-operational.  All material intercompany transactions and account balances have been eliminated in consolidation.

Use of Estimates, Policy [Policy Text Block]

Use of Estimates:

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. These estimates are subject to a high degree of judgment and potential change. Actual results could differ from those estimates.  

Reclassification, Policy [Policy Text Block]

Reclassifications:

Certain reclassifications

may

have been made to prior year balances to conform to the current year’s presentation.

Cash and Cash Equivalents, Policy [Policy Text Block]

Cash:

We maintain cash at financial institutions which periodically

may

exceed federally insured amounts. We have a corporate credit card program through our primary financial institution, JPMorgan Chase Bank, N.A. In connection with this, the Company granted a security interest to the bank in our money market account to act as collateral for the activity within the corporate card program, up to

$15,000.

Inventory, Policy [Policy Text Block]

Inventory

: Inventory is stated at the lower of cost or net realizable value with cost determined under the average cost method. We record provisions for excess, obsolete or slow-moving inventory based on changes in customer demand, technology developments or other economic factors. The allowance for excess, obsolete or slow-moving inventory was

$6,000

at

June 30, 2018

and

December 31, 2017.

Receivables, Policy [Policy Text Block]

Accounts Receivable

: We carry our accounts receivable at invoice amount less an allowance for doubtful accounts.  On a periodic basis, we evaluate our accounts receivable and establish an allowance for doubtful accounts, based on a history of past write-offs and collections and current credit conditions.  We do

not

accrue interest on past due invoices.  The allowance for doubtful accounts was

zero

at

June 30, 2018

and

December 31, 2017.

Software Property And Equipment [Policy Text Block]

Software, Property and Equipment:

Capitalized software, property and equipment are stated at cost. Estimated useful lives are as follows: 

Software (in years)		3
Office equipment (in years)	5	-	7
Leasehold improvements	lesser of useful life or lease term

Depreciation and amortization are computed using the straight-line method. Betterments, renewals and significant repairs that extend the life of the assets are capitalized. Other repairs and maintenance costs are expensed when incurred. When disposed, the cost and accumulated depreciation applicable to assets retired are removed from the accounts and the gain or loss on disposition is recognized in Other income. Depreciation and software amortization expense for the

six

months ended

June 30, 2018

and

2017

amounted to

$88,000

and

$92,000,

respectively. Depreciation and software amortization expense for the

three

months ended

June 30, 2018

and

2017

amounted to

$44,000

and

$46,000,

respectively.

Whenever events or circumstances indicate, our long-lived assets including any intangible assets with finite useful lives are tested for impairment by using the estimated future cash flows directly associated with, and that are expected to arise as a direct result of, the use of the assets. If the carrying amount exceeds the estimated undiscounted cash flows, impairment

may

be indicated. The carrying amount is compared to the estimated discounted cash flows and if there is an excess, such amount is recorded as impairment. During the

six

months ended

June 30, 2018

and

June 30, 2017

no

impairment charges were recorded.

Fair Value Measurement, Policy [Policy Text Block]

Fair Value of Financial Instruments:

As defined by U.S. GAAP

,

fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A hierarchy for ranking the quality and reliability of the information is used to determine fair values. Assets and liabilities carried at fair value will be classified and disclosed in

one

of the following

three

categories: 

Level

1:

Quoted market prices in active markets for identical assets or liabilities

Level

2:

Observable market based inputs or unobservable inputs that are corroborated by market data

Level

3:

Unobservable inputs that are

not

corroborated by market data 

The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level

1

measurements) and the lowest priority to unobservable inputs (Level

3

measurements). The Financial Accounting Standards Board’s (“FASB”) guidance for the disclosure about fair value of financial instruments requires disclosure of an estimate of the fair value of certain financial instruments. The fair value of financial instruments pursuant to FASB’s guidance for the disclosure about fair value of financial instruments approximated their carrying values at

June 30, 2018

and

December 31, 2017.

The carrying amount of cash, accounts receivable, prepaid expenses and other current assets, accounts payable, deferred revenue and accrued expenses approximates their fair value due to their short maturity. The carrying amount of capital lease obligations approximates fair value because stated or implied interest rates approximate current interest rates that are available for debt with similar terms. The senior convertible notes can be converted into

26,874,775

shares of common stock with an underlying value of

$8,062,000

as of

June 30, 2018

based on the trading price on

June 30, 2018. 

Revenue Recognition, Policy [Policy Text Block]

Revenue Recognition and Deferred Revenue:

On

January 1, 2018,

the Company adopted FASB ASC

606,

 "Revenue from Contracts with Customers" and all related amendments for all contracts using the modified retrospective method.  There was

no

impact upon the adoption of ASC

606.

The Company has determined that the adoption of this standard did

not

require a cumulative effect adjustment. The comparative information has

not

been restated and continues to be reported under the accounting standards in effect for those periods. For contracts where performance obligations are satisfied at a point in time, the Company recognizes revenue when the product is shipped to the customer. For contracts where the performance obligation is satisfied over time, as in the Z-Coach sales, the Company recognizes revenue over the subscription period.  Revenue from the sale of the Company's products is recognized net of cash discounts, sales returns and allowances. The Company has

two

sources of revenue: (i) from the sale of CURA System products and (ii) from stand-alone Z-Coach subscriptions.

The Company's net revenue is derived primarily from domestic customers.  For the

six

months ended

June 30, 2018

net revenue from products transferred over time amounted to

$12,000

and net revenue from products transferred at a point in time amounted to

$4,000.

For the

three

months ended

June 30, 2018

and

2017,

net revenue from products transferred over time amounted to

$8,000

in each quarter.  There were

no

sales from products transferred at a point in time during the

second

quarter of

2018.

