10-K 1 crgs20191231_10k.htm FORM 10-K crgs20191231_10k.htm
 
 

 

Table of Contents

UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549 

FORM 10-K

 

(Mark One)

 

 

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

For the Fiscal Year Ended DECEMBER 31, 2019

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 number 000-24455

 

CURAEGIS TECHNOLOGIES, INC. 

(Name of Small Business Issuer in its charter)

 

NEW YORK 

 

16-1509512

(State or other jurisdiction of 

 

(I.R.S. Employer Identification No.)

incorporation or organization)

 

 

 

 

 

350 Linden Oaks

 

 

Rochester, New York 

 

14625

(Address of principal executive offices) 

 

(Zip Code)

 

Issuer’s Telephone Number, including Area Code: (585) 254-1100
 

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of each class Trading Symbol(s) Name of each exchange on which registered
none n/a n/a

 

 

Securities registered pursuant to Section 12(g) of the Exchange Act:

Trading symbol:  CRGS

Title of Class:  $.01 par value common voting stock 

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ☐ No ☑

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☑ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 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 check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. $5,554,000.

 

State the number of shares outstanding of each of the issuer’s classes of common equity, as of March 27, 2020: 51,187,236

 

 

 

 

 

CURAEGIS TECHNOLOGIES, INC. 

 

TABLE OF CONTENTS

 

 

PAGE

PART I

 

 

Item 1. Business

5

 

 

Item 1A. Risk Factors

7

 

 

Item 1B. Unresolved Staff Comments

11

 

 

Item 2. Properties

11

 

 

Item 3. Legal Proceedings

11

 

 

Item 4. Mine Safety Disclosures

11

 

 

PART II

 

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

12

 

 

Item 6. Selected Financial Data

13

 

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

13

 

 

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

18

 

 

Item 8. Financial Statements and Supplementary Data

18

 

 

 

Report of Independent Registered Public Accounting Firm

20

 

 

 

 

Consolidated Balance Sheets as of December 31, 2019 and 2018

21

 

 

 

 

Consolidated Statements of Operations for each of the years ended December 31, 2019 and December 31, 2018

22

 

 

 

 

Consolidated Statements of Changes in Stockholders’ Deficiency for each of the years ended December 31, 2019 and December 31, 2018

23

 

 

 

 

Consolidated Statements of Cash Flows for each of the years ended December 31, 2019 and December 31, 2018

24

 

 

 

 

Notes to Consolidated Financial Statements

25

 

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

40

 

 

Item 9A. Controls and Procedures

40

 

 

Item 9B. Other Information

40

 

 

PART III

 

 

Item 10. Directors, Executive Officers and Corporate Governance

41

 

 

Item 11. Executive Compensation

48

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

52

 

 

Item 13. Certain Relationships and Related Transactions, and Director Independence

55

 

 

Item 14. Principal Accountant Fees and Services

56

 

 

PART IV

 

 

Item 15. Exhibits, Financial Statement Schedules

56

 

 

EXHIBIT INDEX

57

 

 

 

 

 

Exhibit 3.1

 

 

Exhibit 3.2

 

 

Exhibit 3.3

 

 

Exhibit 3.4

 

 

Exhibit 3.5

 

 

Exhibit 3.6

 

 

Exhibit 3.7

 

 

Exhibit 3.8

 

 

Exhibit 3.9

 

 

Exhibit 3.10

 

 

Exhibit 10.1

 

 

Exhibit 10.2

 

 

Exhibit 10.3

 

 

Exhibit 10.4

 

 

Exhibit 10.5

 

 

Exhibit 10.6

 

 

Exhibit 10.7

 

 

Exhibit 10.8

 

 

Exhibit 10.9

 

 

Exhibit 10.10

 

 

Exhibit 10.11

 

 

Exhibit 10.12

 

 

Exhibit 10.13

 

 

Exhibit 10.14

 

 

Exhibit 10.15

 

 

Exhibit 10.16

 

 

Exhibit 10.17

 

 

Exhibit 10.18

 

 

Exhibit 10.19

 

 

Exhibit 10.20

 

 

Exhibit 10.21

 

 

Exhibit 10.22

 

 

Exhibit 10.23

 

 

Exhibit 10.24

 

 

Exhibit 10.25

 

 

Exhibit 10.26

 

 

Exhibit 10.27

 

 

Exhibit 10.28

 

 

Exhibit 10.29

 

 

Exhibit 10.30

 

 

Exhibit 10.31

 

 

Exhibit 10.32

 

 

Exhibit 10.33

 

 

Exhibit 10.34

 

 

Exhibit 10.35

 

 

Exhibit 10.36

 

 

Exhibit 10.37

 

 

Exhibit 21

 

 

Exhibit 23.1

 

 

Exhibit 24

 

 

Exhibit 31.1

 

 

Exhibit 31.2

 

 

Exhibit 32

 

  Exhibit 33  
  Exhibit 34  
  Exhibit 35  
  Exhibit 36  
  Exhibit 37  
  Exhibit 38  

 

Exhibit 39

 

  Exhibit 40  
  Exhibit 41  
  Exhibit 42  
  Exhibit 43  
  Exhibit 44  
  Exhibit 45  
  Exhibit 46  
  Exhibit 47  
  Exhibit 48  
  Exhibit 49  
  Exhibit 50  
  Exhibit 51  
  Exhibit 52  
  Exhibit 53  
     

SIGNATURE PAGE

62

 

 

 

PART I

 

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, 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. For further discussion of certain of the matters described above and other risks and uncertainties, see “Risk Factors” in Item 1A of this annual report.

 

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 annual report on Form 10-K to reflect new information, future events or other developments.

 

As used in this annual report, unless otherwise indicated, the terms “we”, “our”, “us”, “the Company” and “CurAegis” refer to CurAegis Technologies, Inc.

  

Item 1.  BUSINESS

 

History and Development of Our Technology  

 

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 myCadian 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 significant revenue-producing operations.  

 

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.

    

CURA Division: the myCadian system

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

 

The myCadian platform is designed to predict and detect a degradation of alertness in a user. The myCadian platform will support multiple wearable technology including IOS and android devices. The myCadian system will include: 

 

a risk assessment that identifies the degradation of alertness that may affect a wearer’s ability to perform tasks,

 

real-time reporting that distills complex user data into actionable information on mobile devices,

 

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 using their defined safety criteria and to create protocols for action,

 

pricing that makes it affordable across a broad-based workforce, and

 

the Z-Coach wellness program.

 

The Z-Coach wellness program is a key component of the myCadian system. 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.

 

 

Aegis Division: Hydraulic Pump   

During 2019, the Company initiated discussions with investment bankers and certain hydraulics companies to evaluate the possible monetization of the AEGIS technologies.  Management believes these technologies have the potential to fundamentally shift the design and manufacture of future products in the hydraulics pump and motor industries.

 

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, and

 

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

 

The Company has completed a production prototype and is working to align the prototype capability with specific customer applications. The Company has achieved significant milestones in the design and testing of this prototype. Engineering testing and design of the pump and motor functionality is continuing. Our engineering team has progressively made adjustments to traditional valve and piston technologies which have resulted in improvement in the measured efficiency of the pump. We have filed for patent protection for our novel non-rotating pump concept and continue to file patents as a engineering breakthroughs in our design are identified.  

 

Competition, Industry and Market Acceptance  

Competition in both the wearable device market and the hydraulic industry is, and is expected to remain, intense. The competition ranges from development stage companies to major domestic and international companies, many of which have financial, technical, marketing, sales, manufacturing, distribution and other resources significantly greater than ours. As we commercialize our technologies we expect to compete based on performance, uniqueness of design, reliability, and price. There can be no assurance that our technologies and products will not be rendered obsolete by developments in competing technologies that are currently under development or that may be developed in the future or that our competitors could market competing products that obtain market acceptance more rapidly than ours.

 

We believe that the technologies we are developing have significant advantages relative to similar products manufactured in the worldwide wearable device and hydraulic marketplaces. With respect to our hydraulic mechanical technologies, we believe that our development efforts represent a paradigm shift with respect to presently known technology. With respect to our wearable device technology, we believe that our development efforts are focused on a market that is seeking a better solution to predicting an individual’s level of alertness. Although we have not generated significant revenues from the commercialization of our technologies, we continue to focus our efforts toward those areas where we believe we can get to market quickly and successfully.

 

Patents, Trade Secrets and Trademarks 

Our ability to compete effectively depends in part on our ability to maintain the proprietary nature of our technology, products and manufacturing processes. We principally rely upon patent, trademark, trade secrets and contract law to establish and protect our proprietary rights. Despite our efforts to protect our proprietary information, there can be no assurance that others will not either develop the same or similar information independently or obtain access to our proprietary information. In addition, there can be no assurance that we would prevail if we asserted our intellectual property rights against third parties, or that third parties will not successfully assert infringement claims against us in the future.

 

The Company has five published patents: two hardware technology patents associated with the CURA business and three hydraulic pump and motor related technologies associated with the Aegis business. We have several patent applications in process in various countries including the United States, Europe and Asia.

 

All key employees are required to enter into agreements providing for confidentiality and the assignment of rights to inventions made by them while employed by us. These agreements also contain certain non-competition and non-solicitation provisions effective during the employment term and for varying periods thereafter depending on position and location. There can be no assurance that we will be able to enforce these agreements. All of our employees agree to abide by the terms of a Code of Ethics policy that provides for the confidentiality of certain information received during the course of their employment.

 

Trademarks are an important aspect of our business. The following are our registered trademarks: CurAegis®, myCadian™, CurAegis™, CURA™ and Z-Coach™.

 

Website 

Our website address is www.CurAegis.com. We make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and, if applicable, amendments to those reports, available on the investor information portion of our website. The reports are free of charge and are available as soon as reasonably practicable after they are filed with the Securities and Exchange Commission. We have posted our Corporate Governance guidelines, Board committee charters and Code of Ethics to the investor information portion of our website. This information is available in print to any shareholder upon request. All requests for these documents should be made to our chief financial officer by calling (585) 254-1100.

