NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
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 June 2016 in connection with the establishment of its two business divisions. The CURA division is engaged in the fatigue management business and the Aegis division is engaged in the power and hydraulic business.
The Company develops and markets advanced technologies in the areas of safety, wellness and power. The Company is focused on the commercialization of a wellness and safety system (the CURA System and the myCadian watch) and a uniquely designed hydraulic pump that will be smaller, lighter and more efficient than current technology. The Company has not had any significant revenue-producing operations.
The Company has created the CURA System to market products that reduce fatigue risk in the workplace and help individuals manage their sleep and improve alertness. The CURA System consists of the following capabilities:
|
●
|
the myCadian watch and app,
|
|
●
|
real-time alertness monitoring,
|
|
●
|
the Group Wellness Index and
|
|
●
|
the Z-Coach wellness program.
|
Our goal with the Aegis hydraulic pump technology is to bring to the marketplace a unique concept in hydraulic pumps and motors that will be:
|
●
|
smaller and lighter than conventional pumps and motors,
|
|
●
|
unique in its ability to scale larger, allowing more powerful pumps and motors.
|
It is important to note, regarding both the CURA and Aegis products, that the cycle time from the initiation of the sales process to revenue realization can be highly variable especially as a start-up entity. In addition to the activities to be undertaken to implement our plan of operations, we may expand and/or refocus our activities depending upon future circumstances and developments.
Current Cash Outlook and Management Plans
As of December 31, 2016, we have cash on hand of $2,009,000, working capital of $1,786,000, stockholders’ equity of $1,583,000 and an accumulated deficit of $75,418,000. During the year ended December 31, 2016 we raised $1,510,000 in gross proceeds through the sale of our Series C-3 preferred stock and $3,000,000 through the issuance of 6% convertible notes and warrants. The proceeds from these private placements are being used to support the ongoing development and marketing of our core technologies and product initiatives.
Management estimates that the 2017 cash needs, based on its current development and product plans, will range from $4.0 to $4.6 million. As of December 31, 2016, the Company’s cash and cash equivalents on hand may not be 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.
As described in Note 14 to the consolidated financial statements, subsequent to December 31, 2016, the board of directors authorized the issuance of Senior Convertible Promissory Notes and Warrants to be sold 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 will be made only to “accredited investors” as defined in Rule 501(a) of Regulation D under the Securities Act of 1933. The Company will offer up to $3 million in 6% senior convertible promissory notes with a five-year maturity. The conversion price of the notes will be fixed on the date of issuance at the lower of $0.50 per share or 60% of the market price as determined based on the 90-day volume weighted average price on the date of the agreement. The investors will receive warrants to purchase an aggregate number of shares of the Company’s common stock to equal 10% of the number of shares issuable upon the conversion of the notes. The exercise price of the warrants will be fixed on the date of issuance at the lower of $0.50 per share or 60% of the market price as determined based on the 90-day volume weighted average price on the date of the agreement. No notes had been issued as of the date of this filing.
Since inception, we have financed our operations by the sale of our securities and debt financings. We need to raise additional funds to meet our working capital needs, to fund expansion of our business, to complete development, testing and marketing of our products, or to make strategic acquisitions or investments. No assurance can be given that necessary funds will be available for us to finance our development on acceptable terms, if at all. Furthermore, such additional financings may involve dilution to our shareholders or may require that we relinquish rights to certain of our technologies or products. In addition, we may experience operational difficulties and delays due to working capital restrictions. If adequate funds are not available from additional sources of financing, we will have to delay or scale back our growth plans.
The Company’s ability to fund its current and future commitments out of its available cash depends on a number of factors. These factors include the Company’s ability to (i) launch and generate sales from the CURA division and; (ii) decrease engineering and development and administrative expenses. 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 at December 31, 2016). As of December 31, 2016, each of the subsidiaries is non-operational. The Company intends to let Ice Surface Development, Inc. dissolve by proclamation. All material intercompany transactions and account balances have been eliminated in consolidation.
Use of Estimates:
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (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 and Equivalents:
Cash and equivalents may include time deposits, certificates of deposit, and highly liquid debt instruments with original maturities of three months or less. We maintain cash and cash equivalents 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 $25,000.
Inventory
: Inventory is stated at the lower of cost or market with cost determined under the average cost method. We record provisions for excess, obsolete or slow-moving inventory based on changes in customer demand, technology developments or other economic factors. The allowance for excess, obsolete or slow-moving inventory was zero at December 31, 2016 and December 31, 2015.
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, 2016 and December 31, 2015.
Software, Property and Equipment:
Capitalized software, property and equipment are stated at cost. Estimated useful lives are as follows:
Software (in years)
|
|
3
|
|
Office equipment (in years)
|
5
|
-
|
7
|
Leasehold improvements
|
lesser of useful life or lease term
|
Depreciation and amortization are computed using the straight-line method. Betterments, renewals and significant repairs that extend the life of the assets are capitalized. Other repairs and maintenance costs are expensed when incurred. When disposed, the cost and accumulated depreciation applicable to assets retired are removed from the accounts and the gain or loss on disposition is recognized in other income (expense). Depreciation and software amortization expense for the years ended December 31, 2016 and 2015 amounted to $173,000 and $127,000, respectively.
Whenever events or circumstances indicate, our long-lived assets including any intangible assets with finite useful lives are tested for impairment by using the estimated future cash flows directly associated with, and that are expected to arise as a direct result of, the use of the assets. If the carrying amount exceeds the estimated undiscounted cash flows, impairment may be indicated. The carrying amount is compared to the estimated discounted cash flows and if there is an excess such amount is recorded as impairment. During the years ended December 31, 2016 and 2015, we recorded no impairment charges.
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, 2016. The carrying amount of cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, deferred revenue and accrued expenses approximates their fair value due to their short maturity. The carrying amount of capital lease obligations approximates fair value because stated or implied interest rates approximate current interest rates that are available for debt with similar terms. The 6% senior convertible notes can be converted into common stock which have an underlying value of $8,160,000 as of December 31, 2016 based on the trading price on December 31, 2016.
Revenue Recognition and Deferred Revenue:
The Company began offering the Z-Coach Aviation program in the first quarter of 2016. The Z-Coach program provides fatigue safety training over a 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. One customer accounted for 50% of total sales made during the year ended December 31, 2016. Our collection terms provide customers standard terms of net 30 days. Future performance obligations are reflected in deferred revenue.