Revenue from the sale of CURA System products is recognized upon the shipment of myCadian devices to a customer and upon the company’s satisfaction of all performance obligations as described in customer agreements. The Z-Coach Program provides fatigue training over an annual subscription period of

twelve

months. The Z-Coach Program allows the user unlimited access during the annual subscription period. Customers are billed at the acceptance of the subscription, and revenue is recognized ratably over the subscription period as our performance obligations are satisfied and when collection is reasonably assured. Our collection terms provide customers standard terms of net

30

 days. Future performance obligations are reflected in deferred revenue. Revenue earned from the sale of the CURA app since the soft launch in

May 2018

is

not

material.

One customer accounted for

79%

of total Z-Coach subscription sales made during the

six

months ended

June 30, 2018

and another customer accounted for

40%

of the sales made in the

three

months ended

June 30, 2018. 

During the

three

and

six

month periods ended

June 30, 2017,

a single customer accounted for

66%

and

55%,

respectively of the sales made in each respective period.  Our collection terms provide customers standard terms of net

30

 days. Future performance obligations are reflected in deferred revenue.

In Process Research and Development, Policy [Policy Text Block]

Engineering and Development and Patents:

Engineering and development costs and patent expenses are charged to operations as incurred. Engineering and development includes personnel-related costs, materials and supplies, depreciation and consulting services.

Patent costs for the

three

months ended

June 30, 2018

and

June 30, 2017

amounted to

$25,000

and

$44,000,

respectively, and are included in general and administrative expenses. Patent costs for the

six

months ended

June 30, 2018

and

June 30, 2017

amounted to

$56,000

and

$74,000,

respectively, and are included in general and administrative expenses.

Share-based Compensation, Option and Incentive Plans Policy [Policy Text Block]

Stock-based Compensation:

FASB Accounting Standards Codification (“ASC”)

718

-

10

requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense over the service period (generally the vesting period) in the consolidated financial statements based on their fair values on the grant date. The impact of actual forfeitures prior to vesting is considered in the amount recognized. In addition, the realization of tax benefits in excess of amounts recognized for financial reporting purposes will be recognized as a financing activity in accordance with ASC

718

-

10.

No

tax benefits were attributed to the stock-based compensation expense because a valuation allowance was maintained for substantially all net deferred tax assets.   

FASB ASC

505

-

50,

“Equity-Based Payments to Non-Employees,” requires all share-based payments to non-employees, including grants of stock options, to be recognized in the consolidated financial statements as expense generally over the service period of the consulting arrangement or as performance conditions are expected to be met. Using a Black-Scholes valuation model, we periodically reassess the fair value of non-employee options as service conditions are met, which generally aligns with the vesting period of the options, and we adjust the expense recognized in the consolidated financial statements accordingly.

FASB ASC

718

-

20

requires that modifications of the terms or conditions of equity awards be treated as an exchange of the original award for a new award.  Incremental compensation cost is measured as the excess, if any, of the fair value of the modified award over the fair value of the original award immediately before its terms are modified.

Income Tax, Policy [Policy Text Block]

Income Taxes:

We account for income taxes using the asset and liability method, the objective of which is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting and the tax basis of our assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. A valuation allowance related to deferred tax assets is recorded when it is more likely than

not

that some portion or all of the deferred tax assets will

not

be realized.  

We account for uncertain tax positions using a more-likely-than-

not

recognition threshold based on the technical merits of the tax position taken. Tax benefits that meet the more-likely-than-

not

recognition threshold should be measured as the largest amount of tax benefits, determined on a cumulative probability basis, which is more likely than

not

to be realized upon ultimate settlement in the financial statements. It is our policy to recognize interest and penalties related to income tax matters as general and administrative expenses. As of

June 30, 2018,

and

December 31, 2017,

there were

no

accrued interest or penalties related to uncertain tax positions.

Earnings Per Share, Policy [Policy Text Block]

Loss per Common Share:

FASB’s ASC

260

-

10

(“Earnings Per Share”) requires the presentation of basic earnings per share, which is based on weighted average common stock outstanding, and dilutive earnings per share, which gives effect to options, warrants and convertible securities in periods when they are dilutive. At

June 30, 2018

and

2017

we excluded

87,941,132

and

72,197,708

potential common shares, respectively, relating to convertible preferred stock, convertible notes, options and warrants outstanding from the diluted net loss per common share calculation because their inclusion would be anti-dilutive. In addition, we excluded

625,000

warrants from the diluted net loss per common share calculation at

June 30, 2018

and

2017

as the conditions for their vesting are

not

probable.  

New Accounting Pronouncements, Policy [Policy Text Block]

Recent Accounting Pronouncements: 

 In

June 2018,

the FASB issued ASU

No.2018

-

07,

"Compensation - Stock Compensation (Topic

718

) Improvements to Nonemployee Share-Based Payment Accounting." The FASB issued this update as part of its Simplification Initiative. The amendments in this update expand the scope of Topic

718

to include share-based payments for acquiring goods and services from nonemployees.  An entity should apply the requirements of Topic

718

to nonemployee awards except for specific guidance on inputs to an option model and the attribution of cost.  The amendments specify that Topic

718

applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor's own operations by issuing share-based payment awards. The amendments for this update are effective for public companies for fiscal years beginning after

December 15, 2018.

Early adoption is permitted but

no

earlier than the adoption date of Topic

606.

An entity should only remeasure liability-classified awards that have

not

been settled by the date of adoptions and equity classified awards for which a measurement date has

not

been established through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption.  Upon transition, the entity is required to measure these nonemployee awards at fair value as of the adoption date.  The Company believes the adoption of this standard on our consolidated financial statements and related disclosures will

not

be material.

On

February 25, 2016,

the FASB issued ASU

No.

 

2016

-

02,

“Leases,” a comprehensive new lease standard which will supersede previous lease guidance. The standard requires a lessee to recognize in its balance sheet assets and liabilities related to long-term leases that were classified as operating leases under previous guidance. An asset will be recognized related to the right to use the underlying asset and a liability will be recognized related to the obligation to make lease payments over the term of the lease. The standard also requires expanded disclosures surrounding leases. The standard is effective for fiscal periods beginning after

December 15, 2018,

and requires modified retrospective adoption, with early adoption permitted. The Company believes the adoption of this standard on our consolidated financial statements and related disclosures will

not

be material.