 

  

Engineering, Research and Development 

For the years ended December 31, 2019 and 2018, the Company spent approximately $809,000 and $1,262,000, respectively on product engineering, design, development and testing on its technology and products.

 

Employees  

As of December 31, 2019, we employed a total of 7 employees, 2 of which are primarily devoted to engineering, design and development, and 5 focused on corporate operations and administration. All of these individuals are employed in the U.S. None of our employees is represented by a labor union.

 

Executive Officers 

Our executive officers as of December 31, 2019, were as follows:

 

Richard A. Kaplan has served as chief executive officer and as a director since October 2010. He was named president of the Company in October 2019 upon the retirement of Keith Gleasman. From 2000 to 2010, Mr. Kaplan was the chief executive officer of Pictometry International Corp., a visual information systems company that experienced exponential growth under his leadership. Previously, Mr. Kaplan led and developed a number of other successful businesses in industries including retail floor covering, advertising and marketing, computer software, real estate development and human resource development.

 

Mr. Kaplan currently is on the boards of two companies: Caldwell Manufacturing and Viggi Corporation. He has also been very active in the community in academic institutions and charitable organizations, including present roles on the Board of Trustees at Rochester Institute of Technology (“RIT”), Nazareth College, and the University of Rochester Medical Center as well as directorships at Venture Creations (an RIT business incubator), Camp Good Days and Special Times, Rochester’s Child, Rochester Broadway Theatre League, George Eastman House, the Center for Governmental Research. Mr. Kaplan’s business success and contributions within the community have been recognized by multiple awards, including the prestigious Herbert W. Vanden Brul Entrepreneurial Award presented by the RIT E. Philip Saunders College of Business in April 2007. Mr. Kaplan was also designated the “Businessperson of the Year” in 2007. In 2012, he was inducted into the Rochester Business Hall of Fame.  Mr. Kaplan has an extensive background in economics, accounting, management and executive leadership. He is regularly sought out by startups, universities and other organizations for which he has done private consulting and guest lecturing on marketing, economics and organizational development. He attended Rochester Institute of Technology and the University of Buffalo where he majored in accounting and minored in economics.

 

Mr. Kaplan retired as the Company's chief executive officer and president on March 19, 2020 and continues as a member of the Company's board of directors.

 

James Donnelly has served as chief operating officer since October 2019. From January 2017 to October 2019, Mr. Donnelly served as the Company’s senior vice-president of sales and marketing. Prior to CurAegis, Jim served as the Vice President of Business Development for Six15 Technologies. Preceding the formation of Six15 in June of 2012, Jim was the Director of Defense and Augmented Reality Sales for Vuzix Corporation. He holds a B.S. in Business Administration from LeMoyne College and sits on two boards in the Rochester area within the non-profit sector. 

 

Mr. Donnelly was appointed as the Company's chief executive officer and president effective March 26, 2020.

 

Kathleen A. Browne has served as chief financial officer, corporate secretary and principal accounting officer since April 2015. Prior to joining the Company, Ms. Browne was the sole owner of a professional services and consulting business. From 2007 to 2015 she served as chief financial officer in several development stage public businesses including: U-Vend, Inc. and NaturalNano, Inc. Ms. Browne also served as the Controller and Chief Accountant for Paychex (2001-2004) and W. R. Grace (1996-2001). Ms. Browne spent thirteen years in public accounting with PricewaterhouseCoopers. Ms. Browne is a CPA with a degree in accounting from St. John Fisher College in Rochester, NY. 

 

Item 1A.  RISK FACTORS

 

We face a variety of risks inherent in perfecting our technologies to production-ready models and in our efforts to commercialize these technologies to generate revenues and profits. Below are certain significant risks that could adversely affect us and our prospects. Because of the following risks and uncertainties, our past financial performance should not be considered as an indicator of future performance.

 

We are a company focused on developing new technology and have not generated significant revenues.

We have a limited operating history and have not generated significant revenues since our founding in 1996. If revenue-generating sales and/or licenses of our technologies do not materialize or do not materialize on a timely basis, we will be compelled to seek additional equity financing or to incur additional debt to sustain operations which could have a material adverse effect on our business, financial condition and results of operations.

 

 

The results of engineering and development efforts may be uncertain and there can be no assurance of the commercial success of our technologies or future products. 

The development of our products and services is complex and costly.  Some products currently under development or future product developments, including specific product features or functions, may not be technologically successful. In addition, the cost and length of our product development may be greater than we anticipate and we may experience delays in future product development or problems in design or quality of our products. Unanticipated problems in developing products and services could also divert substantial research and development resources, which may impair our ability to develop products and services and could substantially increase our costs. If new or enhanced product and service introductions are delayed or not successful, we may not be able to achieve an acceptable return, if any, on our product and development efforts.  Even if our resulting products are technologically successful, they may not achieve market acceptance or compete effectively with our competitors’ products.

 

Our efforts to develop the CURA software platform, designed to measure a degradation of alertness in a person’s ability to perform a task or job, may not be technologically successful.  We continue to design and refine the myCadian software focused on optimizing the user experience.  

 

Our efforts to develop and monetize our Aegis hydraulic pump, an innovative hydraulic pump that is smaller, lighter, and more efficient and cost competitive than other such pumps in the market, may not be successful.

 

The timetable for our product development may be longer than we anticipate and we may experience delays in future product development or may elect not to pursue such development. Even if one or more of our resulting products or product features is technologically successful, it may not achieve market acceptance or compete effectively with our competitors’ technologies. In addition, there can be no assurance that our patent applications will result in patents being issued or that current or additional patents will afford protection against competitors.  

 

The Company is exposed to the potential of cyber security risks that could affect unauthorized access to our technology, product designs, testing and development as well as to our internal financial and operating systems. 

The Company's products, services and systems used in internal communications and customer and third-party interactions include the storage, processing and transmission of sensitive data. This can include intellectual property, proprietary and confidential data, and personnel information. A successful breach, employee malfeasance, or security access error could result in access to and potentially unauthorized disclosure, modification, misuse, loss or destruction of Company, customer, or other third-party data or systems.  If such a breach were to occur, the Company would be at risk of loss of access to critical data or systems through ransomware, destructive attacks or other means, business delays, service and system disruptions or denials of service.

 

We are continuing to develop our fatigue management business and we cannot predict our future results from operations of that business. 

We entered the fatigue management business in October 2014. We are continuing to develop and test our fatigue management product and consequently there are currently only nominal revenues from this line of business. Given our lack of operating history in this line of business, it is difficult to predict our future results. Investors should consider the risks and uncertainties that we have encountered and may continue to encounter as a pre-revenue-stage company in a new and unproven market. These uncertainties include: 

 

our ability to design and engineer products having the desired features in a cost-efficient manner,

 

consumer demand for and acceptance of our products, 

 

our ability to be successful in the highly competitive mobile APP market,

 

our ability to demonstrate the benefits of our products to end users, and

 

our ability to raise additional capital as needed on commercially acceptable terms.

 

We continue the development of our software based on our present technology but have not generated meaningful product sales. While we believe that we have a reasonable understanding of the approximate cost it will take to finalize the software APP, such costs are only estimated. If we are unable to control our cost to design and develop our software products, we may not be as successful generating profit margins that we expect, which could adversely affect our financial condition or business. 

 

If we are unable to adequately protect our intellectual property, our anticipated competitive advantage may disappear. 

Our success will be determined in part by our ability to retain and obtain United States and foreign patent protection for our technology. Because of the substantial length of time and expense associated with developing new technology, we place considerable importance on patent protection. We intend to continue to rely on a combination of patent protection, technical measures, and nondisclosure agreements with our employees, suppliers and customers to establish and protect the ideas, concepts and documentation of technology developed by us. Our ability to compete and the ability of our business to grow could suffer if these intellectual property rights are not adequately protected. There can be no assurance that our patent applications will result in patents being issued or that current or future patents will afford protection against competitors. Failure of our patents, trademarks, non-disclosure agreements and other measures to provide protection of our technology and our intellectual property rights could enable our competitors to more effectively compete with us and have an adverse effect on our business, financial condition and results of operations. In addition, our trade secrets and proprietary know-how may otherwise become known or be independently discovered by others. No guarantee can be given that others will not independently develop substantially equivalent proprietary information or techniques, or otherwise gain access to our proprietary technology. In addition, we may be required to litigate in the future to enforce our intellectual property rights, or to defend against claims of infringement or invalidity. Any such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on our business, financial condition or results of operations, and there can be no assurances of the success of any such litigation.

 

 

Although we believe that our technology does not and will not infringe upon the patents or violate the proprietary rights of others, it is possible such infringement or violation has occurred or may occur which could have a material adverse effect on our business. 

Our business is heavily reliant upon patented and patentable technology. We are not aware of any infringement by us. In the event that products we sell are determined or alleged to infringe upon the patents or proprietary rights of others, we could be required to modify our products or obtain a license for the manufacture and/or sale of such products. In such event, there can be no assurance that we would be able to do so in a timely manner, upon acceptable terms and conditions, or at all, and the failure to do any of the foregoing could have a material adverse effect upon our business. Moreover, there can be no assurance that we will have the financial or other resources necessary to enforce or defend a patent infringement or proprietary rights violation action. In addition, if our products or proposed products are determined or alleged to infringe or likely to infringe upon the patents or proprietary rights of others, we could be subject to injunctive relief and, under certain circumstances, become liable for damages, which could also have a material adverse effect on our business and our financial condition.  

 

If we fail to retain our key personnel and attract and retain additional qualified personnel, we might not be able to pursue our growth strategy. 