Engineering and Development and Patents:
Engineering and development costs and patent expenses are charged to operations as incurred. Engineering and development includes personnel-related costs, materials and supplies, depreciation and consulting services.
Patent costs for the years ended December 31, 2016 and 2015 amounted to $96,000 and $83,000, respectively, and are included in general and administrative expenses.
Stock-based Compensation:
FASB Accounting Standards Codification (“ASC”) 718-10 requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense over the service period (generally the vesting period) in the consolidated financial statements based on their fair values on the grant date. The impact of 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 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 generally 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 until service conditions are met, which generally aligns with the vesting period of the options, and we adjust the expense recognized in the consolidated financial statements accordingly.
FASB ASC 718-20 requires that modifications of the terms or conditions of equity awards be treated as an exchange of the original award for a new award. Incremental compensation cost is measured as the excess, if any, of the fair value of the modified award over the fair value of the original award immediately before its terms are modified.
Income Taxes:
We account for income taxes using the asset and liability method, the objective of which is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting and the tax basis of our assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. A valuation allowance related to deferred tax assets is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
We account for uncertain tax positions using a more-likely-than-not recognition threshold based on the technical merits of the tax position taken. Tax benefits that meet the more-likely-than-not recognition threshold should be measured as the largest amount of tax benefits, determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement in the financial statements. It is our policy to recognize interest and penalties related to income tax matters as general and administrative expenses. As of December 31, 2016, and December 31, 2015, 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, 2016 and 2015, we excluded 72,385,000 and 54,215,000 potential common shares, respectively, relating to convertible preferred stock, convertible notes, options and warrants outstanding from the diluted net loss per common share calculation because their inclusion would be anti-dilutive. In addition, we excluded 625,000 warrants from the diluted net loss per common share calculation at December 31, 2016 and 2015 as the conditions for their vesting are not time-based.
Recent Accounting Pronouncements:
FASB Accounting Pronouncements Related to Revenue from Contracts with Customers (Topic 606)
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers” which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 recognizes revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.
In May 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers” extending the date of implementation of this guidance for public companies to reporting periods beginning after December 15, 2017. In March 2016, the FASB issued ASU 2016-08 “Revenue from Contracts with Customers” to provide guidance on the topic of principal versus agent considerations. In 2016, the FASB issued 2016-12 and ASU No. 2016-10 and ASU No. 2016-20 to further clarify and identify performance obligations and licensing instances, narrow-scope improvements and identify practical expedients relative to Topic 606.
These standards are effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect recognized at the date of adoption (which includes additional footnote disclosures).
The Company continues to evaluate the impact of the adoption of FASB accounting pronouncements related to revenue from Contracts with Customers (Topic 606). Since the Company has had minimal revenue since inception the impact of adoption is anticipated to be nominal.
Other FASB Accounting Pronouncements
In November 2016, the FASB issued ASU No. 2016-18 Statement of Cash Flows (Topic 230).
T
his update requires that a statement of cash flows explain the change in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows.
This change is effective for public entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company does not believe that the adoption of this standard will have a material effect on our consolidated financial statements and related disclosures.
In August 2016, the FASB issued ASU No. 2016-15 Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (Topic 230). There is diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. This pronouncement addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The amendments are effective for public entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company does not believe that the adoption of this standard will have a material effect on our consolidated financial statements and related disclosures.
In June 2016, the FASB issued ASU No. 2016-13 Financial Instruments - Credit Losses (Topic 326) “Measurement of Credit Losses on Financial Instruments.” The pronouncement affects entities holding financial assets and net investments in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets that have the contractual right to receive cash. This pronouncement will affect an entity to varying degrees depending on the credit quality of the assets held, their duration, and how the entity applies current GAAP. The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is evaluating the impact of the adoption of this standard on our consolidated financial statements and related disclosures.
On March 30, 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” which amends the current stock compensation guidance. The amendments simplify the accounting for the taxes related to stock based compensation, including adjustments as to how excess tax benefits and a company's payments for tax withholdings should be classified. The standard is effective for fiscal periods beginning after December 15, 2016, with early adoption permitted. The Company is evaluating the impact of the adoption of this standard on our consolidated financial statements and related disclosures.
On February 25, 2016, the FASB issued ASU No. 2016-02, “Leases,” a comprehensive new lease standard which will supersede previous lease guidance. The standard requires a lessee to recognize in its balance sheet assets and liabilities related to long-term leases that were classified as operating leases under previous guidance. An asset will be recognized related to the right to use the underlying asset and a liability will be recognized related to the obligation to make lease payments over the term of the lease. The standard also requires expanded disclosures surrounding leases. The standard is effective for fiscal periods beginning after December 15, 2018, and requires modified retrospective adoption, with early adoption permitted. The Company does not believe that the adoption of this standard will have a material effect on our consolidated financial statements and related disclosures.
NOTE 3 - 6% SENIOR CONVERTIBLE NOTES AND WARRANTS
During the third quarter of 2016, the board of directors authorized the issuance of up to $3 million in 6% Senior Convertible Promissory Notes and Warrants (the “Convertible Notes”) in connection with the August 25, 2016 Securities Purchase Agreement (the “2016 SPA”). The Convertible Notes have five year maturity dates ranging from August 2021 through December 2021 and a fixed annual interest rate of 6%. The initial year of interest expense will be paid to the note holders on the first anniversary of each note's issuance and quarterly thereafter. Principal is due in full on each note's maturity date.
The conversion rate of the notes has been fixed at $0.25 per share as determined at the close of business on August 25, 2016. The investors have been 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, 2016, the Company issued Convertible Notes aggregating $3,000,000 pursuant to the 2016 SPA. In connection with the notes, the Company granted 1,200,000 warrants with an exercise price of $0.25 per share and 10 year terms. The Company incurred $28,000 in debt issuance costs in connection with the issuance of the Convertible Notes. In accordance with FASB ASU 2015-03 Interest-Imputation of Interest (Subtopic 835-30), these debt issuance costs have been presented as a direct deduction from the carrying amount of the Convertible Note liability and reflected as a component of debt discount which is amortized and included in interest expense over the five-year term of the Convertible Notes.
The Company allocated $2,551,000 of the proceeds to debt discount based on the computed fair value of the warrants issued, the beneficial conversion feature and the debt issuance costs. During the year ended December 31, 2016 the Company recorded $129,000 in interest expense including amortization of debt discount of $94,000. As of December 31, 2016, the Convertible Notes have a face value of $3,000,000 and are presented net of unamortized debt discount of $2,457,000 related to warrants, beneficial conversion feature and debt issuance costs resulting in a carrying value of $543,000.