XML

Note 2 - Summary of Significant Accounting Policies (Tables)

6 Months Ended

Jun. 30, 2018

Notes Tables

Software, Property and Equipment Estimated Useful Life [Table Text Block]

Software (in years)		3
Office equipment (in years)	5	-	7
Leasehold improvements	lesser of useful life or lease term

XML

Note 3 - Inventory and Related Vendor Liability (Tables)

6 Months Ended

Jun. 30, 2018

Notes Tables

Schedule of Inventory, Current [Table Text Block]

	June 30,			December 31,
	2018			2017
Raw materials	$	1,678,000		$	1,681,000
Finished goods		69,000			69,000
		1,747,000			1,750,000
Less: Reserve for quality		(6,000	)		(6,000	)
Inventory (net)	$	1,741,000		$	1,744,000
Liability for inventory held at vendor	$	1,462,000		$	1,678,000

XML

Note 4 - Senior Convertible Notes and Warrants (Tables)

6 Months Ended

Jun. 30, 2018

Notes Tables

Convertible Debt [Table Text Block]

Face value June 30, 2018	$	400,000
Debt discount at issuance		(120,000	)
Amortization of debt discount since inception		2,000
2018 Senior Convertible Notes (net)	$	282,000

Face value of 2017 Convertible Notes	$	4,420,000
Debt discount at issuance		(1,897,000	)
2017 extinguishment impact on discount		1,183,000
Amortization of debt discount since inception		127,000
2017 Senior Convertible Notes (net)	$	3,833,000

Face value December 31, 2016	$	3,000,000
Debt discount at issuance		(2,551,000	)
Amortization of debt discount since inception		789,000
2016 Senior Convertible Notes (net)	$	1,238,000

XML

Note 6 - Property and Equipment (Tables)

6 Months Ended

Jun. 30, 2018

Notes Tables

Property, Plant and Equipment [Table Text Block]

	June 30, 2018			December 31, 2017
Office equipment	$	249,000		$	249,000
Shop equipment		231,000			231,000
Leasehold improvements		253,000			253,000
		733,000			733,000
Less accumulated depreciation		(634,000	)		(608,000	)
Net property and equipment	$	99,000		$	125,000

XML

Note 7 - Business Segments (Tables)

6 Months Ended

Jun. 30, 2018

Notes Tables

Schedule of Segment Reporting Information, by Segment [Table Text Block]

	CURA			Aegis			Corporate			Total
Revenue	$	8,000		$	-		$	-		$	8,000
Loss on Revenue		(25,000	)		-			-			(25,000	)
Total Costs and Expenses		373,000			160,000			325,000			858,000
Loss from operations		(398,000	)		(160,000	)		(325,000	)		(883,000	)
Other expense		-			-			(259,000	)		(259,000	)
Net loss	$	(398,000	)	$	(160,000	)	$	(584,000	)	$	(1,142,000	)
Stock based compensation	$	5,000		$	26,000		$	4,000		$	35,000
Depreciation and amortization	$	37,000		$	5,000		$	2,000		$	44,000
Capital expenditures	$	-		$	-		$	-		$	-
Assets at June 30, 2018	$	1,810,000		$	65,000		$	144,000		$	2,019,000

	CURA			Aegis			Corporate			Total
Revenue	$	16,000		$	-		$	-		$	16,000
Loss on revenue		(54,000	)		-			-			(54,000	)
Total costs and expenses		896,000			291,000			701,000			1,888,000
Loss from operations		(950,000	)		(291,000	)		(701,000	)		(1,942,000	)
Other expense		-			-			(495,000	)		(495,000	)
Net loss	$	(950,000	)	$	(291,000	)	$	(1,196,000	)	$	(2,437,000	)
Stock based compensation	$	(11,000	)	$	28,000		$	20,000		$	37,000
Depreciation and amortization	$	74,000		$	10,000		$	4,000		$	88,000
Capital expenditures	$	-		$	-		$	-		$	-
Assets at June 30, 2018	$	1,810,000		$	65,000		$	144,000		$	2,019,000

	CURA			Aegis			Corporate			Total
Revenue	$	8,000		$	-		$	-		$	8,000
Loss on Revenue		(29,000	)		-			-			(29,000	)
Total Costs and Expenses		666,000			137,000			394,000			1,197,000
Loss from operations		(695,000	)		(137,000	)		(394,000	)		(1,226,000	)
Other expense		-			-			(164,000	)		(164,000	)
Net loss	$	(695,000	)	$	(137,000	)	$	(558,000	)	$	(1,390,000	)
Stock based compensation	$	2,000		$	2,000		$	25,000		$	29,000
Depreciation and amortization	$	38,000		$	5,000		$	3,000		$	46,000
Capital expenditures	$	97,000		$	34,000		$	-		$	131,000
Assets at June 30, 2017	$	308,000		$	71,000		$	128,000		$	507,000

	CURA			Aegis			Corporate			Total
Revenue	$	17,000		$	-		$	-		$	17,000
Loss on revenue		(57,000	)		-			-			(57,000	)
Total costs and expenses		1,425,000			269,000			821,000			2,515,000
Loss from operations		(1,482,000	)		(269,000	)		(821,000	)		(2,572,000	)
Other expense		-			-			(319,000	)		(319,000	)
Net loss	$	(1,482,000	)	$	(269,000	)	$	(1,140,000	)	$	(2,891,000	)
Stock based compensation	$	78,000		$	4,000		$	50,000		$	132,000
Depreciation and amortization	$	75,000		$	11,000		$	6,000		$	92,000
Capital expenditures	$	108,000		$	34,000		$	-		$	142,000
Assets at June 30, 2017	$	308,000		$	71,000		$	128,000		$	507,000

XML

Note 9 - Stock Options (Tables)

6 Months Ended

Jun. 30, 2018

Notes Tables

Schedule of Share-based Payment Award, Stock Options, Valuation Assumptions [Table Text Block]