Our future success depends upon the continued service of our management team and engineering staff who possess longstanding industry and first-hand knowledge of our technology designs, products and operations. The loss of any of our key employees could negatively impact our ability to pursue our growth strategy and conduct operations. Although we believe that our relationship with these individuals is positive, there can be no assurance that the services of these individuals will continue to be available to us in the future.

  

Future growth in our business could make it difficult to manage our resources. 

If we are successful in executing our business plan, we will place a significant strain on our business operations, management, and financial resources. Significant growth in our business may require us to expand our production capabilities, improve our operational, financial and information systems, and to effectively grow and manage our employee base. There can be no assurance that we will be able to successfully manage such a substantial expansion of our business, including attracting and retaining qualified personnel. Any failure to properly manage our future growth could negatively impact our business and operating results.

 

We cannot predict our future capital needs and we may not be able to secure additional financing.

To date we have relied on sales of our equity securities and debt financing to finance our operations. We will need to raise additional funds in the future to fund our working capital needs, to fund the expansion of our business, to complete development, testing and marketing of our products, or to make strategic acquisitions or investments. We will require additional equity or debt financings, collaborative arrangements with corporate partners or funds from other sources for these purposes. 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 would involve substantial dilution of 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 operations or additional sources of financing, we may have to delay or scale back our growth plans. 

 

There is currently a limited public market for our Common Stock, which may result in volatility and negatively impacting our trading price, and potentially causing investors to have difficulty when trying to sell the Common Stock issuable upon conversion of their shares. 

We are not required to meet certain quantitative and qualitative listing standards established by stock exchanges for the protection of investors. The market for our Common Stock is extremely limited, meaning that at any time and from time to time, there may not be enough sellers in the market to fill purchase orders and/or enough buyers in the market to fill sell orders for transactions where a given price is stipulated (i.e. “limit orders”). Such orders, therefore, may expire unfilled. Our Common Stock is volatile, meaning that purchase and/or sell orders for a numerically small number of shares (e.g. 500) may have a disproportionate positive or negative impact on the trading price at any time during any given trading day but especially, during the first and the last half-hour of trading. The market for our Common Stock is disproportionately influenced by market makers (i.e. broker/dealers) who agree to buy a limited number of shares of our Common Stock (e.g. 500 share blocks) during the course of a given trading day at various specified prices (the “bid”) who may negatively affect the trading price by periodically “lowering the bid” for our Common Stock without regard to company performance and/or disclosure of material events regarding our activities.

  

Our Common Stock is deemed to be a “penny stock,” which may make it more difficult for investors to sell their shares due to suitability requirements.  

Unless the trading price for our Common Stock is $5.00 or more, the stock is classified as a “penny stock” by the Securities and Exchange Commission. This classification means that broker/dealers are required to determine whether our stock is a “suitable” investment for their customers, required to disclose to the customer certain bids, offers and quotations in our stock at least two days before executing a transaction and additionally are required to deliver certain information regarding the risks generally associated with penny stocks (e.g. lack of liquidity, volatility and the potential that the investor will lose his entire investment) at least two days prior to executing a penny stock transaction. These requirements may reduce the number of individuals who otherwise may purchase our Common Stock in the open market.

 

 

We may issue additional shares of capital stock in the future, which would cause dilution to all shareholders. 

As of December 31, 2019, we are authorized to issue up to 400,000,000 shares of our Common Stock, of which a total of 156,515,539 shares are outstanding or are reserved for future issuance due to outstanding stock options, warrants or the conversion of convertible debt or preferred stock. As of December 31, 2019, we have the authority to issue an additional 243,484,461 shares of Common Stock without obtaining shareholder approval.  

 

We are authorized to issue up to 100,000,000 shares of our Preferred Stock, of which a total of 43,961,221 shares have been issued and are outstanding. As of December 31, 2019, our board has the authority to approve the issuance of an additional 56,038,779 shares of Preferred Stock subject to the approval of the holders of the outstanding Preferred Stock.   

 

In the future, we may need to raise additional capital through the issuance of equity securities to finance our operations. Prior issuances of stock have resulted in substantial dilution to our shareholders, and such dilution will continue if we are required to finance our business with additional sales of our stock. Any issuance of additional shares of our Common Stock or Preferred Stock will dilute the percentage ownership interest of all shareholders and will dilute the book value per share of the Common Stock issuable upon conversion of the Shares.

 

The exercise of our outstanding options and warrants and conversion of our preferred stock may depress our stock price. 

As of December 31, 2019, we had outstanding stock options and warrants to purchase an aggregate of 18,472,207 shares of our Common Stock at exercise prices ranging from $0.22 to $5.00 per share. In addition, we had 44,737,077 shares of Preferred Stock (including the impact of accrued dividends) convertible into shares of our Common Stock at a 1:1 ratio. To the extent that these securities are converted into Common Stock, dilution to our shareholders will occur, which may result in a decrease in the market price of our Common Stock.

 

Certain investors in our equity securities have significant voting power over management and corporate transactions. 

As of December 31, 2019, we have one principal shareholder who controls approximately 42% of our outstanding voting securities. This principal shareholder and one board member together control approximately 47% of our outstanding voting securities. If these shareholders act together, they will be able to exert significant control over our management and affairs requiring shareholder approval, including approval of significant corporate transactions.

 

We do not anticipate paying dividends in the foreseeable future, and the lack of dividends may have a negative effect on the stock price. 

We have never declared or paid any cash dividends on our stock. We currently intend to retain our future earnings to support operations and to commercialize our products and, therefore, do not anticipate paying any cash dividends on our capital stock in the foreseeable future.

 

The terms of any future financing arrangements may restrict our operations. 

In the future, we may enter into financing arrangements with financial institutions or other lenders. These financing arrangements would likely require us to satisfy many financial covenants that could limit our ability to incur other indebtedness, pay dividends or engage in certain other types of transactions in the future. 

 

Our ability to realize potential value from our net operating loss carry-forwards is highly speculative and subject to numerous material uncertainties.  

As part of our business strategy we plan to explore whether there are opportunities to realize potential value from our net operating loss carry-forwards (“NOL Strategy”). Our net operating loss carry-forwards permit us to apply our net operating losses from prior fiscal years to taxable income in future years in order to reduce our tax liability.  As we have incurred losses since our inception, we are unable to realize value from our net operating loss carry-forwards unless we become profitable, either through the commercialization of the products we are developing or through the acquisition of a profitable company. The success of a NOL Strategy will be predicated on maintaining the value of and utilizing all or substantially all of our net operating loss carry-forwards to offset future taxable income of our company or any acquired company. This strategy would be adversely affected if we are unable to realize value from, or otherwise preserve and utilize, our net operating loss carry-forwards, including for any of the following reasons, none of which we have explored or researched as of December 31, 2019:

 

 

Past Ownership Changes.  In the event that we are deemed to have undergone an “ownership change” as defined in Section 382(g)(1) of the Internal Revenue Code (the “Code”), our net operating loss carry-forwards generated prior to the ownership change would be subject to annual limitations, which could reduce, eliminate, or defer the utilization of these losses.  Generally, an “ownership change” occurs if the percentage of the stock owned by one or more “5-percent shareholders” (as that term is defined for purposes of Section 382 of the Code) has increased by more than 50 percentage points over the lowest percentage of stock owned by those shareholders at any time during the “testing period”, which is generally the preceding three-year period.

 

 

 

Future Ownership Changes.  Even if an ownership change has not occurred in the past, there is still the potential for an ownership change to occur under Section 382 of the Code as a result of future changes in stock ownership.  For example, our issuance of additional stock in the future will result in additional ownership change.

 

 

 

 

Equity Structure Shift.  Certain equity structure shifts, including certain reorganization type-transactions, public offerings, and similar transactions that give rise to a change in the ownership of the Company may result in a limitation or prohibition on the use of the net operating loss carry-forwards.  Additionally, the IRS has viewed an acquisition of an ownership percentage in a company that is represented by certain equity instruments, including certain preferred stock, debt instruments, or stock options, as indicative of a transfer of a beneficial ownership interest in a company under Section 382 of the Code.  Accordingly, when those instruments are issued, there could be an unintended ownership change that results in a limitation or prohibition on the use of the net operating loss carry-forwards.

 

 

 

 

De Facto Liquidation.  In order to preserve our net operating loss carry-forwards, there must not be a “de facto liquidation” of the Company. The IRS has interpreted a “de facto liquidation” to include sales or the discontinuation of the current business of a company.

  

In light of the significant uncertainties inherent in the forward-looking statements made by us, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved.  Important factors could affect our results and could cause results to differ materially from those expressed in our forward-looking statements. Such factors may be updated from time to time in our periodic filings with the SEC, which are accessible on the SEC’s website at www.sec.gov. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law. 

 

Item 1B.  UNRESOLVED STAFF COMMENTS

Not Applicable.

  

Item 2.  PROPERTIES

We occupy 5,600 square feet of leased office space located at 350 Linden Oaks, Rochester, New York. In August 2019, we entered into a short-term sub-lease agreement through December 30, 2022. The current rental rate is $5,491 per month ($65,900 per annum) for the initial twelve months of the lease agreement. The Agreement allows for annual 5% increases from this initial lease rental rate effective on: August 1, 2020, August 1, 2021 and August 1, 2022. We believe that, given our present circumstances, these offices are sufficient to meet our anticipated operational requirements for the next twelve months.

  

 Item 3.  LEGAL PROCEEDINGS

There are no litigation matters, actions and/or proceedings to which we are a party or to which our properties are subject.

 

Item 4.  MINE SAFETY DISCLOSURES

Not Applicable.  

 

 

PART II

 

Item 5.  MARKET FOR COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information  

 

Our common stock is traded on the over-the-counter market which is an alternative stock exchange listing for companies that either choose not to be listed on a U.S. stock exchange or do not meet the relevant listing requirements. The over-the-counter market and the broker-dealer activities in the market are regulated by the Financial Industry Regulatory Authority (“FINRA”), the U.S. Securities and Exchange Commission (“SEC”) and various state regulators.