NOTE 4
-
CAPITAL LEASE OBLIGATION
In 2015, we entered into a capital lease for a copy machine over a 5 year term, with a fair market value buyout option. The capitalized value of the lease was approximately $9,000 and the monthly payment is approximately $170 with an implicit interest rate of 5.3%. Future payments remaining under this lease agreement are less than $2,000 per year through the lease expiration date in 2020.
NOTE 5 - SOFTWARE
The Company invested in software for the CURA System during the years ended December 31, 2016 and 2015. These assets are amortized over an estimated useful life of 3 years. Amortization expense recognized for the years ended December 31, 2016 and 2015 was $114,000 and $33,000, respectively. The net value of capitalized software at December 31, 2016 and 2015 was $227,000 and $303,000, respectively. Future amortization expense is expected to be $121,000 in 2017, $92,000 in 2018, $10,000 in 2019, and $4,000 thereafter.
NOTE 6 - PROPERTY AND EQUIPMENT
At December 31, 2016 and 2015 property and equipment consist of the following:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Office equipment
|
|
$
|
244,000
|
|
|
$
|
235,000
|
|
Shop equipment
|
|
|
173,000
|
|
|
|
226,000
|
|
Leasehold improvements
|
|
|
253,000
|
|
|
|
253,000
|
|
|
|
|
670,000
|
|
|
|
714,000
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation
|
|
|
553,000
|
|
|
|
554,000
|
|
Net property and equipment
|
|
$
|
117,000
|
|
|
$
|
160,000
|
|
Depreciation expense for the years ended December 31, 2016 and 2015 was $59,000 and $94,000 respectively.
NOTE 7- BUSINESS SEGMENTS
The Company has two operating business segments. The CURA business operates in the fatigue management industry and the Aegis business is focused in the power and hydraulic industry.
Segment information
for the years ended December 31, 2016 for the company’s business segments follows:
|
|
CURA
|
|
|
Aegis
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
26,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
26,000
|
|
Loss on revenue
|
|
|
101,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
101,000
|
|
Total costs and expenses
|
|
|
2,078,000
|
|
|
|
527,000
|
|
|
|
1,289,000
|
|
|
|
3,894,000
|
|
Loss from operations
|
|
|
2,179,000
|
|
|
|
527,000
|
|
|
|
1,289,000
|
|
|
|
3,995,000
|
|
Other expense
|
|
|
-
|
|
|
|
-
|
|
|
|
(167,000
|
)
|
|
|
(167,000
|
)
|
Net loss
|
|
$
|
2,179,000
|
|
|
$
|
527,000
|
|
|
$
|
1,456,000
|
|
|
$
|
4,162,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense
|
|
$
|
96,000
|
|
|
$
|
8,000
|
|
|
$
|
41,000
|
|
|
$
|
145,000
|
|
Depreciation and amortization
|
|
$
|
124,000
|
|
|
$
|
38,000
|
|
|
$
|
11,000
|
|
|
$
|
173,000
|
|
Capital expenditures
|
|
$
|
86,000
|
|
|
$
|
-
|
|
|
$
|
8,000
|
|
|
$
|
94,000
|
|
Assets at December 31, 2016
|
|
$
|
311,000
|
|
|
$
|
46,000
|
|
|
$
|
2,078,000
|
|
|
$
|
2,435,000
|
|
Segment information
for the years ended December 31, 2015 for the company’s business segments follows:
|
|
CURA
|
|
|
Aegis
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
$
|
998,000
|
|
|
$
|
657,000
|
|
|
|
1,101,000
|
|
|
$
|
2,756,000
|
|
Other income
|
|
|
-
|
|
|
|
-
|
|
|
|
(39,000
|
)
|
|
|
(39,000
|
)
|
Net loss
|
|
$
|
998,000
|
|
|
$
|
657,000
|
|
|
$
|
1,062,000
|
|
|
$
|
2,717,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense
|
|
$
|
226,000
|
|
|
$
|
6,000
|
|
|
$
|
172,000
|
|
|
$
|
404,000
|
|
Depreciation and amortization
|
|
$
|
33,000
|
|
|
$
|
62,000
|
|
|
$
|
32,000
|
|
|
$
|
127,000
|
|
Capital expenditures
|
|
$
|
336,000
|
|
|
$
|
7,000
|
|
|
$
|
17,000
|
|
|
$
|
360,000
|
|
Assets at December 31, 2015
|
|
$
|
303,000
|
|
|
$
|
134,000
|
|
|
$
|
1,304,000
|
|
|
$
|
1,741,000
|
|
NOTE 8
-
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, 2016 and 2015 is summarized below:
|
|
December 31,
201
6
|
|
|
December 31,
201
5
|
|
Current tax expense (benefit):
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
0
|
|
|
$
|
0
|
|
State
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Deferred tax expense (benefit):
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(787,000
|
)
|
|
|
(615,000
|
)
|
State
|
|
|
(462,000
|
)
|
|
|
(65,000
|
)
|
Increase in valuation allowance
|
|
|
1,249,000
|
|
|
|
680,000
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
0
|
|
|
$
|
0
|
|
The difference between income taxes at the statutory federal income tax rate and income taxes reported in the statements of operations is attributable to the following:
|
|
December 31,
201
6
|
|
|
December 31,
201
5
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit at the federal statutory rate
|
|
$
|
(1,415,000
|
)
|
|
$
|
(924,000
|
)
|
State income tax (benefit), net of effect of federal taxes
|
|
|
(305,000
|
)
|
|
|
(43,000
|
)
|
Expiration of non-qualified stock options
|
|
|
31,000
|
|
|
|
178,000
|
|
Expiration of warrants
|
|
|
424,000
|
|
|
|
68,000
|
|
Other
|
|
|
16,000
|
|
|
|
41,000
|
|
Increase in valuation allowance
|
|
|
1,249,000
|
|
|
|
680,000
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
0
|
|
|
$
|
0
|
|
The deferred tax asset at December 31, 2016 and 2015 consists of the following:
|
|
201
6
|
|
|
201
5
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
3,284,000
|
|
|
$
|
2,613,000
|
|
Deferred startup costs
|
|
|
13,906,000
|
|
|
|
12,929,000
|
|
Stock-based compensation
|
|
|
2,193,000
|
|
|
|
2,635,000
|
|
Other
|
|
|
66,000
|
|
|
|
23,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,449,000
|
|
|
|
18,200,000
|
|
Less: Valuation allowance
|
|
|
(19,449,000
|
)
|
|
|
(18,200,000
|
)
|
Net deferred tax asset
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
0
|
|
|
$
|
0
|
|
At December 31, 2016, we have approximately $8,794,000 and $8,093,000 of adjusted federal and New York State net operating loss carryforwards, respectively, to offset future taxable income. These net operating losses begin expiring in 2025 through 2036. In addition, we have $58,000 of federal research and development tax credit carryforwards to offset future tax. These credits expire in 2036. Additionally, from the date of inception through 2016, we have accumulated approximately $36,954,000 of adjusted deferred startup costs, subject to certain alternative minimum tax limitations. Start-up costs will be amortized over a 15 year period beginning in the year we begin an active trade or business. We have provided a full valuation allowance on the net deferred tax assets due to uncertainty of realization through future earnings.