	2018		2017
Expected term (years)		6.3		6.6
Expected forfeiture rate		0%		0%
Risk-free rate		2.6%		2.1%
Volatility		130%		130%
Dividend yield		0%		0%

Share-based Compensation, Stock Options, Activity [Table Text Block]

	Shares			Weighted Average Exercise Price		Average Remaining Contractual Term (years)		Aggregate Intrinsic Value
Outstanding at January 1, 2018		9,682,000		$	.54
Granted		1,067,500			.24
Exercised		-			-
Canceled or expired		(391,875	)		.57
Outstanding at June 30, 2018		10,357,625		$	.51		3.9	$	170,000
Exercisable at June 30, 2018		6,643,500		$	.60		3.3	$	15,000

XML

Note 10 - Warrants (Tables)

6 Months Ended

Jun. 30, 2018

Warrant [Member]

Notes Tables

Share-based Compensation, Activity [Table Text Block]

						Weighted
			Weighted			Average
			Average			Remaining		Aggregate
			Exercise			Contractual		Intrinsic
	Shares		Price			Term		Value
Outstanding at January 1, 2018		5,214,836	$	.57	(A)
Granted		1,430,871		.32
Exercised		-		-
Canceled or expired		-		-
Outstanding at June 30, 2018		6,645,707	$	.50	(A)	6.8	(B)	$	103,000
Exercisable at June 30, 2018		6,020,707	$	.48		6.3	(C)	$	102,000

XML

Note 1 - The Company and Basis of Presentation (Details Textual)	6 Months Ended
	Jun. 30, 2018 USD ($)	Dec. 31, 2017 USD ($)	Jun. 30, 2017 USD ($)	Dec. 31, 2016 USD ($)
Number of Operating Segments	2
Cash and Cash Equivalents, at Carrying Value, Ending Balance	$ 89,000	$ 194,000	$ 67,000	$ 2,009,000
Working Capital	102,000
Stockholders' Equity Attributable to Parent, Ending Balance	(5,318,000)	(3,408,000)
Retained Earnings (Accumulated Deficit), Ending Balance	(83,278,000)	$ (80,841,000)
Proceeds From Convertible Debt, Gross	1,995,000
Minimum [Member]
Cash Needed During the Year to Fund Current and Future Commitments	4,000,000
Maximum [Member]
Cash Needed During the Year to Fund Current and Future Commitments	$ 4,500,000

XML

Note 2 - Summary of Significant Accounting Policies (Details Textual) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017	Dec. 31, 2017
Inventory Valuation Reserves, Ending Balance	$ 6,000		$ 6,000		$ 6,000
Allowance for Doubtful Accounts Receivable, Current, Ending Balance	0		0		0
Depreciation, Depletion and Amortization, Total	44,000	$ 46,000	88,000	$ 92,000
Capitalized Computer Software, Impairments			0	0
Revenue from Contract with Customer, Including Assessed Tax	8,000	8,000	16,000	17,000
Research and Development Expense, Total	329,000	467,000	734,000	$ 960,000
Excess Tax Benefit from Share-based Compensation, Operating Activities			0
Unrecognized Tax Benefits, Income Tax Penalties and Interest Accrued, Total	0		$ 0		$ 0
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount			87,941,132	72,197,708
Warrant [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount			625,000	625,000
Patents [Member] | General and Administrative Expense [Member]
Research and Development Expense, Total	$ 25,000	$ 44,000	$ 56,000	$ 74,000
Sales Revenue, Net [Member] | Customer Concentration Risk [Member] | Customer One [Member]
Concentration Risk, Percentage	40.00%	66.00%	79.00%	55.00%
Z-Coach Aviation Wellness Program Annual Subscription [Member]
Deferred Revenue Arrangement, Subscription Period			1 year
Transferred over Time [Member]
Revenue from Contract with Customer, Including Assessed Tax	$ 8,000	$ 8,000	$ 12,000
Transferred at Point in Time [Member]
Revenue from Contract with Customer, Including Assessed Tax	0		$ 4,000
Senior Convertible Promissory Notes [Member]
Debt Instrument, Convertible, Number of Equity Instruments			26,874,775
Long-term Debt, Fair Value	8,062,000		$ 8,062,000
Commercial Paper [Member] | Collateral Pledged [Member]
Debt Instrument, Collateral Amount	$ 15,000		$ 15,000
Subsidiaries [Member]
Equity Method Investment, Ownership Percentage	56.00%		56.00%

XML

Note 2 - Summary of Significant Accounting Policies - Property, and Equipment, Estimated Useful Lives (Details)	6 Months Ended
	Jun. 30, 2018
Office Equipment [Member] | Minimum [Member]
Property plant and equipment, useful lives (Year)	5 years
Office Equipment [Member] | Maximum [Member]
Property plant and equipment, useful lives (Year)	7 years
Leasehold Improvements [Member]
Property plant and equipment, useful lives	lesser of useful life or lease term
Computer Software, Intangible Asset [Member]
Property plant and equipment, useful lives (Year)	3 years

XML

Note 3 - Inventory and Related Vendor Liability (Details Textual) - USD ($)	Jun. 30, 2018	Dec. 31, 2017
Inventory, Raw Materials, Gross, Total	$ 1,678,000	$ 1,681,000
Liability for Inventory Held at Vendor	$ 1,462,000	$ 1,678,000

XML

Note 3 - Inventory and Related Vendor Liability - Inventory (Details) - USD ($)	Jun. 30, 2018	Dec. 31, 2017
Raw materials	$ 1,678,000	$ 1,681,000
Finished goods	69,000	69,000
	1,747,000	1,750,000
Less: Reserve for quality	(6,000)	(6,000)
Inventory (net)	1,741,000	1,744,000
Liability for inventory held at vendor	$ 1,462,000	$ 1,678,000