 

Our common stock is regularly quoted on the OTC Link System, an inter-dealer quotation system, operated by OTC Markets Group Inc. OTC Markets Group has developed the OTC Market Tiers in order to bring increased clarity, transparency and disclosure to the OTC market. Quotations for our common stock within the OTC Market Tiers are found on the OTCQB which is limited to companies whose quoted equity is registered with the SEC and that are current in their reporting requirements.

 

The following table presents the range of high and low bid prices for our common stock for each quarter during the last two calendar years. The source of the high and low bid price information is the OTCQB. The market represented by the OTCQB is extremely limited, is heavily influenced by market makers and the price for our common stock quoted on the OTCQB is not necessarily a reliable indication of the value of our common stock. We also believe that the price of our common stock is significantly impacted by short-selling. Quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

 

2019

 

High

   

Low

 

1st Quarter

  $ 0.30     $ 0.15  

2nd Quarter

  $ 0.24     $ 0.10  

3rd Quarter

  $ 0.20     $ 0.05  

4th Quarter

  $ 0.14     $ 0.01  

 

2018

 

High

   

Low

 

1st Quarter

  $ 0.47     $ 0.25  

2nd Quarter

  $ 0.40     $ 0.20  

3rd Quarter

  $ 0.36     $ 0.10  

4th Quarter

  $ 0.49     $ 0.15  

  

Holders of Common Stock  

As of December 31, 2019, we had approximately 334 shareholders of record of our common stock. As of December 31, 2019, we had 50,979,964 common shares issued and outstanding.

 

Dividend Policy on Common Stock  

We have not paid any dividends on our common stock since the inception of the Company. The declaration or payment of dividends, if any, on our common stock is within the discretion of the board of directors and will depend upon our earnings, capital requirements, financial condition and other relevant factors. Given our current financial condition, the board of directors does not anticipate payment of any dividends on our common stock in the foreseeable future. 

 

The declaration and payment of dividends on our common stock is limited by provisions of the New York Business Corporation Law which permits the payment of dividends only, if after the dividends are paid, a company’s net assets are at least equal to its stated capital. Payment of dividends on our common stock is also subordinated to the requirement that we pay all current and accumulated dividends on our Class A and Class B Preferred Shares prior to the payment of any dividends on our common stock.  

 

 

Securities Authorized for Issuance under Equity Compensation Plans as of December 31, 2019:

 

Plan Category  

Number of

securities

to be issued

upon

exercise of

outstanding

options,

warrants and

rights

   

Weighted

average

exercise

price of

outstanding

options,

warrants and

rights

   

Number of

securities

remaining

available

for

future

issuance

under equity

compensation

plans

(excluding

securities

reflected in

col.)

 
                         

Equity compensation plans approved by security holders

    10,740,500 (1)   $ 0.45       2,159,500  

Equity compensation plans not approved by security holders

    1,223,000 (2)   $ 1.04 (3)  

None

 

Total

    11,963,500               2,159,500  

 

(1)

Represents the aggregate number of common stock options outstanding under the 2011 and 2016 Stock Option Plans, as well as other stock options granted to certain executive officers and non-management directors.

(2)

Represents common stock warrants issued to certain business, engineering, financial, and technical consultants.

(3)

Excludes the impact of 1,750,000 unvested warrants with no determined exercise price.

 

Unregistered Sales of Equity Securities and Use of Proceeds 

The Company issued a total of $1,800,000 of convertible promissory and demand notes to accredited investors during the year ended December 31, 2019. The convertible promissory and demand notes were offered and sold without registration under the Securities Act of 1933 pursuant to Rule 506(c) of Regulation D under the Securities Act of 1933. The offerings were made only to “accredited investors” as defined in Rule 501(a) of Regulation D under the Securities Act of 1933. Subsequent to December 31, 2019 and up to the filing of this Form 10K, the Company issued an additional $435,000 of convertible notes.

 

Reports to Shareholders  

We furnish our shareholders with an annual report containing audited financial statements and such other periodic reports as we may determine to be appropriate or as may be required by law. We comply with periodic reporting, proxy solicitation and certain other requirements of the Securities Exchange Act of 1934.

 

Transfer Agent and Registrar  

Continental Stock Transfer & Trust Company has been appointed as our Transfer Agent and Registrar for our common stock and for our preferred stock. Continental’s mailing address is One State Street, New York, New York 10004, and the main telephone number is (212) 509-4000.

 

Item 6.  SELECTED FINANCIAL DATA

 

As a smaller reporting company, we are not required to include information otherwise required by this Item.  

 

Item 7.  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, 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. For further discussion of certain of the matters described above and other risks and uncertainties, see “Risk Factors” in Item 1A of this annual report.

 

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 annual report on Form 10-K to reflect new information, future events or other developments.

 

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

 

Impact of COVID-19 Outbreak

Subsequent to year-end 2019, the World Health Organization declared a novel coronavirus (COVID-19) outbreak as a public health emergency.  There have been mandates from international, federal, state and local authorities requiring forced closures of various businesses, schools and other facilities and organizations.  While the closures and limitations on movement, domestically and internationally, are expected to be temporary, if the outbreak continues on its current trajectory the duration of the supply chain disruption could reduce the availability, or result in delays, of material or supplies to or from the Company, which in turn could materially interrupt the Company's business operations.  Given the speed and frequency of continuously evolving developments with respect to this pandemic, the Company cannot reasonably estimate the magnitude of the impacts to its results of operations.

 

 

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 myCadian 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 significant revenue-producing operations.  

 

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.

    

CURA Division: the myCadian system

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

 

The myCadian platform is designed to predict and detect a degradation of alertness in a user. The myCadian platform will support multiple wearable technology including IOS and android devices. The myCadian system will include: 

 

a risk assessment that identifies the degradation of alertness that may affect a wearer’s ability to perform tasks,

 

real-time reporting that distills complex user data into actionable information on mobile devices,

 

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 using their defined safety criteria and to create protocols for action,

 

pricing that makes it affordable across a broad-based workforce, and

 

the Z-Coach wellness program.

 

The Z-Coach wellness program is a key component of the myCadian system. 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.

 

Aegis Division: Hydraulic Pump   

During 2019, the Company initiated discussions with investment bankers and certain hydraulics companies to evaluate the possible monetization of the AEGIS technologies.  Management believes these technologies have the potential to fundamentally shift the design and manufacture of future products in the hydraulics pump and motor industries.

 

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, and

 

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

 

The Company has completed a production prototype and is working to align the prototype capability with specific customer applications. The Company achieved significant milestones in the design and testing of this prototype. Engineering testing and design of the pump and motor functionality is continuing. Our engineering team has progressively made adjustments to traditional valve and piston technologies which have resulted in improvement in the measured efficiency of the pump. We have filed for patent protection for our novel non-rotating group pump concept and continue to file patents as a engineering breakthroughs in our design are identified.  

 

In addition to the activities to be undertaken to implement our plan of operation detailed above, 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.

 

 

Results of Operations for the years ended December 31, 2019 and 2018

 

Revenue, Cost of Revenue and Loss on Revenue

 

   

For the year ended

December 31,

   

 

Variance

 
   

2019

   

2018

   

Incr (decr)

 

CURA revenue

  $ 15,000     $ 37,000     $ (22,000 )

Cost of revenue

    13,000       110,000       (97,000 )

Earnings (loss) on revenue

  $ 2,000     $ (73,000 )   $ 75,000  

 

The Company recorded $15,000 and $37,000 in CURA revenue during the years ended December 31, 2019 and 2018, respectively. Revenue from Z-Coach stand-alone sales aggregated $13,000 and $26,000 for the years ended December 31, 2019 and 2018, respectively.  During the year ended December 31, 2018, the Company recognized $11,000 in revenue from sales of the CURA system.

 

During the year ended December 31, 2019, fifty-one Z-Coach Aviation subscriptions were sold to five customers resulting in total customer sales of $7,000. As of December 31, 2019, and December 31, 2018, the Company has deferred revenue of $4,000 and $9,000, respectively attributed to Z-Coach subscription revenue that will be recognized ratably as our performance obligations are satisfied.

 

The Company recorded $13,000 and $110,000 in cost of revenue during the years ended December 31, 2019 and December 31, 2018, respectively. The cost of revenue includes 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 software was fully amortized in 2019.

 

The Z-Coach modules have been designed for a range of industry professionals, including aviation, trucking and busing industry and for corporate workers. The Z-Coach training module 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 year ended

December 31,

   

Variance

 
   

2019

   

2018

   

Incr (decr)

 

Wages and benefits

  $ 502,000     $ 731,000     $ (229,000 )

Professional fee and advisors

    242,000       305,000       (63,000 )

Parts and shop supplies

    12,000       102,000       (90,000 )

Computer and software maintenance

    13,000       45,000       (32,000 )

Depreciation and amortization

    22,000       38,000       (16,000 )

Other costs and expenses

    11,000       11,000       -  
      802,000       1,232,000       (430,000 )

Stock based compensation

    7,000       30,000       (23,000 )

Total Engineering and Development

  $ 809,000     $ 1,262,000     $ (453,000 )

 

Engineering and development expenses decreased during the year ended December 31, 2019 compared to the year ended December 31, 2018 due to: decrease in wages, professional fees and reduced spending for parts and shop supplies.  Reduced headcount effected computer and software expenses reflecting reduction in number of subscription-based software programs. These decreases reflect reduced spending as a result of more focused engineering efforts as the Company gets closer to product commercialization. Engineering headcount was two and six professionals as of December 31, 2019 and 2018, respectively.

