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       1,093,000  

State

    131,000       252,000  

Change in valuation allowance

    (714,000

)

    (1,345,000

)

Provision for income tax

  $ -     $ -  

 

The difference between income taxes at the statutory federal income tax rate and income taxes reported in the statements of operations for each of the years ended December 31, 2019 and 2018 is attributable to the following:

 

   

2019

   

2018

 

Income tax benefit at federal statutory rate

  $ (898,000

)

  $ (1,325,000

)

State income tax (benefit), net of effect of federal taxes

    (103,000

)

    (199,000

)

Non-deductible debt discount

    157,000       132,000  
Convertible debt interest expense     96,000       -  
Debt issuance expense     70,000       -  

Other

    (36,000 )     47,000  
Increase in valuation allowance     714,000       1,345,000  

Provision for income taxes

  $ -     $ -  

 

The deferred tax asset at December 31, 2019 and 2018 consists of the following:

 

   

2019

   

2018

 

Deferred income tax assets:

               

Net operating loss carryforwards

  $ 3,277,000     $ 3,044,000  

Deferred startup costs

    11,224,000       10,787,000  

Stock-based compensation

    1,321,000       1,302,000  

Other

    141,000       117,000  
      15,963,000       15,250,000  

Less: Valuation allowance

    (15,963,000

)

    (15,250,000

)

Net deferred tax asset

  $ -     $ -  

 

 

At December 31, 2019, we have approximately $12,799,000 and $12,095,000 of adjusted federal net operating loss carryforwards and New York State net operating loss carryforwards, respectively, to offset future taxable income. These net operating losses begin expiring in 2023 through 2038. Beginning with tax years starting after December 31, 2017, NOL’s created can be carried forward indefinitely, however they can only be utilized in any given year, up to 80% of taxable income in that year. In addition, we have $249,000 of research and development tax credits carryforwards to offset future tax. These credits expire in 2039. Furthermore, from the date of inception through 2019, we have accumulated approximately $43,413,000 of adjusted deferred startup costs. Start-up costs will be amortized over a 15-year period beginning in the year we begin an active trade or business, with the exception of a nominal portion of these costs related to the sale of CURA software currently being amortized. We have provided a full valuation allowance on the net deferred tax assets due to uncertainty of realization through future earnings.

 

The amortization period for a nominal portion of the startup expenses, $273,000, under IRC Section 195 began in 2018 because the active trade or business related to those startup expenses commenced. The Company received revenue in 2018 and 2019 for the sale of subscription software services and demos of the CURA watch. An inventory reserve was booked in 2018 based on changes in technology developments.  A full reserve was recorded for all inventory on hand and the Company is no longer pursuing sales of the related product. The Company expects CURA software sales will continue to be relevant to the Company's business.  An election was made in 2018 to begin to amortize the IRC Section 195 costs related to the CURA software’s original cost, and modifications, which the Company is currently reselling. The remaining Section 195 costs will be amortized over a 15-year period beginning in the year the Company begins as an active trade or business.

 

Based upon the change in ownership rules under Section 382 of the Internal Revenue Act of 1986, if a company issues common stock or other equity instruments convertible into common shares which results in an ownership change exceeding a 50% limitation threshold over a rolling three-year time frame 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 a particular year. Utilization of the NOL carry-forwards may be subject to an annual limitation in the case of sufficient equity ownership changes under Section 382 of the tax law or the NOLs may expire unutilized.

  

Reconciliations of the beginning and ending amounts of unrecognized tax benefits for the years ended December 31, 2019 and 2018 are as follows:

 

    2019     2018  
Balance as of January 1   $ 1,112,000     $ 1,112,000  
Additions based on tax positions related to current year     -       -  
Additions based on enacted tax change in state rate     -       -  
Additions for tax positions of prior years     -       -  
Reductions for tax positions of prior years     -       -  
Reductions based on enacted changes in tax rates     -       -  
Settlements     -       -  
Balance as of December 31   $ 1,112,000     $ 1,112,000  

 

Tax years that remain subject to examination for our major tax jurisdictions include the years ended December 31, 2016 through December 31, 2019. NOL's generated in previous years may also be subject to examination.