XML

Note 4 - Senior Convertible Notes and Warrants (Details Textual)					3 Months Ended		6 Months Ended		12 Months Ended
	May 08, 2018 USD ($) $ / shares	Nov. 30, 2017 USD ($) $ / shares	May 31, 2017 USD ($) $ / shares	Aug. 25, 2016 $ / shares	Jun. 30, 2018 USD ($) $ / shares shares	Jun. 30, 2017 USD ($)	Jun. 30, 2018 USD ($) $ / shares shares	Jun. 30, 2017 USD ($)	Dec. 31, 2016 USD ($) $ / shares shares	Dec. 31, 2017 USD ($)
Interest Expense, Total					$ 259,000	$ 165,000	$ 496,000	$ 321,000
Amortization of Debt Discount (Premium)							289,000	231,000
Warrants Related to the 2017 Convertible Notes [Member]
Investment Threshold			$ 500,000
Percentage of Shares Issuable Upon Conversion of the Promissory Notes, Below Investment Threshold			10.00%
Class of Warrant or Right, Exercise Price of Warrants or Rights | $ / shares		$ 0.333	$ 0.50
Percentage of Shares Issuable Upon the Conversion of the Promissory Notes			25.00%
Class of Warrant or Right, Term			10 years
Warrants Related to the 2016 Convertible Notes [Member]
Class of Warrant or Right, Exercise Price of Warrants or Rights | $ / shares				$ 0.25					$ 0.25
Class of Warrant or Right, Number of Securities Called by Warrants or Rights | shares									1,200,000
Percentage of Shares Issuable Upon the Conversion of the Promissory Notes				10.00%
Class of Warrant or Right, Term									10 years
Convertible Notes [Member]
Long-term Debt, Gross					7,821,000		7,821,000			$ 5,825,000
Debt Instrument, Unamortized Discount, Total					2,468,000		2,468,000			2,262,000
Long-term Debt, Total					5,353,000		5,353,000			3,563,000
Convertible Notes [Member] | Five Members of the Board of Directors [Member]
Long-term Debt, Total					1,902,000		1,902,000
Convertible Notes [Member] | Investor [Member]
Long-term Debt, Total					1,170,000		1,170,000
The 2018 Convertible Notes [Member]
Long-term Debt, Gross					400,000		400,000
Debt Instrument, Unamortized Discount, Total					118,000		118,000
Long-term Debt, Total					282,000		$ 282,000
Amount of Senior Convertible Promissory Notes Authorized to Issue in Private Placement	$ 1,000,000
Debt Instrument, Term	5 years						5 years
Debt Instrument, Convertible, Conversion Price | $ / shares	$ 0.25
Debt Instrument, Face Amount					400,000		$ 400,000
Payments of Debt Issuance Costs							4,000
Debt Instrument, Debt Discount Before Amortization					$ 120,000		120,000
Interest Expense, Total							$ 2,000
Warrants Related to the 2018 Convertible Notes [Member]
Investment Threshold	$ 500,000
Percentage of Shares Issuable Upon Conversion of the Promissory Notes, Below Investment Threshold	10.00%
Percentage of Shares Issuable Upon Conversion of the Promissory Notes, Above Investment Threshold	25.00%
Class of Warrant or Right, Exercise Price of Warrants or Rights | $ / shares	$ 0.25				$ 0.25		$ 0.25
Warrants and Rights Outstanding, Term	10 years				10 years		10 years
Class of Warrant or Right, Number of Securities Called by Warrants or Rights | shares					310,000		310,000
The 2017 Convertible Notes [Member]
Long-term Debt, Gross					$ 4,420,000		$ 4,420,000			2,825,000
Debt Instrument, Unamortized Discount, Total					587,000	587,000	587,000	587,000		261,000
Long-term Debt, Total					3,833,000	3,833,000	3,833,000	3,833,000		2,564,000
Amount of Senior Convertible Promissory Notes Authorized to Issue in Private Placement					5,000,000		$ 5,000,000
Debt Instrument, Term							5 years
Debt Instrument, Convertible, Conversion Price | $ / shares		$ 0.333	$ 0.50
Debt Instrument, Face Amount					$ 1,595,000		$ 1,595,000
Class of Warrant or Right, Number of Securities Called by Warrants or Rights | shares					1,120,871		1,120,871
Debt Instrument, Debt Discount Before Amortization					$ 1,897,000		$ 1,897,000
Interest Expense, Total					$ 92,000		$ 166,000	7,000
Debt Instrument, Interest Rate, Stated Percentage					6.00%		6.00%
Convertible Notes, Aggregate Amount Reissued		$ 2,450,000
Debt Instrument, Convertible, Number of Equity Instruments							4,789,790
Amortization of Debt Discount (Premium)					$ 28,000		$ 48,000	6,000
The 2017 Convertible Notes Issued in First Half of 2018 [Member]
Debt Instrument, Debt Discount Before Amortization					374,000		374,000
The 2016 Convertible Notes [Member]
Long-term Debt, Gross					3,000,000		3,000,000
Debt Instrument, Unamortized Discount, Total					1,762,000		1,762,000			2,001,000
Long-term Debt, Total					1,238,000		1,238,000			999,000
Debt Instrument, Term				5 years					5 years
Debt Instrument, Convertible, Conversion Price | $ / shares				$ 0.25
Debt Instrument, Face Amount					3,000,000		3,000,000			$ 3,000,000
Debt Instrument, Debt Discount Before Amortization					2,551,000		2,551,000		$ 2,551,000
Interest Expense, Total					165,000	158,000	328,000	314,000
Debt Instrument, Interest Rate, Stated Percentage									6.00%
Amortization of Debt Discount (Premium)					$ 120,000	$ 113,000	$ 238,000	$ 225,000
Debt Issuance Costs, Net, Total									$ 28,000
The 2016 Convertible Notes [Member] | Maximum [Member]
Amount of Senior Convertible Promissory Notes Authorized to Issue in Private Placement									$ 3,000,000