  

 

General and Administrative Costs and Expenses

 

   

For the year ended

December 31,

   

Variance

 
   

2019

   

2018

   

Incr (decr)

 

Wages and benefits

  $ 838,000     $ 1,195,000     $ (357,000 )

Professional fees and advisors

    210,000       199,000       11,000  

Facilities and occupancy

    137,000       153,000       (16,000 )

Insurance

    87,000       87,000       -  

Sales and marketing

    62,000       30,000       32,000  

Patents

    45,000       150,000       (105,000 )

Travel

    31,000       44,000       (13,000 )

Computer and software maintenance

    29,000       37,000       (8,000 )

Shareholder

    36,000       53,000       (17,000 )

Depreciation and amortization

    2,000       8,000       (6,000 )

Other costs and expenses

    40,000       53,000       (13,000 )
      1,517,000       2,009,000       (492,000 )

Stock based compensation

    119,000       150,000       (31,000 )

Total General and Administrative

  $ 1,636,000     $ 2,159,000     $ (523,000 )

 

General and administrative expense decreased during the year ended December 31, 2019 compared to the year ended December 31, 2018 primarily due to: headcount decreases in our sales and operations teams and reduced spending for patent costs. General and administrative headcount was five and nine at December 31, 2019 and 2018, respectively.

 

Provision for Inventory and Impairment Loss 

The Company recorded a provision for excess inventory during the year ended December 31, 2018 based on changes in customer demand and technology developments. Inventory on hand at December 31, 2019 and December 31, 2018 has been fully reserved. The Company recognized $15,000 as a recovery of previously reserved inventory items upon the sale of certain of these components during the year ended December 31, 2019.

 

During the year ended December 31, 2018, the Company recorded an impairment charge of $17,000 on certain property and equipment that was no longer of use in the Company’s product development.

 

Non-operating Expense

 

   

For the year ended

December 31,

   

Variance

 
   

2019

   

2018

   

Incr/decr

 

Interest expense

  $ (1,233,000 )   $ (1,057,000

)

  $ 176,000  

Debt issuance cost

    (333,000 )     -       333,000  

Vendor penalty

    (300,000 )     -       300,000  

Other income

    18,000       1,000       (17,000 )
    $ (1,848,000 )   $ (1,056,000

)

  $ 792,000  

 

Interest expense increased by $176,000 for the year ended December 31, 2019 compared to the prior year. The Company has $10,310,000 in face value of convertible notes outstanding compared to $9,160,000 at December 31, 2018. During the year ended December 31, 2019, the Company recognized $1,233,000 in interest expense on the convertible, demand and promissory notes which includes $748,000 of amortization on debt discount that is classified as interest expense.

 

The increase in interest expense since 2018 reflects $650,000 of new 2019 convertible notes with an interest rate of 6% per annum issued since 2018, interest on $650,000 of demand notes with an interest rate of 6% per annum issued in the third quarter of 2019, and amortization of debt discount on July 2018 notes issued in the first half of 2019. The 2019 interest expense also reflects the interest incurred on the 6% unsecured promissory notes.

 

During 2019, the Company and the third-party vendor agreed to a $300,000 penalty payable to the vendor to reflect the aging on this outstanding liability.

 

During the year ended December 31, 2018 the Company recognized $1,057,000 in interest expense on the convertible notes including $627,000 of amortization on debt discount classified as interest expense related to the convertible notes.

 

Net Loss for the years ended December 31, 2019 and 2018 

The net loss for the year ended December 31, 2019 was $4,276,000, compared with a net loss in the year ended December 31, 2018 of $6,308,000. The net loss attributable to common stockholders for the year ended December 31, 2019 was $4,494,000 as compared to $6,526,000 for the year ended December 31, 2018. The weighted average basic and diluted common shares outstanding amounted to 50,601,000 and 49,781,000 for each of the years ended December 31, 2019 and 2018, respectively. Basic and diluted loss per common share for each of the years ended December 31, 2019 and 2018 were $0.09 and $0.13 respectively.

 

Preferred stock dividends of $218,000 were recorded in the years ended December 31, 2019 and December 31, 2018.

 

Liquidity and Capital Resources   

During the year ended December 31, 2019 we used $2,260,000 of cash in operating activities. A net loss of $4,276,000 was adjusted for $1,326,000 in non-cash expenses for: amortization of debt discount, depreciation and amortization, the non-cash expense recognized for the fair market value of share rights issued with demand notes, stock-based compensation and interest paid in common shares during the year. The Company reported $690,000 in changes in working capital components during the year ended December 31, 2019.  The decrease in cash used in operations in the year ended December 31, 2019 compared to the year ended December 31, 2018 was driven primarily by the decrease in the net loss and the provision for inventory reserve taken in 2018.

 

 

During the year ended December 31, 2019, the Company received net proceeds of $925,000 in senior convertible debt, $650,000 in demand notes and $800,000 in unsecured subordinated promissory notes. The Company repaid $150,000 in unsecured promissory notes during the third quarter of 2019 resulting in $2,225,000 in net cash provided by financing activities.

 

During the year ended December 31, 2018 we used $3,530,000 of cash in operating activities. A net loss of $6,308,000 was adjusted for $2,784,000 in non-cash expenses for: amortization of debt discount, depreciation and amortization, stock-based compensation, a reserve for inventory and an asset impairment, and interest paid in common shares during the year. The Company reported $6,000 in changes in working capital components during the year ended December 31, 2018.  During the year ended December 31, 2018, the Company received net proceeds of $3,388,000 in senior convertible debt and $1,000 in proceeds from the exercise of a common stock warrant.

 

Current Cash Outlook and Management Plans   

 

As of December 31, 2019, we have cash on hand of $18,000, negative working capital of $4,545,000, a stockholders’ deficiency of $12,203,000 and an accumulated deficit of $91,425,000. During the year ended December 31, 2019 we raised $2,375,000 in proceeds through the issuance of demand notes, convertible notes and promissory notes. The proceeds from these private placements have been used to support the ongoing development and marketing of our core technologies and product initiatives.

 

Management estimates that the 2020 cash needs will be approximately $1.5 to 2 million, based upon the cash used in operations in the fourth quarter of 2019. As of December 31, 2019, 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 will involve dilution to our shareholders or may require that we relinquish rights to certain of our technologies or products. In addition, we will 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 products or (ii) generate proceeds from the monetization of our hydraulic technologies. If these and other factors are not met, the Company would 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.

 

Critical Accounting Policies  

 

Revenue Recognition  

The Company has two sources of revenue: (i) from the sale of CURA products and (ii) from stand-alone Z-Coach subscriptions. Revenue from the sale of CURA products is recognized upon the shipment 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 December 31, 2019 and December 31, 2018, 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 that may occur prior to vesting is also estimated and 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 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.  

  

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 compensation 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. 

 

Impact of Inflation   

Inflation has not had a significant impact on our operations to date and we are currently unable to determine the extent inflation may impact our operations in future periods.  

 

Quarterly Fluctuations   

Since we are currently focused on developing our technologies for commercialization and we have not yet engaged in significant revenue producing operations, we do not have any meaningful quarterly fluctuations that impact our financial performance.

 

 

Item 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 

As a smaller reporting company, we are not required to include information otherwise required by this Item.  

 

 

Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

 

CURAEGIS TECHNOLOGIES, INC.
Contents
Financial Statements

 

 

 

PAGE

 

 

Report of Independent Registered Public Accounting Firm

20

 

 

Consolidated Balance Sheets as of December 31, 2019 and 2018

21

 

 

Consolidated Statements of Operations for each of the years ended December 31, 2019 and December 31, 2018

 22

 

 

Consolidated Statements of Changes in Stockholders’ Deficiency for each of the years ended December 31, 2019 and 2018

 23

 

 

Consolidated Statements of Cash Flows for each of the years ended December 31, 2019 and December 31, 2018

 24

 

 

Notes to Consolidated Financial Statements

 25

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 

 

 

To the Board of Directors and Stockholders of

CurAegis Technologies, Inc.

 

Opinion on the Financial Statements 

We have audited the accompanying consolidated balance sheets of CurAegis Technologies, Inc. and its subsidiaries (the “Company”) as of December 31, 2019 and 2018 the related consolidated statements of operations, changes in stockholders’ deficiency and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements presented fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Adoption of Accounting Standard Update (ASU) 2016-02, Leases (Topic 842)

As discussed in Note 7 to the consolidated financial statements, the Company has changed its method of accounting for leases in 2019 due to the adoption of ASU 2016-02, Leases (Topic 842) and the related amendments.

 

Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and its total liabilities exceed its total assets. This raises substantial doubt about the Company’s ability to continue as a going concern. Management's plans in regard to these matters are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

 

/s/ Freed Maxick CPAs, P.C.

 

We have served as the Company’s auditor since 2011.