The excess tax benefits associated with stock warrant exercises are recorded directly to stockholders’ equity only when realized. As a result, the excess tax benefits available in deferred start-up costs, but not reflected in deferred tax assets was approximately $4,475,000. The uncertain tax benefits included in the tabular reconciliation relate to these excess tax benefits.
Based upon the change in ownership rules under Section 382 of the Internal Revenue Code of 1986, if a company issues common stock or other equity instruments convertible into common shares which result in an ownership change exceeding a 50% limitation threshold over a rolling three-year timeframe as imposed by that Section, all of that company’s net operating loss carryforwards may be significantly limited as to the amount of use in any particular year. During 2016, we evaluated the Section 382 regulations, and concluded that we have not had a cumulative ownership change that would limit the use of our net operating loss and tax credit carryforwards.
Reconciliations of the beginning and ending amounts of unrecognized tax benefits for the years ended December 31, 2016 and 2015 are as follows:
|
|
201
6
|
|
|
201
5
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1
|
|
$
|
1,666,000
|
|
|
$
|
1,666,000
|
|
Additions for tax positions of prior years
|
|
|
0
|
|
|
|
0
|
|
Additions based on enacted changes in state rate
|
|
|
18,000
|
|
|
|
0
|
|
Reductions based on enacted change in state rate
|
|
|
0
|
|
|
|
0
|
|
Settlements
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31
|
|
$
|
1,684,000
|
|
|
$
|
1,666,000
|
|
Tax years that remain subject to examination for our major tax jurisdictions include the years ended December 31, 2013 through December 31, 2016. The federal income tax audit for the year 2012 recently concluded and resulted in a reduction to out net operating loss carry-forward of $222,000.
State laws enacted in 2015 changed the treatment of net operating loss carry-overs related to tax years beginning prior to January 1, 2015. The deferred tax asset has been reduced to reflect the newly enacted change in treatment of net operating loss carry-overs.
NOTE 9 - PREFERRED and COMMON STOCK
Common Stock
We have authorized 400,000,000 shares of common stock, with a par value of $0.01 per share.
During the year ended December 31, 2016, the Company issued 1,270,000 shares of common stock in connection with conversion notices received from various preferred shareholders. During the year ended December 31, 2015, the Company issued 80,467 shares of common stock in connection with conversion notices received from two Series A convertible preferred shareholders. The company issued 43,880 shares of common stock in connection with these notices and an additional 36,587 in common shares attributed to dividends earned on these converted shares.
Preferred Stock
Our certificate of incorporation permits the Company to issue up to 100,000,000 shares of $.01 par value preferred stock. The board of directors has the authority to allocate these shares into as many separate classes of preferred as it deems appropriate and with respect to each class, designate the number of preferred shares issuable and the relative rights, preferences, seniority with respect to other classes and to our common stock and any limitations and/or restrictions that may be applicable without obtaining shareholder approval.
Class A Preferred Stock
We have authorized the issuance of up to 3,300,000 Class A Non-Voting Cumulative Convertible Preferred Shares. Each Class A Preferred Share is convertible after a one year holding period, at the holder’s election, into one share of our common stock. The conversion rate is subject to adjustment in the event of the issuance of our common stock as a dividend or distribution and in the case of the subdivision or combination of our common stock. The Class A Preferred has no voting rights, except with respect to matters directly impacting upon the rights and privileges accorded to such Class.
The holders of the Class A Preferred are entitled to receive cumulative preferential dividends in the amount of $.40 per share of Class A Preferred for each annual dividend period. Dividends payable on the Class A Preferred will be paid in cash out of any funds legally available for the payment of dividends or, in the discretion of the board, will be paid in Class A Preferred at a rate of 1 share of Class A Preferred for each $4.00 of dividends. If dividends are paid in shares of Class A Preferred, such dividend shares are not entitled to accumulate additional dividends and themselves may be converted into the common stock of the Company on a one for one basis. Holders of Class A Preferred are permitted to request that dividends payable in Class A Preferred be immediately converted into shares of our common stock. At times, our board may elect to settle the dividends through the issuance of common stock in lieu of cash. Accumulated and unpaid dividends on the Class A Preferred will not bear interest. Class A Preferred shares are also entitled to participate pro rata in dividends declared and/or distributions made with respect to all classes of our outstanding equity. We may, in the absolute discretion of our board, redeem at any time and from time to time from any source of funds legally available any and all of the outstanding Class A Preferred at the redemption price of $4.00 per Class A Preferred, plus all unpaid accumulated dividends payable with respect to each Class A Preferred Share.
During the year ended December 31, 2015, the Company issued 80,467 shares of common stock in connection with conversion notices received from two Series A convertible preferred shareholders. The company issued 43,880 shares of common stock in connection with these notices and an additional 36,587 in common shares attributed to dividends earned on these converted shares.
At December 31, 2016, there were 543,221 outstanding shares of Class A Preferred stock, of which 8,709 shares resulted from the settlement of dividends due to conversion, and those shares no longer accrue dividends. The value of dividends payable upon the conversion of the remaining 534,512 outstanding shares of Class A Preferred stock amounted to approximately $2,538,000 and $2,325,000 at December 31, 2016 and 2015, respectively.