  

 

NOTE 12 - 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, 2019 the Company issued 30,000 shares of common stock in connection with a conversion notice received from a preferred Series C-3 shareholder, 195,415 shares of common stock in payment of interest on the Company’s 2016, 2017 and 2019 Convertible Notes and 390,000 shares of common stock in connection with the issuance of 2019 Convertible Notes and Demand Notes.

 

During the year ended December 31, 2018, the Company issued 874,000 shares of common stock in connection with conversion notices received from various preferred shareholders and warrant exercises and 320,853 shares at $0.25 per share in payment of interest on the Company’s 2016 and 2017 Convertible Notes. The company also issued 190,150 common shares at $0.25 per share to note holders that initiated conversion of their debt during the year ended December 31, 2018.

 

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. 

 

At December 31, 2019 and 2018, there were 468,221 outstanding shares of Class A Preferred stock, of which 8,709 shares resulted from the settlement of dividends due to conversion, and those shares no longer accrue dividends. The value of dividends payable upon the conversion of the remaining 468,221 outstanding shares of Class A Preferred stock amounted to approximately $2,713,000 and $2,530,000 at December 31, 2019 and 2018, 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 $2,713,000 and $2,530,000 at December 31, 2019 and 2018, 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, 2019 and 2018, we settled no Class B Preferred dividends.

 

At December 31, 2019, dividends payable upon the conversion of 67,500 outstanding shares of Class B Preferred amounted to approximately $488,000. 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 $488,000 and $454,000 at December 31, 2019 and 2018, 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, 2019 Series C Preferred shareholders converted 250,000 of Series C Preferred into common stock. At December 31, 2019 and 2018, there were 15,687,500 shares of Series C Preferred stock outstanding. The value of the Series C Preferred shareholders’ liquidation preference was $6,275,000 at December 31, 2019 and 2018. 

 

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.

 

During 2018, Series C-2 Preferred shareholders converted 500,000 of Series C-2 Preferred into common stock. At December 31, 2019 and 2018, there were 24,500,000 shares of Preferred C-2 stock outstanding. The value of the Series C-2 Preferred shareholders’ liquidation preference was $4,900,000 at December 31, 2019 and 2018. 

 

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.

 

In 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 the year ended December 31, 2019, the Company issued 30,000 shares of common stock in connection with conversion notices received from a Series C-3 convertible preferred shareholder. During the year ended December 31, 2018, the Company issued 120,000 shares of common stock in connection with conversion notices received from Series C-3 convertible preferred shareholders. At December 31, 2019 and 2018, there were 3,238,000 and 3,268,000 shares of Preferred C-3 stock outstanding, respectively.

   

 

NOTE 13 - STOCK OPTIONS   

 

The shareholders approved the 2011 and 2016 Stock Option Plans (the “2016 Plan” and the “2011 Plan”) which provide for the grant of up to 6,000,000 common stock options to provide equity incentives to directors, officers, employees and consultants. Two types of options may be granted under the plans: non-qualified stock options and incentive stock options. 

 

Under the 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 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 incentive stock options granted to any employee who owns more than 10% of our stock may not be greater than five years.

 

As of December 31, 2019, there are 2,159,500 options are available for future grant under these plans.

    

Summary   For the years ended December 31, 2019 and 2018, compensation expense related to stock option awards amounted to $126,000 and $180,000, respectively. As of December 31, 2019, there was approximately $105,000 of unrecognized compensation costs related to outstanding stock options, which are expected to be recognized over a weighted average term of 11 months.

 

No employee stock options were granted in the year ended December 31, 2019. During the year ended December 31, 2018, the Company granted 1,787,500 stock options to employees and non-employee board members. The weighted average grant date fair value of stock options granted during the year ended December 31, 2018 was $0.23. The total grant date fair value of stock options vested during the years ended December 31, 2019 and 2018 was approximately $173,000 and $412,000, respectively.  