 

Buffalo, New York


March 27, 2020

 

  

 

CURAEGIS TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS

 

   

December 31,

 
   

2019

   

2018

 

ASSETS

               

Current Assets:

               

Cash

  $ 18,000     $ 53,000  

Prepaid expenses and other current assets

    2,000       25,000  

Total current assets

    20,000       78,000  
                 

Right to use asset (net)

    193,000       -  

Property and equipment (net)

    38,000       62,000  

Software (net)

    -       10,000  

Total non-current assets

    231,000       72,000  
                 

Total Assets

  $ 251,000     $ 150,000  
                 

LIABILITIES AND STOCKHOLDERS' DEFICIENCY

               

Current Liabilities:

               

Liability for inventory held at vendor

  $ 1,764,000     $ 1,462,000  

Demand notes

    650,000       -  

Senior convertible notes (net)

    647,000       -  

Promissory notes

    425,000       -  

Accounts payable

    420,000       323,000  

Accrued interest

    509,000       166,000  

Current right to use obligation

    64,000       -  

Other current liabilities

    36,000       40,000  

Accrued wages and benefits

    50,000       35,000  

Total current liabilities

    4,565,000       2,026,000  
                 

Non-current right to use obligation

    126,000       -  

Senior convertible notes (net)

    7,763,000       6,603,000  

Total Liabilities

    12,454,000       8,629,000  
                 

Commitments and other matters (Note 16)

    -       -  
                 

Stockholders' Deficiency:

               

Preferred stock, $.01 par value, 100,000,000 shares authorized

               

Series C, voting, convertible, no dividend, shares issued and outstanding at December 31, 2019 and 2018: 15,687,500 and 15,687,500, respectively

    157,000       157,000  

Series C-2, voting, convertible, no dividend, shares issued and outstanding at December 31, 2019 and 2018: 24,500,000 and 24,500,000, respectively

    245,000       245,000  

Series C-3, voting, convertible, no dividend, shares issued and outstanding at December 31, 2019 and 2018: 3,238,000 and 3,268,000, respectively

    32,000       33,000  

Class A, non-voting, convertible, cumulative dividend $.40 per share per annum, shares issued and outstanding at December 31, 2019 and 2018: 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 December 31, 2019 and 2018: 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 December 31, 2019 and 2018: 50,979,964 and 50,364,549, respectively

    510,000       504,000  

Additional paid-in capital

    78,272,000       77,725,000  

Accumulated deficit

    (91,425,000

)

    (87,149,000

)

Total Stockholders' Deficiency

    (12,203,000

)

    (8,479,000

)

                 

Total Liabilities and Stockholders' Deficiency

  $ 251,000     $ 150,000  

 

See notes to consolidated financial statements.

 

 

 

CURAEGIS TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

   

For the Year Ended

December 31,

 
   

2019

   

2018

 
                 

Revenue and Cost of revenue:

               

CURA revenue

  $ 15,000     $ 37,000  

Cost of revenue

    13,000       110,000  

Gross margin (loss) on revenue

    2,000       (73,000

)

                 

Costs and expenses:

               

Provision (recovery) inventory reserve

    (15,000

)

    1,741,000  

Impairment loss

    -       17,000  

Engineering and development

    809,000       1,262,000  

General and administrative

    1,636,000       2,159,000  

Total costs and expenses

    2,430,000       5,179,000  

Loss from operations

    (2,428,000

)

    (5,252,000

)

                 

Non-operating expense:

               

Interest expense

    (1,233,000

)

    (1,057,000

)

Debt issuance cost

    (333,000

)

    -  

Vendor penalty

    (300,000

)

    -  

Other income

    18,000       1,000  

Non-operating expense

    (1,848,000

)

    (1,056,000

)

                 

Loss before income taxes

    (4,276,000

)

    (6,308,000

)

Income taxes

    -       -  

Net loss

    (4,276,000

)

    (6,308,000

)

                 

Preferred stock dividends

    218,000       218,000  

Net loss attributable to common stockholders

  $ (4,494,000

)

  $ (6,526,000

)

Net loss per share attributable to common stockholders

               

Basic and Diluted

  $ (0.09

)

  $ (0.13

)

Weighted average number of shares of common stock

               

Basic and Diluted

    50,601,000       49,781,000  

 

See notes to consolidated financial statements. 

 

 

 

CURAEGIS TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIENCY

 

                                   

For the Year Ended December 31, 2019

                                                 
                                                                                                                         
                                                                                                                         
   

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     Deficiency  
                                                                                                                         

Balance At January 1, 2019

    15,687,500     $ 157,000       24,500,000     $ 245,000       3,268,000     $ 33,000       468,221     $ 5,000       67,500     $ 1,000       50,364,549     $ 504,000     $ 77,725,000     $ (87,149,000 )   $ (8,479,000 )
                                                                                                                         

Conversion of C3 Preferred Shares to common stock

                                    (30,000 )     (1,000 )                                     30,000       1,000                       -  

Issuance of warrants with convertible note

                                                                                                    65,000               65,000  

Stock-based compensation

                                                                                                    126,000               126,000  

Common shares issued for interest

                                                                                    195,415       2,000       42,000               44,000  

Common shares issued with convertible notes

                                                                                    195,000       2,000       19,000               21,000  

Common shares issued with demand notes

                                                                                    195,000       1,000       19,000               20,000  

Share rights issued with demand notes

                                                                                                    276,000               276,000  

Net Loss

                                                                                                            (4,276,000 )     (4,276,000 )

Balance At December 31, 2019

    15,687,500     $ 157,000       24,500,000     $ 245,000       3,238,000     $ 32,000       468,221     $ 5,000       67,500     $ 1,000       50,979,964     $ 510,000     $ 78,272,000     $ (91,425,000 )   $ (12,203,000 )

 

 

                                   

For the Year Ended December 31, 2018

                                                 
                                                                                                                         
                                                                                                                         
                                                                                           
    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     Deficiency  
                                                                                                                         

Balance At January 1, 2018

    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 stock

    (250,000 )     (2,000 )                                                                     250,000       2,000                       -  

Conversion of C2 Preferred Shares to common stock

                    (500,000 )     (5,000 )                                                     500,000       5,000                       -  

Conversion of C3 Preferred Shares to common stock

                                    (120,000 )     (1,000 )                                     120,000       1,000                       -  

Issuance of warrants with convertible note

                                                                                                    557,000               557,000  

Stock-based compensation

                                                                                                    180,000               180,000  

Common shares issued for interest

                                                                                    320,853       3,000       77,000               80,000  

Beneficial conversion feature on convertible note

                                                                                                    369,000               369,000  

Common shares issued upon note conversions

                                                                                    190,150       2,000       47,000               49,000  

Exercise of common stock warrant

                                                                                    4,000       1,000       1,000               2,000  

Net Loss

                                                                                                            (6,308,000 )     (6,308,000 )

Balance At December 31, 2018

    15,687,500     $ 157,000       24,500,000     $ 245,000       3,268,000     $ 33,000       468,221     $ 5,000       67,500     $ 1,000       50,364,549     $ 504,000     $ 77,725,000     $ (87,149,000 )   $ (8,479,000 )

 

See notes to consolidated financial statements.

 

 

 

CURAEGIS TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   

For the Year Ended

December 31,

 
   

2019

   

2018

 

Cash flows from operating activities:

               

Net loss

  $ (4,276,000

)

  $ (6,308,000

)

Adjustments to reconcile net loss to net cash used in operating activities:

               

Amortization of discount reported as interest

    748,000       627,000  

Depreciation and amortization

    132,000       138,000  

Fair market value of share rights issued with demand notes

    276,000       -  

Stock-based compensation

    126,000       180,000  

Interest paid in shares

    44,000       81,000  

Provision for inventory reserve

    -       1,741,000  

Impairment of capitalized shop equipment

    -       17,000  

Changes in working capital items:

               

Accounts receivable

    -       8,000  

Prepaid expenses and other current assets

    23,000       2,000  

Liability for inventory held at vendor

    302,000       (216,000

)

Accounts payable

    63,000       172,000  

Accrued interest

    299,000       79,000  

Accrued wages and benefits

    7,000       (12,000

)

Other current liabilities

    (4,000

)

    (39,000

)

Net cash used in operating activities

    (2,260,000

)

    (3,530,000

)

                 

Cash flows from financing activities:

               

Proceeds from issuance of senior convertible notes (net)

    925,000       3,388,000  

Proceeds from demand notes

    650,000       -  

Proceeds from promissory notes

    800,000       -  

Repayment of promissory notes

    (150,000

)

    -  

Proceeds from exercise of common stock warrant

    -       1,000  

Net cash provided by financing activities

    2,225,000       3,389,000  
                 

Net decrease in cash

    (35,000

)

    (141,000

)

Cash at beginning of year

    53,000       194,000  

Cash at end of year

  $ 18,000     $ 53,000  
                 

Supplemental Disclosures:

               

Cash used for payment of interest

  $ 86,000     $ 271,000  

Right to use asset

  $ 279,000     $ -  
Exchange of promissory notes for convertible notes   $ 225,000     $ -  

Debt discount related to issuance of convertible notes

  $ 91,000     $ 933,000  

Common shares issued in payment of interest

  $ 44,000     $ 80,000  

Conversion of preferred shares to common

  $ 1,000     $ 8,000  

Common shares issued upon conversion of debt

  $ -     $ 49,000  

                                   

See notes to consolidated financial statements.

 

 

CURAEGIS TECHNOLOGIES, INC.

NOTES TO 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 myCadian 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.  

 

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.

    

CURA Division: the myCadian system

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

 

The myCadian platform is designed to predict and detect a degradation of alertness in a user. The myCadian platform will support multiple wearable technology including IOS and android devices. The myCadian system will include: 

 

 

a risk assessment that identifies the degradation of alertness that may affect a wearer’s ability to perform tasks,

 

real-time reporting that distills complex user data into actionable information on mobile devices,

 

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 using their defined safety criteria and to create protocols for action,

 

pricing that makes it affordable across a broad-based workforce, and

 

the Z-Coach wellness program.

 

The Z-Coach wellness program is a key component of the myCadian system. 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.

 

Aegis Division: Hydraulic Pump   

During 2019, the Company initiated discussions with investment bankers and certain hydraulics companies to evaluate the possible monetization of the AEGIS technologies.  Management believes these technologies have the potential to fundamentally shift the design and manufacture of future products in the hydraulics pump and motor industries.

 

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, and

 

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

 

The Company has completed a production prototype and is working to align the prototype capability with specific customer applications. The Company achieved significant milestones in the design and testing of this prototype and engineering testing and design of pump and motor functionality is continuing. Our engineering team has progressively made adjustments to traditional valve and piston technologies which have resulted in improvement in the measured efficiency of the pump. We have filed for patent protection for our novel non-rotating group pump concept and continue to file patents as a engineering breakthroughs in our design are identified.  