In the event of a liquidation, dissolution and winding up of the Company, and subject to the liquidation rights and privileges of our Class C Preferred shareholders, Class A Preferred shareholders have a liquidation preference with respect to all accumulated and unsettled dividends. The value of the Class A Preferred shareholders’ liquidation preference was approximately $2,538,000 and $2,325,000 at December 31, 2016 and 2015, respectively. In the event of liquidation, dissolution or winding up of the Company, unpaid accumulated dividends on the Class A Preferred are payable in Class A Preferred at a rate of 1 share of Class A Preferred for each $4.00 of dividends.
Class B Preferred Stock
The Company authorized the issuance of up to 300,000 Class B Non-Voting, Cumulative Convertible Preferred Shares to fund the business operations of Iso-Torque Corporation, an entity incorporated to separately commercialize the Company’s Iso-Torque differential technology.
Each Class B Preferred Share is convertible after a one year holding period, at the holder’s election, into one share of our common stock or one share of the common stock of Iso-Torque Corporation. The conversion rate is subject to adjustment in the event of the issuance of the company’s or Iso-Torque Corporation’s common stock as a dividend or distribution and in the case of the subdivision or combination of such common stock. The Class B Preferred has no voting rights, except with respect to matters directly impacting upon the rights and privileges accorded to such Class.
Subject to the dividend rights and privileges of our Class A Preferred, the holders of the Class B Preferred are entitled to receive cumulative dividends in the amount of $.50 per share of Class B Preferred for each annual dividend period. Dividends payable on the Class B Preferred will be paid in cash out of any funds legally available for the payment of dividends or, in the discretion of the board, will be paid in Class B Preferred at a rate of 1 share of Class B Preferred for each $5.00 of dividends. If dividends are paid in shares of Class B Preferred, such dividend shares are not entitled to accumulate additional dividends and themselves may be converted into the common stock of the Company on a one for one basis. Holders of Class B Preferred are permitted to request that dividends payable in Class B Preferred be immediately converted into shares of our common stock. Accumulated and unpaid dividends on the Class B Preferred will not bear interest. Class B Preferred shares are also entitled to participate pro rata in dividends declared and/or distributions made with respect to all classes of our outstanding equity. We may, in the absolute discretion of our board, redeem at any time and from time to time from any source of funds legally available any and all of the outstanding Class B Preferred at the redemption price of $5.00 per Class B Preferred, plus all unpaid accumulated dividends payable with respect to each Class B Preferred Share.
Depending upon our cash position, from time to time we may request that a converting preferred shareholder receiving dividends in cash consent to receive shares of restricted common stock in lieu thereof. For the years ended December 31, 2016 and 2015, we settled no Class B Preferred dividends.
At December 31, 2016, dividends payable upon the conversion of 67,500 outstanding shares of Class B Preferred amounted to approximately $386,000. In the event of liquidation, dissolution and winding up of the Company, and subject to the liquidation rights and privileges of our Class C Preferred shareholders and our Class A Preferred shareholders, Class B Preferred shareholders have a liquidation preference with respect to all accumulated and unsettled dividends. The value of the Class B Preferred shareholders’ liquidation preference was $386,000 and $353,000 at December 31, 2016 and 2015, respectively. In the event of a liquidation, dissolution or winding up of the Company, unpaid accumulated dividends on the Class B Preferred are payable in Class B Preferred shares at a rate of 1 share of Class B Preferred for each $5.00 of dividends.
Series C Preferred Stock
We have authorized and issued 16,250,000 shares of Series C Voting Convertible Preferred Stock. Each Series C Preferred share is convertible, at the holder’s election, into one share of our common stock. The conversion rate is subject to adjustment in the event of the issuance of common stock as a dividend or distribution, and the subdivision or combination of the outstanding common stock.
The Series C Preferred shares have a liquidation preference at their stated value per share of $0.40 that is senior to our common stock, and the Company’s Class A Non-Voting Cumulative Convertible Preferred Shares and Class B Non-Voting Cumulative Convertible Preferred Shares. The liquidation preference is payable upon a liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, or upon a deemed liquidation of the Company.
The Series C Preferred shares have no right to receive dividends and have no redemption right. The Series C Preferred shares vote with the common stock on an as-converted basis.
During the year ended December 31, 2016, Series C Preferred shareholders converted 250,000 shares of Series C Preferred into common stock. At December 31, 2016 and 2015, there were 16,000,000 and 16,250,000 shares of Series C Preferred stock outstanding. The value of the Series C Preferred shareholders’ liquidation preference was $6,400,000 and $6,500,000 at December 31, 2016 and 2015, respectively.
Series C-2 Preferred Stock
In March 2014, the board of directors authorized, and Class A Preferred, Class B Preferred and Series C Preferred shareholders approved, a series of preferred stock, namely 25,000,000 shares of Series C-2 Voting Convertible Preferred Stock.
Each Series C-2 Preferred Share is convertible, at the holder’s election, into one share of our common stock, par value $0.01 per share. The conversion rate is subject to adjustment in the event of the issuance of common stock as a dividend or distribution, and the subdivision or combination of the outstanding common stock or a reorganization, recapitalization, reclassification, consolidation or merger of the Company.
The Series C-2 Preferred Shares have a liquidation preference at their stated value per share of $0.20 that ranks pari passu to our existing Series C Voting Convertible Preferred Shares and is senior to our common stock, and our Class A Non-Voting Cumulative Convertible Preferred Shares and Class B Non-Voting Cumulative Convertible Preferred Shares. The liquidation preference is payable upon a liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, or upon a deemed liquidation of the Company. A deemed liquidation includes, unless decided by the holders of at least two-thirds of the Series C-2 Preferred Shares, any consolidation, merger, or reorganization of the Company in which the shareholders of the Company own less than fifty percent of the voting power of the resultant entity, or an acquisition to which the Company is a party in which at least fifty percent of the Company’s voting power is transferred, or the sale, lease, exclusive license or transfer of all or substantially all of the assets or intellectual property of the Company other than to a wholly owned subsidiary.
The Series C-2 Preferred Shares are not entitled to receive preferred dividends and have no redemption right, but are entitled to participate, on an as converted basis; with holders of outstanding shares of common stock in dividends and distributions on liquidation after all preferred shares have received payment in full of any preferred dividends or liquidation preferences. The Series C-2 Preferred Shares vote with the common stock on an as-converted basis.