XML

Note 4 - Senior Convertible Notes and Warrants - Schedule of Senior Convertible Notes Outstanding (Details) - USD ($)	Jun. 30, 2018	Dec. 31, 2017	Jun. 30, 2017	Dec. 31, 2016
The 2018 Convertible Notes [Member]
Face value of Convertible Notes	$ 400,000
Debt discount at issuance	(120,000)
Amortization of debt discount since inception	2,000
Senior Convertible Notes (net)	282,000
The 2017 Convertible Notes [Member]
Face value of Convertible Notes	4,420,000	$ 2,825,000
Debt discount at issuance	(1,897,000)
Amortization of debt discount since inception	127,000
Senior Convertible Notes (net)	3,833,000	2,564,000	$ 3,833,000
2017 extinguishment impact on discount	1,183,000
The 2016 Convertible Notes [Member]
Face value of Convertible Notes	3,000,000
Debt discount at issuance	(2,551,000)			$ (2,551,000)
Amortization of debt discount since inception	789,000
Senior Convertible Notes (net)	$ 1,238,000	$ 999,000

XML

Note 5 - Software (Details Textual) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017	Dec. 31, 2017
Capitalized Computer Software, Amortization	$ 32,000	$ 32,000	$ 63,000	$ 63,000
Capitalized Computer Software, Net, Ending Balance	40,000		$ 40,000		$ 102,000
Computer Software, Intangible Asset [Member]
Finite-Lived Intangible Asset, Useful Life			3 years
Finite-Lived Intangible Assets, Amortization Expense, Next Twelve Months	29,000		$ 29,000
Finite-Lived Intangible Assets, Amortization Expense, Year Two	$ 11,000		$ 11,000

XML

Note 6 - Property and Equipment (Details Textual) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Depreciation, Total	$ 13,000	$ 14,000	$ 25,000	$ 29,000

XML

Note 6 - Property and Equipment - Property and Equipment (Details) - USD ($)	Jun. 30, 2018	Dec. 31, 2017
Office equipment	$ 249,000	$ 249,000
Shop equipment	231,000	231,000
Leasehold improvements	253,000	253,000
	733,000	733,000
Less accumulated depreciation	(634,000)	(608,000)
Net property and equipment	$ 99,000	$ 125,000

XML

Note 7 - Business Segments (Details Textual)	6 Months Ended
	Jun. 30, 2018
Number of Operating Segments	2

XML

Note 7 - Business Segments - Operation by Segments (Details) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017	Dec. 31, 2017
Revenue	$ 8,000	$ 8,000	$ 16,000	$ 17,000
Loss on Revenue	(25,000)	(29,000)	(54,000)	(57,000)
Total Costs and Expenses	858,000	1,197,000	1,888,000	2,515,000
Loss from operations	(883,000)	(1,226,000)	(1,942,000)	(2,572,000)
Other expense	(259,000)	(164,000)	(495,000)	(319,000)
Net loss	(1,142,000)	(1,390,000)	(2,437,000)	(2,891,000)
Stock based compensation	35,000	29,000	37,000	132,000
Depreciation and amortization	44,000	46,000	88,000	92,000
Capital expenditures		131,000		142,000
Assets	2,019,000	507,000	2,019,000	507,000	$ 2,200,000
Other expense	(259,000)	(164,000)	(495,000)	(319,000)
Operating Segments [Member] | CURA Division [Member]
Revenue	8,000	8,000	16,000	17,000
Loss on Revenue	(25,000)	(29,000)	(54,000)	(57,000)
Total Costs and Expenses	373,000	666,000	896,000	1,425,000
Loss from operations	(398,000)	(695,000)	(950,000)	(1,482,000)
Other expense
Net loss	(398,000)	(695,000)	(950,000)	(1,482,000)
Stock based compensation	5,000	2,000	(11,000)	78,000
Depreciation and amortization	37,000	38,000	74,000	75,000
Capital expenditures		97,000		108,000
Assets	1,810,000	308,000	1,810,000	308,000
Other expense
Operating Segments [Member] | Aegis Division [Member]
Revenue
Loss on Revenue
Total Costs and Expenses	160,000	137,000	291,000	269,000
Loss from operations	(160,000)	(137,000)	(291,000)	(269,000)
Other expense
Net loss	(160,000)	(137,000)	(291,000)	(269,000)
Stock based compensation	26,000	2,000	28,000	4,000
Depreciation and amortization	5,000	5,000	10,000	11,000
Capital expenditures		34,000		34,000
Assets	65,000	71,000	65,000	71,000
Other expense
Corporate, Non-Segment [Member]
Revenue
Loss on Revenue
Total Costs and Expenses	325,000	394,000	701,000	821,000
Loss from operations	(325,000)	(394,000)	(701,000)	(821,000)
Other expense	(259,000)	(164,000)	(495,000)	(319,000)
Net loss	(584,000)	(558,000)	(1,196,000)	(1,140,000)
Stock based compensation	4,000	25,000	20,000	50,000
Depreciation and amortization	2,000	3,000	4,000	6,000
Capital expenditures
Assets	144,000	128,000	144,000	128,000
Other expense	$ (259,000)	$ (164,000)	$ (495,000)	$ (319,000)