 

  

Current Cash Outlook and Management Plans 

As of December 31, 2019, we have cash on hand of $18,000, negative working capital of $4,545,000, a stockholders’ deficiency of $12,203,000 and an accumulated deficit of $91,425,000. During the year ended December 31, 2019 we raised $2,375,000 in proceeds through the issuance of demand notes, convertible notes and promissory notes. The proceeds from these private placements have been used to support the ongoing development and marketing of our core technologies and product initiatives.

 

Management estimates that the 2020 cash needs will be approximately $1.5 to 2 million, based upon the cash used in operations in the fourth quarter of 2019. As of December 31, 2019, 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 will involve dilution to our shareholders or may require that we relinquish rights to certain of our technologies or products. In addition, we will 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 products or (ii) generate proceeds from the monetization of our hydraulic technologies. If these and other factors are not met, the Company would 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.

  

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 

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). These subsidiaries are non-operational.

 

Use of Estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles (U.S. 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 $5,000. 

 

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 December 31, 2019 and December 31, 2018.

 

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. Inventory on hand at December 31, 2019 and 2018 has been fully reserved.

 

Depreciation and amortization: Depreciation and amortization are computed using the straight-line method.   Depreciation and amortization expense for the years ended December 31, 2019 and 2018 are as follows:

 

   

For Years ended

December 31,

 
   

2019

   

2018

 

Amortization right-to-use asset

  $ 98,000     $ -  

Software

    10,000       92,000  

Property and equipment

    24,000       46,000  
    $ 132,000     $ 138,000  

 

 

Right to use building asset: The FASB issued ASU No. 2016-02, “Leases,” which requires a lessee to recognize on its balance sheet the assets and liabilities related to long-term leases that were classified as operating leases under previous guidance. An asset is recognized related to the Company's ability to retain the economic benefits and control of the underlying asset. A corresponding liability is recognized related to the Company's obligation to make lease payments over the term of the lease.

 

The standard became effective for the Company January 1, 2019. The Company utilized the modified retrospective approach to measure the right to use operating lease agreement associated with the office building used for our business operations located in Rochester, New York. The adoption of this accounting standard did not impact our consolidated loss from operations and had no impact on cash flows.

  

Software, Property and Equipment: Capitalized software, property and equipment are stated at cost. Estimated useful lives for capitalized software is 3 years and for property and equipment is 5 to 7 years. 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 (expense). 

 

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 year ended December 31, 2018 we recorded an impairment charge of $17,000 on certain property and equipment.

 

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 December 31, 2019 and December 31, 2018. The carrying amount of cash, prepaid expenses and other current assets, liability for inventory, accounts payable, accrued expenses, demand and promissory notes approximates their fair value due to their short maturity. The senior convertible notes can be converted into common stock with an underlying value of $3,436,000 as of December 31, 2019 based on the trading price on December 31, 2019. 

 

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 FASB ASC 606. The Company has determined that the adoption of this standard did not require a cumulative effect adjustment. 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 MyCadian system products and (ii) from stand-alone Z-Coach subscriptions.

 

The Company's net revenue is derived primarily from domestic customers.  For the year ended December 31, 2019 net revenue from products transferred over time amounted to $13,000 and net revenue from products transferred at a point in time amounted to $2,000. One customer accounted for 43% of total Z-Coach subscription sales made during the year ended December 31, 2019. Our collection terms provide customers standard terms of net 30 days. Future performance obligations are reflected in deferred revenue.

 

CURA revenue is recognized (a) upon receipt of payment at the point of sale of the CURA app, (b) upon the delivery of myCadian products and (c) 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. 

 

 

Engineering and Development and Patents: Engineering and development costs and patent expenses are charged to operations as incurred. Engineering and development include personnel-related costs, materials and supplies, depreciation and consulting services. Patent costs for the years ended December 31, 2019 and 2018 amounted to $45,000 and $150,000, 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. 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.   

 

During 2018, the Company adopted FASB ASU 2018-07, “Equity-Based Payments to Non-Employees,” which 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. The Company utilized a modified retrospective approach effective as of January 1, 2018 in the adoption of this accounting guidance which resulted in a $10,000 reduction of stock compensation expense previously reported. 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 December 31, 2019, and December 31, 2018, 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 December 31, 2019 and 2018, we excluded 105,535,575 and 94,784,206 potential common shares, respectively, relating to convertible preferred stock, convertible notes, future share rights issued with demand 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 December 31, 2019 and 2018 as the conditions for their vesting are not time-based.  

  

 

NOTE 3 – INVENTORY AND RELATED VENDOR LIABILITY

At December 31, 2019 and 2018 inventory consisted of:

 

   

December 31,

 
   

2019

   

2018

 

Raw materials

  $ 1,665,000     $ 1,678,000  

Finished goods

    69,000       69,000  
      1,734,000       1,747,000  

Less: Reserve

    (1,734,000 )     (1,747,000 )

Inventory (net)

  $ -     $ -  
                 

Liability for inventory held at vendor

  $ 1,764,000     $ 1,462,000  

 

During 2017, the Company initiated a purchase order with a third-party 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.  At December 31, 2018, the Company had a reserve of $1,747,000 reflecting a full reserve for all inventory on-hand at that date. Management will evaluate this reserve in future reporting periods.

 

During 2019, the Company and the third-party vendor agreed to a $300,000 penalty payable to the vendor to reflect the aging on this outstanding liability.

 

 

 

NOTE 4 - DEMAND NOTE 

 

The Company entered into a credit facility with a commercial bank in 2019 for up to $1,500,000 in advances to support working capital needs of the business. The demand notes issued in connection with this commercial bank are supported by individual co-borrowing agreements from certain accredited investors. In connection with this credit agreement, the Company entered into a general security agreement that provides the bank a continuing security interest in all of the Company's personal property and fixtures. 

 

The co-borrowers participating in this credit facility received 30,000 common shares for each $100,000 in principal co-borrowed. The fair market value of these shares was estimated on the date of the note issuance and is reflected in debt issuance costs. The co-borrowers were also granted the right to purchase common shares up to the amount co-borrowed, at a price per share determined based on the closing price of the Company’s common stock one day prior to the agreement. The fair market value of these future rights is reflected in debt issuance costs in the results of operations. The price per share for the future share rights is fixed at the higher of the closing price of the Company’s common stock one day prior to the co-borrowing arrangement or $0.15 per share. Each co-borrower has the right to purchase these common shares until the indebtedness is paid in full or within five business days after the consummation of the sale of the Company’s Aegis division.

 

At December 31, 2019, the Company had issued $650,000 in demand notes and issued 195,000 shares of common stock in connection with the co-borrowing demand notes. The common shares issued in connection with the co-borrowing demand notes were valued at $21,000 on the date of issuance and have been reported in debt issuance costs. Coincident with the issuance of these notes, these co-borrowers also received the right to purchase up to 4,333,333 shares of the Company’s common stock at a fixed price of $0.15 per share. The fair market value of these future share rights was estimated at $276,000 on the date of the issuance of the notes utilizing the Black Scholes valuation model and has been reported in debt issuance costs. 

 

Advances drawn under this facility have been issued as demand notes with an adjustable interest rate set at the bank’s prime rate, which was 4.75% December 31, 2019. The Company incurred $37,000 in debt issuance costs related to bank and legal fees incurred in connection with this credit facility.

 

The shares of the Company’s Common Stock are being offered and sold in a private placement exempt from registration under Section 4(a)(2) of the Securities Act of 1933 (“Securities Act”), as amended, and Rule 506 of Regulation D as promulgated by the United States Securities and Exchange Commission thereunder. The shares of the Company’s Common Stock will not be registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

  

 

NOTE 5 - SENIOR CONVERTIBLE NOTES AND WARRANTS 

 

At December 31, 2019, the Company had $10,310,000 in convertible notes outstanding which have been presented net of unamortized debt discounts of $1,900,000, resulting in a carrying value of $8,410,000. The 2019 convertible notes have been presented in current liabilities as of December 31, 2019 as these notes mature on the earlier of the Aegis monetization event or five years from the date of issuance. As of December 31, 2018, the Company had $9,160,000 in convertible notes outstanding, presented net of unamortized debt discounts of $2,557,000 resulting in a carrying value of $6,603,000.

 

Scheduled maturities on the Company’s convertible note are: $650,000 in the twelve months ending 2020; $2,990,000 in the twelve months ending December 31, 2021; $2,775,000 in the twelve months ending in December 31, 2022; $3,395,000 in the twelve months ending December 31, 2023 and $500,000 thereafter.

 

Included in the face value of convertible notes outstanding at December 31, 2019 and December 31, 2018, is $2,477,000 and $2,252,000, respectively in convertible notes payable to six of our directors and $1,170,000 in convertible notes payable to an investor that is deemed an affiliate. 

 

   

 

 

 

Total

   

 

2019

6%

Notes

   

 

JULY

2018

Notes

   

 

2018

 

Notes

   

 

2017

6%

Notes

   

 

2016

6%

Notes

 
                                                 

Face value 12/31/18

  $ 9,160,000     $ -     $ 1,175,000     $ 625,000     $ 4,370,000     $ 2,990,000  

Notes issued

    1,150,000       650,000       500,000       -       -       -  

Face value 12/31/19

  $ 10,310,000     $ 650,000     $ 1,675,000     $ 625,000     $ 4,370,000     $ 2,990,000  
                                                 

 

Debt discount 12/31/18

  $ (2,557,000 )   $ -     $ (360,000 )   $ (231,000 )   $ (456,000 )   $ (1,510,000 )

Debt discount issued

    (91,000 )     (26,000 )     (65,000 )     -       -       -  

Amortization reported as interest

    748,000       23,000       72,000       46,000       94,000       513,000  

Debt discount 12/31/19

  $ (1,900,000 )   $ (3,000 )   $ (353,000 )   $ (185,000 )   $ (362,000 )   $ (997,000 )
                                                 
                                                 

Senior convertible notes (net) 12/31/19

  $ 8,410,000     $ 647,000     $ 1,322,000     $ 440,000     $ 4,008,000     $ 1,993,000  

 

 

 2019 Convertible Notes

 

The board of directors authorized the issuance of up to $2.5 million in 6% Convertible Promissory Notes (the “2019 Convertible Notes”) in connection with the May 28, 2019 Securities Purchase Agreement (the “2019 SPA”). The 2019 Convertible Notes mature on the earlier of: five days after the sale of substantially all of the assets of the Aegis division or five years from the date of issuance.