We may not, without approval of the holders of at least two-thirds of the Series C-2 Preferred Shares, (i) create any class or series of stock that is pari passu or senior to the Series C-2 Preferred Shares; (ii) create any class or series of stock that would share in the liquidation preference of the Series C-2 Preferred Shares or that is entitled to dividends payable other than in common stock or Series C-2 Preferred Shares of its own series, (iii) acquire any equity security or pay any dividend, except dividends on a class or series of stock that is junior to the Series C Preferred Shares, payable in such junior stock, (iv) reissue any Series C-2 Preferred Shares, (v) declare or pay any dividend that would impair the payment of the liquidation preference of the Series C-2 Preferred Shares, (vi) authorize or issue any additional Preferred Shares, (vii) change the Certificate of Incorporation to adversely affect the rights of the holders of the Series C-2 Preferred Shares, or (viii) authorize, commit to or consummate any liquidation, dissolution or winding up in which the liquidation preference of the Series C-2 Preferred Shares would not be paid in full.
The Series C-2 Preferred Shares have not been registered under the Securities Act of 1933, as amended, or the Securities Act, and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.
Cumulatively through December 31, 2016, Series C-2 Preferred shareholders have converted no shares of Series C-2 Preferred into common stock. At December 31, 2016 and 2015, there were 25,000,000 shares of Preferred C-2 stock outstanding. The value of the Series C-2 Preferred shareholders’ liquidation preference was $5,000,000 at December 31, 2016 and 2015.
In connection with the issuance of the Series C-2 Preferred Shares, the Company entered into an Investors’ Rights Agreement on September 23, 2011 (the “Investors’ Rights Agreement”). Pursuant to the Investors’ Rights Agreement, the Company granted registration rights to the investors covering Common Stock issued on the conversion of the Preferred Shares or exercise of the Warrants or other shares issued in connection with the Transaction (the “Underlying Shares”). The registration rights are triggered when the Company is eligible to utilize Form S-3, and until such time as (i) the Company is sold, (ii) dissolved, or (iii) the Underlying Shares are eligible for resale without restriction in a three month period under Rule 144. Investors holding shares for sale to receive at least $500,000 in gross proceeds have the right to make the demand up to one time in any such twelve month period. The Investors’ Rights Agreement also contains a right of first offer for the future issuance of any equity securities of the Company.
Pursuant to the terms of the Investors’ Rights Agreement, the Company may not (i) grant any equity based compensation; (ii) reduce the per-share exercise price or conversion price of any equity based compensation; (iii) create or incur indebtedness in excess of $1,000,000 in the aggregate at any time, or (iv) guarantee the indebtedness of any third party except for trade account payables arising in the ordinary course of business, without the consent of the lead investor. In the event the Company grants any equity based compensation or reduces the per-share exercise price or conversion price of any equity based compensation in violation of the terms of the Investors’ Rights Agreement, and with the effect that additional equity interests are issuable as a result, then the Company shall be obligated to immediately issue to each Investor such aggregate number of additional shares of Common Stock so that immediately following such violation such Investor’s ownership percentage is unaffected by the violation.
The Investors also agreed to “Market Stand-off” provisions that may be requested by an underwriter in an underwritten public offering by the Company. In addition, pursuant to the terms of the Investors’ Rights Agreement, as long as the lead investor may acquire at least 3,000,000 shares of Common Stock by conversion or exercise of his Series C Securities, (i) the lead investor is entitled to inspect the properties, assets, business and operation of the Company and discuss its business and affairs with its officers, consultants, directors and key employees, (ii) the Company shall invite the lead investor or his representative to attend all meetings of the Board of Directors and provide all information provided to directors for such purpose, and (iii) at his request, the Company shall cause him to be appointed to serve as a director until the following annual meeting of shareholders and until a successor is elected.
Series C-3 Preferred Stock
In 2015, the board of directors authorized and the Class A Preferred, Class B Preferred, Series C Preferred and C-2 Preferred shareholders approved, a series of preferred stock, namely 10,000,000 shares of Series C-3 Voting Convertible Preferred Stock.
On December 8, 2015, the Company commenced the offering of up to $2,500,000 of the Series C-3 Preferred Shares at the price of $0.25 per share in a private placement pursuant to Rule 506(c) of Regulation D under the Securities Act of 1933. The offering was made only to “accredited investors” as defined in Rule 501(a) of Regulation D under the Securities Act of 1933. The Series C-3 Preferred Shares are convertible into shares of the Company’s common stock at the rate of one-to-one, subject to adjustment in some circumstances. The Series C-3 Preferred Shares have an aggregate liquidation preference, ranking
pari passu
with the Series C Preferred Shares and Series C-2 Preferred Shares and senior to the company’s common stock, the Class A Preferred Shares and Class B Preferred Shares. The Series C-3 Preferred Shares are not entitled to receive preferred dividends and have no redemption rights, but are entitled to participate, on an as converted basis, with holders of the company’s common stock in dividends and distributions. The Series C-3 Preferred Shares vote with the Company’s common stock on an as-converted basis and have certain protective provisions. The Series C-3 Preferred Shares have not been registered under the Securities Act of 1933. Accordingly, those shares and the shares of common stock issuable upon their conversion are “restricted securities” within the meaning of Rule 144 under the Securities Act of 1933 and may not be offered for resale or resold or otherwise transferred except pursuant to a registration statement under the Securities Act of 1933 or an applicable exemption from registration requirements.
During 2016, the Company issued a total of 6,042,000 shares of Series C-3 Voting Convertible Preferred Stock in a private placement transaction, generating gross proceeds of $1,510,500. Direct expenses of $12,000 pertaining to the transaction, consisting of external legal costs, were incurred, resulting in net proceeds of $1,495,000.
In conjunction with the issuance of the Series C-3 Preferred stock, we computed the value of the non-cash beneficial conversion feature associated with the right to convert the shares into common stock on a one-for-one basis. We compared the fair value of our common stock on the date of issuance with the effective conversion price, and determined that the value of the non-cash beneficial conversion feature was $885,000 and has been reflected in our consolidated statements of operations as an adjustment to arrive at the net loss attributable to common stockholders.
During the year ended December 31, 2016 the Company issued 1,020,000 shares of common stock in connection with conversion notices received from various Series C-3 convertible preferred shareholders.
NOTE 10 - STOCK OPTIONS
2016 Stock Option Plan
At the 2016 Annual Meeting the shareholders approved the 2016 Stock Option Plan (the “2016 Plan”) which provides for the grant of up to 3,000,000 common stock options to provide equity incentives to directors, officers, employees and consultants. Two types of options may be granted under the 2016 Plan: non-qualified stock options and incentive stock options. As of December 31, 2016, no options have been granted under this plan.