XML

Note 8 - Preferred and Common Stock (Details Textual) - USD ($)	6 Months Ended		12 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Dec. 31, 2016	Dec. 31, 2017
Common stock, shares authorized (in shares)	400,000,000			400,000,000
Common stock, par value (in dollars per share)	$ 0.01			$ 0.01
Preferred stock, shares authorized (in shares)	100,000,000			100,000,000
Preferred Stock, Par or Stated Value Per Share	$ 0.01			$ 0.01
Preferred Stock, Shares Outstanding, Accruing Dividends				459,512
Preferred Class A [Member]
Preferred stock, shares outstanding (in shares)	468,221			468,221
Preferred Stock, Shares Outstanding, Not Accruing Dividends	8,709			8,709
Preferred Stock, Shares Outstanding, Accruing Dividends	459,512
Dividends Payable	$ 2,438,000			$ 2,346,000
Preferred Stock, Liquidation Preference, Value	$ 2,438,000			$ 2,346,000
Preferred Stock, Liquidation Preference Per Share	$ 4			$ 4
Preferred Class B [Member]
Preferred stock, shares outstanding (in shares)	67,500			67,500
Dividends Payable	$ 437,000			$ 420,000
Preferred Stock, Liquidation Preference, Value	$ 437,000			$ 420,000
Preferred Stock, Liquidation Preference Per Share	$ 5			$ 5
Series C Preferred Stock [Member]
Preferred stock, shares outstanding (in shares)	15,687,500			15,937,500
Preferred Stock, Liquidation Preference, Value	$ 6,275,000			$ 6,375,000
Preferred Stock, Liquidation Preference Per Share	$ 0.40
Series C2 Preferred Stock [Member]
Preferred stock, shares outstanding (in shares)	24,500,000			25,000,000
Preferred Stock, Liquidation Preference, Value	$ 4,900,000			$ 5,000,000
Series C3 Preferred Stock [Member]
Stock Issued During Period, Shares, Conversion of Convertible Securities	120,000	1,050,000
Preferred stock, shares outstanding (in shares)	3,268,000			3,388,000
Stock Issued During Period, Shares, New Issues			6,042,000
Proceeds from Issuance of Private Placement, Net			$ 1,495,000
Common Stock [Member] | Conversion of Series C, C2 and C3 Convertible Stock Into Common Stock [Member]
Stock Issued During Period, Shares, Conversion of Convertible Securities	870,000
Common Stock [Member] | Conversion of Series C3 Convertible Stock Into Common Stock [Member]
Stock Issued During Period, Shares, Conversion of Convertible Securities		1,113,000

XML

Note 9 - Stock Options (Details Textual) - USD ($)	3 Months Ended			6 Months Ended		12 Months Ended
	Jun. 30, 2018	Mar. 31, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017	Dec. 31, 2011	Dec. 31, 2017
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross				1,067,500
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range, Lower Range Limit				$ 0.22
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range, Upper Range Limit				$ 1.58
Allocated Share-based Compensation Expense, Total	$ 35,000		$ 29,000	$ 37,000	$ 132,000
Stock Issued During Period, Value, Share-based Compensation, Forfeited				$ 82,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period					0
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized, Total	$ 246,000			$ 246,000
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized, Period for Recognition				1 year 36 days
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Weighted Average Grant Date Fair Value				$ 0.25	$ 0.76
Share-based Compensation Arrangement by Share-based Payment Award, Options, Vested in Period, Fair Value				$ 259,000	$ 3,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number, Ending Balance	10,357,625			10,357,625			9,682,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Vested and Expected to Vest, Outstanding, Number	6,643,500			6,643,500
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Available for Grant	2,542,375			2,542,375
Share-based Compensation Arrangement by Share-based Payment Award, Options, Forfeitures in Period					0
Stock Option Plan 2016 [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Authorized	3,000,000			3,000,000
Stock Option Plan 2011 [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Authorized						3,000,000
Share-based Compensation Arrangement by Share-based Payment Award, Percentage of Outstanding Stock Maximum						10.00%
Share-based Compensation Arrangement by Share-based Payment Award, Discount from Market Price, Offering Date						110.00%
Share-based Compensation Arrangement by Share-based Payment Award, Expiration Period		10 years				10 years
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross				1,067,500
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range, Lower Range Limit				$ 0.23
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range, Upper Range Limit				$ 0.35
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Rights, Percentage				25.00%

XML

Note 9 - Stock Options - Stock Options Valuation Assumptions (Details)	6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017
Expected term (years) (Year)	6 years 109 days	6 years 219 days
Expected forfeiture rate	0.00%	0.00%
Risk-free rate	2.60%	2.10%
Volatility	130.00%	130.00%
Dividend yield	0.00%	0.00%

XML

Note 9 - Stock Options - Share-based Compensation, Stock Options, Activity (Details) - USD ($)	6 Months Ended		12 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Dec. 31, 2017
Outstanding shares (in shares)	9,682,000
Outstanding - weighted average exercise price (in dollars per share)	$ 0.54
Outstanding - weighted average remaining contractual term (Year)	3 years 328 days
Outstanding - aggregate intrinsic value	$ 170,000
Shares, granted (in shares)	1,067,500
Weighted average exercise price, granted (in dollars per share)	$ 0.24
Shares, exercised (in shares)		0
Weighted average exercise price, exercised (in dollars per share)
Shares, canceled or expired (in shares)	(391,875)
Weighted average exercise price, canceled or expired (in dollars per share)	$ 0.57
Outstanding shares (in shares)	10,357,625		9,682,000
outstanding - weighted average exercise price (in dollars per share)	$ 0.51		$ 0.54
Shares, exercisable (in shares)	6,643,500
Weighted average exercise price, exercisable (in dollars per share)	$ 0.60
Exercisable- weighted average remaining contractual term (Year)	3 years 109 days
Exercisable-aggregate intrinsic value	$ 15,000

XML

Note 10 - Warrants (Details Textual) - shares	Jun. 30, 2018	Jan. 01, 2018	Dec. 31, 2017
Warrants without Expiration Date, Outstanding	743,500		743,500
Warrants without Expiration Date, Exercisable	118,500		118,500
Warrants Not Determined, Exercise Price [Member]
Class of Warrant or Right, Outstanding	1,750,000	1,750,000