 

The conversion rate of the notes is fixed at the greater of $0.15 per share and the closing market price of the Company’s common stock on the trading day immediately prior to the issuance of the note. Investors receive 30,000 shares of common stock for each $100,000 investment in the 2019 Convertible Notes. 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 year ended December 31, 2019, the Company issued $650,000 in new notes and allocated $26,000 of the proceeds to debt discount based on the estimated fair value of the common shares issued and debt issuance costs on the date of investment. During the year ended December 31, 2019, the Company recorded $40,000 in interest expense which includes $23,000 of amortization on debt discount.

  

JULY 2018 Convertible Notes 

 

The board of directors authorized the issuance of up to $2.5 million in non-interest bearing Senior Convertible Promissory Notes and Warrants (the “JULY 2018 Convertible Notes”) in connection with the July 24, 2018 Securities Purchase Agreement (the “JULY 2018 SPA”). The JULY 2018 Convertible Notes have a five-year maturity. In April 2019, the Company’s board approved a resolution to complete this offering.

 

The conversion rate of the notes was fixed at $0.25 per share as determined at the close of business on July 24, 2018. Investors in this offering were granted warrants to purchase common shares equal to 10% or 25% of the number of shares issuable upon the conversion of the notes based upon the amount of their investment. 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 year ended December 31, 2019, the Company issued $500,000 in new convertible notes and allocated $65,000 of the proceeds to debt discount based on the estimated fair value of the warrants issued and debt issuance costs incurred on the date of investment. In connection with the issuance of these convertible notes, the Company issued 350,000 warrants with an exercise price of $0.25 per share and a 10-year term.

 

During the year ended December 31, 2019 and December 31, 2018, the Company recorded $72,000 and $20,000 respectively in interest expense which includes amortization of debt discount.  

 

During the year ended December 31, 2018, the Company issued $1,175,000, in convertible notes and allocated $380,000, of the proceeds to debt discount based on the estimated fair value of the warrants issued and debt issuance costs incurred on the date of investment. In connection with the issuance of these convertible notes, the Company issued 590,000 warrants with an exercise price of $0.25 per share and a 10-year term.

 

2018 Convertible Notes 

 

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. On July 19, 2018, the Company’s board approved a resolution to complete this offering.

 

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 in this offering were granted warrants to purchase common stock equal to 10% or 25% of the number of shares issuable upon the conversion of the notes based upon the amount of their investment. 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 year ended December 31, 2019 and December 31, 2018, the Company recorded $45,000 and $19,000 respectively in interest expense which reflects the amortization of debt discount.

 

 

2017 Convertible Notes 

 

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 (as amended, the “2017 SPA”). The 2017 Convertible Notes have a five-year maturity and a fixed annual interest rate of 6%. Investors in this offering were granted warrants to purchase warrants equal to 10% or 25% of the number of shares issuable upon the conversion of the notes based upon the amount of their investment. 

 

The conversion rate of the 2017 Notes was originally set at $0.50 per share and subsequently modified in November 2018 to $0.333 per share. The exercise price of related warrants issued in connection with the 2017 Notes was also subsequently modified in November 2018 to $0.333 per share. 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.

 

During the year ended December 31, 2019 and December 31, 2018 the Company recorded $356,000 and $355,000, respectively, in interest expense including $94,000 and $105,000, respectively of amortization of debt discount.

 

2016 Convertible Notes

 

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 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 of 1934, as amended 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 of 1933.  

 

During the year ended December 31, 2019 and December 31, 2018 the Company recorded $692,000 and $664,000, respectively, in interest expense including $513,000 and $483,000, respectively of amortization of debt discount.

 

 

NOTE 6- UNSECURED SUBORDINATED PROMISSORY NOTES 

 

During the year ended December 31, 2019, the Company issued $800,000, in unsecured subordinated promissory notes to the Company’s Chief Executive Officer and to another board member. These notes bear interest at a rate of 6% per annum and have a maturity date of ninety days from the date of issuance. As of December 31, 2019, all promissory notes outstanding were payable to our Chief Executive Officer and aggregated $425,000 at this date.  The maturity dates on the outstanding promissory notes have been amended to reflect a June 30, 2020 date.

 

During 2019, the Company paid off $150,000 and converted $225,000 of the promissory notes to 2019 convertible notes. The Company recognized interest expense of $15,000 on these notes during the year ended December 31, 2019.

     

 

NOTE 7 - RIGHT TO USE BUILDING ASSET

 

The FASB issued ASU No. 2016-02, “Leases,” which requires a lessee to recognize in its balance sheet the assets and liabilities related to long-term leases that were classified as operating leases under previous guidance. An asset is recognized related to the right to use the underlying asset and a liability is recognized related to the obligation to make lease payments over the term of the lease. The standard became effective for the Company January 1, 2019. 

 

As of January 1, 2019, the Company utilized the modified retrospective approach to measure the right to use operating lease agreement associated with the office building located at 1999 Mt. Read Blvd in Rochester New York. The adoption of this accounting standard did not impact our consolidated loss from operations and had no impact on cash flows. Upon adoption, the Company determined the present value of future lease costs at $257,000, which included monthly rental, common area costs, and taxes. The Company assumed an incremental borrowing rate of 6% as the building lease agreement did not include an implicit rate. The right-to-use asset included two, one-year renewal options that ran through May 2021. On September 1, 2019, the Company vacated this property at the request of the landlord and relocated to a new office. The Company terminated the lease obligation without penalty or liability for unused periods associated with the original lease obligation and as such, the Company did not incur an impairment as a result of this change in lease term. Operating lease costs for this lease aggregated $80,000 for year ended December 31, 2019.

 

 

On August 1, 2019, the Company entered into an operating lease obligation for office space located at 350 Linden Oaks in Rochester New York. The Company determined the present value of future lease costs at the inception of the lease was $212,000. The Company assumed an incremental borrowing rate of 6% as the building lease agreement did not include an implicit rate. The lease has a termination date of December 30, 2022. Operating lease costs for the year ended December 31, 2019 were $26,000 with future maturing lease obligations as follows: $64,000 in 2020; $64,000 in 2021 and $63,000 in 2022. Total future lease payments are $212,000 including imputed interest of $21,000.

 

 

NOTE 8 - SOFTWARE

 

The Company investment in software for the CURA division have been amortized over an estimated useful life of 3 years. Amortization expense recognized for the year ended December 31, 2019 and 2018 was $10,000 and $92,000, respectively. All capitalized software was fully amortized as of December 31, 2019. The net value of capitalized software at December 31, 2018 was $10,000.

  

 

NOTE 9 - PROPERTY AND EQUIPMENT 

 

At December 31, 2019 and 2018 property and equipment consist of the following:

 

   

December 31,

2019

   

December 31,

2018

 

Office equipment

  $ 199,000     $ 249,000  

Shop equipment

    132,000       182,000  

Leasehold improvements

    -       253,000  
      331,000       684,000  

Less accumulated depreciation

    (293,000

)

    (622,000

)

Net property and equipment

  $ 38,000     $ 62,000  

 

Depreciation expense for the years December 31, 2019 and 2018 was $24,000 and $46,000 respectively.  

 

 

NOTE 10 - 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 year ended December 31, 2019 for the Company’s business segments follows: 

 

   

CURA

   

Aegis

   

Corporate

   

Total

 
                                 

Revenue

  $ 15,000     $ -     $ -     $ 15,000  

Gross margin

    2,000       -       -       2,000  

Loss from operations

    (614,000 )     (513,000 )     (1,301,000 )     (2,428,000 )

Non-operating expense

    -       -       (1,848,000 )     (1,848,000 )

Net loss

  $ (614,000 )   $ (513,000 )   $ (3,149,000 )   $ (4,276,000 )
                                 

Stock based compensation

  $ 3,000     $ 17,000     $ 106,000     $ 126,000  

Depreciation and amortization

  $ 14,000     $ 18,000     $ 100,000     $ 132,000  

Assets at December 31, 2019

  $ 1,000     $ 36,000     $ 214,000     $ 251,000  

 

Segment information for the year ended December 31, 2018 for the Company’s business segments follows: 

 

   

CURA

   

Aegis

   

Corporate

   

Total

 
                                 

Revenue

  $ 37,000     $ -     $ -     $ 37,000  

Gross margin (loss) on revenue

    (73,000)       -       -       (73,000)  

Loss from operations

    (3,155,000 )     (658,000 )     (1,439,000 )     (5,252,000 )

Non-operating expense

    -       -       (1,056,000 )     (1,056,000 )

Net loss

  $ (3,155,000 )   $ (658,000 )   $ (2,495,000 )   $ (6,308,000 )
                                 

Stock based compensation

  $ 1,000     $ 44,000     $ 135,000     $ 180,000  

Depreciation and amortization

  $ 110,000     $ 20,000     $ 8,000     $ 138,000  

Assets at December 31, 2018

  $ 15,000     $ 54,000     $ 81,000     $ 150,000  

 

 

 

NOTE 11 - 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 bases 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.

 

The provision (benefit) for income taxes for the years ended December 31, 2019 and 2018 is summarized below:

 

   

2019

   

2018

 

Current tax expense (benefit):

               

Federal

  $ -     $ -  

State

    -       -  
                 

Deferred tax expense (benefit):

               

Federal

    583,000