2011 Stock Option Plan
In 2011, shareholders approved the 2011 Stock Option Plan (the “2011 Plan”) which provides for the grant of up to 3,000,000 common stock options to provide equity incentives to directors, officers, employees and consultants. Two types of options may be granted under the 2011 Plan: non-qualified stock options and incentive stock options.
Under the 2016 and 2011 Stock Option Plans, non-qualified stock options may be granted to our officers, directors, employees and outside consultants. Incentive stock options may be granted only to our employees, including officers and directors who are also employees. In the case of non-qualified stock options, the exercise price may be less than the fair market value of our stock on the date of grant. Stock option grants to non-employees are revalued at each reporting date to reflect the compensation expense over the vesting period. In the case of incentive stock options, the exercise price may not be less than such fair market value and in the case of an employee who owns more than 10% of our common stock, the exercise price may not be less than 110% of such market price. Options generally are exercisable for ten years from the date of grant, except that the exercise period for an incentive stock option granted to an employee who owns more than 10% of our stock may not be greater than five years.
During the year ended December 31, 2016, we granted a total of 502,000 stock options to employees and non-employee board members. These included 175,000 stock options granted at exercise prices ranging from $0.38 to $0.62 per share, exercisable for 10 years that vest at a rate of 25% on each anniversary of the date of grant. The Company also granted 327,000 stock options at exercise prices ranging from $0.34 to $0.53 per share, exercisable for 10 years, with vesting tied to the market price of the Company’s common stock. These options fully vest when the trading price of the Company’s common stock reaches $5.00 per share.
The expense recognized for options that are granted to consultants (i.e., non-employees) reflect fair value, based on updated valuation assumptions using the Black-Scholes valuation model at each measurement period. Such expense is apportioned over the requisite service period of the consultant, which is concurrent with the vesting dates of the various tranches.
Non-Plan Options
On occasion, we have granted non-qualified stock options to certain officers, directors and employees that have been outside of established Company Stock Option Plans. All such option grants have been authorized by shareholder approval.
Summary
For the years ended December 31, 2016 and 2015, compensation cost related to stock option awards amounted to $145,000 and $404,000, respectively. As of December 31, 2016, there was approximately $307,000 of total unrecognized compensation costs related to outstanding stock options, which are expected to be recognized over a weighted average 1.7 years.
The weighted average grant date fair value of stock options granted during the years ended December 31, 2016 and 2015 was $0.46 and $0.44, respectively. The total grant date fair value of stock options vested during the years ended December 31, 2016 and 2015 was approximately $230,000 and $908,000, respectively.
The fair value of each option granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
|
|
2016
|
|
|
2015
|
|
Expected term (years)
|
|
|
5.4
|
|
|
|
6.1
|
|
Expected forfeiture rate
|
|
|
0%
|
|
|
|
0%
|
|
Risk-free rate
|
|
|
2.0%
|
|
|
|
1.9%
|
|
Volatility
|
|
|
130.4%
|
|
|
|
131.5%
|
|
Dividend yield
|
|
|
0.0%
|
|
|
|
0.0%
|
|
The average risk-free interest rate is based on the U.S. treasury security rate in effect as of the grant date. We determined expected volatility using the historical closing stock price. The expected life was generally determined using the simplified method as we do not believe we have sufficient historical stock option exercise experience on which to base the expected term.
The following summarizes the activity of all of our outstanding stock options for the years ended December 31, 2016 and 2015:
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term (years)
|
|
|
Value
|
|
Outstanding at January 1, 2015
|
|
|
8,343,000
|
|
|
$
|
.63
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
770,000
|
|
|
|
.51
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Canceled or expired
|
|
|
(100,000
|
)
|
|
|
5.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
9,013,000
|
|
|
$
|
.57
|
|
|
|
5.5
|
|
|
$
|
33,000
|
|
Granted
|
|
|
502,000
|
|
|
|
.46
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Canceled or expired
|
|
|
(68,000
|
)
|
|
|
4.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
9,447,000
|
|
|
$
|
.53
|
|
|
|
4.8
|
|
|
$
|
2,016,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2016
|
|
|
6,276,000
|
|
|
$
|
.61
|
|
|
|
4.4
|
|
|
$
|
1,041,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2015
|
|
|
6,152,000
|
|
|
$
|
.66
|
|
|
|
5.3
|
|
|
$
|
-
|
|
During year ended December 31, 2016, the Company cancelled 3,000 options and 65,000 options expired unexercised. As of December 31, 2015, there were 2,048,000 stock options outstanding under the 2011 Plan, 1,137,000 of which were vested at that date; leaving 952,000 options available for future grant under the Plan. No options, were exercised and 100,000 options expired unexercised during the year ended December 31, 2015.
As of December 31, 2016, the exercise prices of all outstanding stock options ranged from $.20 per share to $1.58 per share. As of December 31, 2016, the exercise prices of all vested stock options ranged from $.20 per share to $1.58 per share.
NOTE 11 - WARRANTS
The following summarizes the activity of our outstanding warrants for the years ended December 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Remaining
|
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Exercise
|
|
|
|
Contractual
|
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
|
Term
|
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2015
|
|
|
3,356,750
|
|
|
$
|
1.99
|
|
(A)
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Canceled or expired
|
|
|
(41,750
|
)
|
|
|
.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
3,315,000
|
|
|
$
|
2.04
|
|
(A)
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,200,000
|
|
|
|
.25
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Canceled or expired
|
|
|
(296,500
|
)
|
|
|
3.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
4,218,500
|
|
|
|
.95
|
|
(A)
|
|
|
6.1
|
|
(B)
|
|
$
|
874,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2016
|
|
|
3,593,500
|
|
|
$
|
.90
|
|
|
|
|
5.9
|
|
(C)
|
|
$
|
872,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2015
|
|
|
2,690,000
|
|
|
$
|
1.89
|
|
|
|
|
4.5
|
|
(C)
|
|
$
|
5,300
|
|
|
(A)
|
The weighted average exercise price for warrants outstanding as of December 31, 2016 and 2015 and January 1, 2015 excludes 1,750,000 warrants in each period with no determined exercise price.
|
|
(B)
|
The weighted average remaining contractual term for warrants outstanding as of December 31, 2016 excludes 743,500 warrants with no expiration date.
|
|
(C)
|
The weighted average remaining contractual term for warrants exercisable as of December 31, 2016, and 2015 excludes 118,500 warrants with no expiration date.
|
NOTE 12
-
RELATED PARTY TRANSACTIONS
During the year ended December 31, 2016, the Company issued a total of 1,990,000 shares of our Series C-3 voting convertible preferred stock generating gross proceeds of $497,500 to seven members of our board of directors and one executive officer. No Series C-3 preferred shares were issued to related parties in the year ended December 31, 2015.