XML

Note 10 - Warrants - Summary of Outstanding Warrants (Details) - USD ($)		6 Months Ended			12 Months Ended
		Jun. 30, 2018		Jun. 30, 2017	Dec. 31, 2017
Outstanding shares (in shares)		9,682,000
Outstanding - weighted average exercise price (in dollars per share)		$ 0.51			$ 0.54
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross		1,067,500
Weighted average exercise price, granted (in dollars per share)		$ 0.24
Shares, exercised (in shares)				0
Weighted average exercise price, exercised (in dollars per share)
Shares, canceled or expired (in shares)		(391,875)
Weighted average exercise price, canceled or expired (in dollars per share)		$ 0.57
Outstanding shares (in shares)		10,357,625			9,682,000
Shares, exercisable (in shares)		6,643,500
Weighted average exercise price, exercisable (in dollars per share)		$ 0.60
Exercisable- weighted average remaining contractual term (Year)		3 years 109 days
Exercisable - aggregate intrinsic value		$ 15,000
Warrant [Member]
Outstanding shares (in shares)		5,214,836
Outstanding - weighted average exercise price (in dollars per share)	[1]	$ 0.50			$ 0.57
Outstanding - weighted average remaining contractual term (Year)		6 years 292 days	[2]
Outstanding - aggregate intrinsic value		$ 103,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross		1,430,871
Weighted average exercise price, granted (in dollars per share)		$ 0.32
Shares, exercised (in shares)
Weighted average exercise price, exercised (in dollars per share)
Shares, canceled or expired (in shares)
Weighted average exercise price, canceled or expired (in dollars per share)
Outstanding shares (in shares)		6,645,707			5,214,836
Shares, exercisable (in shares)		6,020,707
Weighted average exercise price, exercisable (in dollars per share)		$ 0.48
Exercisable- weighted average remaining contractual term (Year)	[3]	6 years 109 days
Exercisable - aggregate intrinsic value		$ 102,000

[1] The weighted average exercise price for warrants outstanding as of June 30, 2018 and January 1, 2018 excludes 1,750,000 warrants in each period with no determined exercise price.

[2] The weighted average remaining contractual term for warrants outstanding as of June 30, 2018 and December 31, 2017 excludes 743,500 warrants with no expiration date.

[3] The weighted average remaining contractual term for warrants exercisable as of June 30, 2018, and December 31, 2017 excludes 118,500 warrants with no expiration date.

XML

Note 11 - Related Party Transactions (Details Textual) - Convertible Notes [Member] - USD ($)	Jun. 30, 2018	Dec. 31, 2017
Long-term Debt, Total	$ 5,353,000	$ 3,563,000
Five Members of the Board of Directors [Member]
Long-term Debt, Total	1,902,000
Investor [Member]
Long-term Debt, Total	$ 1,170,000

XML

Note 12 - Subsequent Events (Details Textual) - USD ($)			1 Months Ended	6 Months Ended
	Jul. 19, 2018	May 08, 2018	Jul. 19, 2018	Jun. 30, 2018	Aug. 06, 2018	Dec. 31, 2017	Nov. 30, 2017	May 31, 2017
Warrants Related to the 2017 Convertible Notes [Member]
Investment Threshold								$ 500,000
Percentage of Shares Issuable Upon Conversion of the Promissory Notes, Below Investment Threshold								10.00%
Class of Warrant or Right, Exercise Price of Warrants or Rights							$ 0.333	$ 0.50
The 2017 Convertible Notes [Member]
Long-term Debt, Gross				$ 4,420,000		$ 2,825,000
Class of Warrant or Right, Number of Securities Called by Warrants or Rights				1,120,871
Debt Instrument, Face Amount				$ 1,595,000
Amount of Senior Convertible Promissory Notes Authorized to Issue in Private Placement				$ 5,000,000
Debt Instrument, Term				5 years
Debt Instrument, Interest Rate, Stated Percentage				6.00%
Debt Instrument, Convertible, Conversion Price							$ 0.333	$ 0.50
The 2018 Convertible Notes [Member]
Long-term Debt, Gross				$ 400,000
Debt Instrument, Face Amount				$ 400,000
Amount of Senior Convertible Promissory Notes Authorized to Issue in Private Placement		$ 1,000,000
Debt Instrument, Term		5 years		5 years
Debt Instrument, Convertible, Conversion Price		$ 0.25
Subsequent Event [Member] | Warrants Related to the 2017 Convertible Notes [Member]
Class of Warrant or Right, Number of Securities Called by Warrants or Rights	2,307,207		2,307,207
Subsequent Event [Member] | Warrants Related to the 2018 Convertible Notes [Member]
Class of Warrant or Right, Number of Securities Called by Warrants or Rights	400,000		400,000
Class Of Warrant Or Right Issued In Period			90,000
Subsequent Event [Member] | Warrants Related to the 2018 Convertible Notes [Member] | Chief Executive Officer [Member]
Class Of Warrant Or Right Issued In Period			10,000
Subsequent Event [Member] | Warrants Related to July 2018 Convertible Notes [Member]
Class of Warrant or Right, Number of Securities Called by Warrants or Rights					100,000
Investment Threshold	$ 500,000		$ 500,000
Percentage of Shares Issuable Upon Conversion of the Promissory Notes, Below Investment Threshold	10.00%		10.00%
Percentage of Shares Issuable Upon Conversion of the Promissory Notes, Above Investment Threshold	25.00%		25.00%
Class of Warrant or Right, Exercise Price of Warrants or Rights	$ 0.25		$ 0.25
Warrants and Rights Outstanding, Term	10 years		10 years
Subsequent Event [Member] | The 2017 Convertible Notes [Member]
Debt Conversion, Original Debt, Amount			$ 50,000
Debt Conversion, Converted Instrument, Shares Issued			150,150
Long-term Debt, Gross	$ 4,420,500		$ 4,420,500
Subsequent Event [Member] | The 2018 Convertible Notes [Member]
Long-term Debt, Gross	625,000		625,000
Debt Instrument, Face Amount	225,000		225,000
Subsequent Event [Member] | The 2018 Convertible Notes [Member] | Chief Executive Officer [Member]
Debt Instrument, Face Amount	25,000		25,000
Subsequent Event [Member] | July 2018 Convertible Notes [Member]
Long-term Debt, Gross					$ 250,000
Amount of Senior Convertible Promissory Notes Authorized to Issue in Private Placement	$ 2,500,000		$ 2,500,000
Debt Instrument, Term	5 years
Debt Instrument, Interest Rate, Stated Percentage	0.00%		0.00%
Debt Instrument, Convertible, Conversion Price	$ 0.25		$ 0.25