During the year ended December 31, 2016, the Company issued $802,500 of senior convertible notes to four members of our board of directors representing a potential of 3,210,000 convertible common shares and 321,000 in warrants. The Company also issued $1,170,000 of senior convertible notes to an investor that is deemed an affiliate through the ownership of the majority of our Series C and C-2 Preferred Stock. This investor has the right to 4,680,000 convertible common shares and 468,000 warrants as a result of this debt issuance. (See Notes 3 and 9.) These notes remain outstanding as of December 31, 2016 as well as $24,000 in related accrued interest.
We occupy a leased facility for our corporate headquarters building, located in Rochester, New York, which consists of both executive offices and manufacturing space. The facility is owned by a partnership, with which one of our directors, is associated. In October 2014, we extended our lease for a three-year renewal term through May 31, 2018. The current rental rate is $6,256 per month ($75,070 per annum) for the remainder of the current lease term. In addition, we are required to pay a proportionate share of yearly real estate taxes and yearly common area operating costs. The lease agreement has a three-year renewal option that includes a 9% rate increase at the renewal period that includes the period from June 2018 through May 2021.
In December 2013, we entered into a consulting agreement with SCIRE Corporation, of which one of our directors is president, to provide us with expertise and advice on hydraulic pump technology and related markets. This consulting agreement expired at December 31, 2015. During the year ended December 31, 2015, we recorded an expense of $18,000 for consulting services and travel costs related to this agreement.
Effective April 13, 2015, we entered into a consulting agreement with a placement firm, of which one of our directors. is a minority investor. During the year ended December 31, 2015, we recorded approximately $65,000 in connection with this service agreement. This service agreement was completed in August 2015.
In December 2010, we executed a three-year consultant agreement with one of our directors to provide consulting services to us at a rate of $200 per hour. We also agreed to pay the consultant an incentive fee for each $1,000,000 of revenue or proportionate part thereof received by us for a period of five years, provided the definitive agreement results from the material efforts by the consultant. The agreement expired on December 13, 2016. The Company incurred no expense in connection with this agreement during the years ended December 31, 2016 or 2015.
NOTE 13 — COMMITMENTS AND OTHER MATTERS
Leases
We occupy a leased facility for our corporate headquarters building, located in Rochester, New York, which consists of both executive offices and manufacturing space. The facility is owned by a partnership in which a Company director is associated. The current rental rate is $6,256 per month ($75,070 per annum) for the remainder of the current lease term. In addition, we are required to pay a proportionate share of yearly real estate taxes and yearly common area operating costs. The lease agreement has a three-year renewal option that includes a 9% rate increase at the renewal period that includes the period from June 2018 through May 2021.
Rent expense for the years ended December 31, 2016 and 2015 was approximately $80,000 and $72,000, respectively. Rent payments required under the extended lease term for the years ending December 31, 2017 and 2018 amount to approximately $75,000 and $31,000, respectively.
Employment Agreements
Our chief executive officer executed a five year employment agreement effective December 31, 2015 pursuant to which his base compensation would be $50,000 per annum, with a compensation increase to $200,000 per annum on the first day of the calendar year immediately following the calendar year in which we have adjusted EBITDA of at least $300,000 (earnings before interest, taxes, depreciation and amortization, but excluding all non-cash expenses associated with stock options). Under the employment agreement, the CEO is entitled to a performance bonus based upon financial targets established each year in good faith by the Governance and Compensation Committee and the achievement of individual management objectives established annually by such committee. The CEO is entitled to participate in all employee benefit plans as are provided from time to time for senior executives. If we terminate the CEO without cause, remove him as CEO, or a change in control of the Company occurs, the CEO is entitled to three years’ severance pay, consisting of base pay and any incentive compensation.
In the third quarter of 2015, the Company hired a Vice President of business development for the CURA division. The hiring agreement includes a severance agreement including six months salary if a termination by the Company is initiated other than for cause or executive good reason. Such severance will be based on the salary at the time of the action in return for a general release of the Company and its officers, directors and agents satisfactory to the Company.
401(k) Retirement Benefit Plan
:
The Company has a defined contribution 401(k) plan covering substantially all employees. Employees can contribute a portion of their salary or wages as prescribed under Section 401(k) of the Internal Revenue Code and, subject to certain limitations, we may, at management’s discretion, authorize an employer contribution based on a portion of the employees' contributions. At the present time, we do not provide for an employer match. During 2016 and 2015, we incurred administrative expenses of approximately $2,000 in each year related to the 401(k) plan.
NOTE 14- SUBSEQUENT EVENTS
Subsequent to December 31, 2016, the board of directors authorized the issuance of Senior Convertible Promissory Notes and Warrants to be sold 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 will be made only to "accredited investors" as defined in Rule 501(a) of Regulation D under the Securities Act of 1933. The Company will offer up to $3 million in 6% senior convertible promissory notes with a five-year maturity. The conversion price of the notes will be fixed on the date of the issuance at the lower of $0.50 per share of 60% of the market price as determined based on the 90-day volume weighted average price on the date of the agreement. The investors will receive warrants to purchase an aggregate number of shares of the Company's common stock to equal 10% of the number of shares issuable upon the conversion of the notes. The exercise price of the warrants will be fixed on the date of issuance at the lower of $0.50 per share of 60% of the market price based on the 90-day volume weighted average price on the date of the agreement, and will have a five-year term. No notes had been issued as of the date of this filing.
Stock Option Grants
Subsequent to December 31, 2016, the Company granted
235,000 incentive stock options at prices ranging from $0.65 to $1.00 per share, with a 10 year life and 4 year vesting.
Conversion of Preferred Stock
Subsequent to December 31, 2016, the Company converted 200,000 Series C-3 preferred shares to 200,000 common shares upon receipt of notices of conversion from two Series C-3 shareholders. The Company also converted 62,500 Series C preferred shares to 62,500 common shares upon receipt of a conversion notice subsequent to December 31, 2016.
Exercise of Warrants
Subsequent to December 31, 2016, the Company converted 40,000 warrants at an exercise price of $0.25 per share upon receipt of a duly completed subscription form by the warrant holder.