 

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

 

   

2019

   

2018

 

Expected term (years)

    -       5.4  

Expected forfeiture rate

    -       0%  

Risk-free rate

    -       2.8%  

Volatility

    -       137%  

Dividend yield

    -       0.0%  

 

 

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

 

The following summarizes the activity of all of our outstanding stock options for the year ended December 31, 2019:

 

   

Shares

   

Weighted

Average

Exercise

Price

   

Average

Remaining

Contractual

Term

(years)

   

Aggregate

Intrinsic

Value

 
                                 

Outstanding at January 1, 2019

    11,028,500     $ 0.49       3.8     $ 94,000  

Granted

    -       -                  

Exercised

    -       -                  

Canceled or expired

    (288,000

)

    0.28                  
                                 

Outstanding at December 31, 2019

    10,740,500     $ 0.50       2.6     $ -  
                                 

Exercisable at December 31, 2019

    7,522,750     $ 0.55       2.3     $ -  

 

During the year ended December 31, 2019, 288,000 options were canceled due to employee turnover, no options expired unexercised, and no options were exercised. During the year ended December 31, 2018, no options were exercised and 441,000 options were cancelled due to employee turnover, no options expired unexercised and no options were exercised. As of December 31, 2019, the exercise prices on outstanding stock options ranged from $.22 per share to $1.58 per share.

 

 

NOTE 14 - WARRANTS 

 

The following summarizes the activity of our outstanding warrants as of December 31, 2019:

 

                     

Weighted

           
           

Weighted

     

Average

           
           

Average

     

Remaining

     

Aggregate

 
           

Exercise

     

Contractual

     

Intrinsic

 
   

Shares

   

Price

     

Term

     

Value

 
                                     

Outstanding at January 1, 2019

    7,381,707     $ 0.46  

(a)

    7.0  

(b)

  $ 39,000  

Granted

    350,000       0.25                      

Exercised

    -       -                      

Canceled or expired

    -       -                      
                                     

Outstanding at December 31, 2019

    7,731,707     $ 0.45  

(a)

    6.2  

(b)

  $ 33,000  
                                     

Exercisable at December 31, 2019

    7,106,707     $ 0.49         6.2  

(c)

  $ 33,000  

 

 

(a)

The weighted average exercise price for warrants outstanding excludes 1,750,000 warrants in each period with no determined exercise price.

 

(b)

The weighted average remaining contractual term for warrants outstanding excludes 743,500 warrants with no expiration date.

 

(c)

The weighted average remaining contractual term for warrants exercisable excludes 118,500 warrants with no expiration date.

 

 

NOTE 15 - RELATED PARTY TRANSACTIONS  

 

As of December 31, 2019, and December 31, 2018, the Company had outstanding $2,477,000 and $2,252,000, respectively, in senior convertible notes held by six members of our board of directors. These notes represent 9,388,378 of potential shares of common stock at December 31, 2019 and 7,888,378 at December 31, 2018. The Company granted 1,239,288 warrants to these board members in connection with their investment in the convertible notes. During 2019, the Company issued 60,000 and 7,500 common shares to the Company's Chief Executive Officer and to another board member in connection with their investment in the 2019 Convertible Notes, as further described in Note 5. The Company had $164,000 and $33,000 in accrued interest on convertible and promissory notes due to board members outstanding at December 31, 2019 and December 31, 2018, respectively.

 

 

As of December 31, 2019, and December 31, 2018, the Company had outstanding a $1,170,000 senior convertible note held by an investor that is deemed an affiliate.  This note represents 4,680,000 of potential shares of common stock as of these reporting dates.  Underlying warrants associated with this note represent 468,000 of potential shares of common stock.  At December 31, 2019 and December 31, 2018, the Company had $88,000 and $17,000 respectively, in accrued interest outstanding on this convertible note.

 

During 2019, the Company issued unsecured subordinated promissory notes of $800,000 of which $225,000 was subsequently converted into 2019 convertible notes and $150,000 was repaid resulting in $425,000 of outstanding promissory notes payable to our Chief Executive Officer as of December 31, 2019. The unsecured promissory notes have maturity date of June 30, 2020 and accrue interest at 6% per annum.   Accrued and unpaid interest due on the promissory notes was $15,000 as of December 31, 2019.

 

 

NOTE 16 — COMMITMENTS AND OTHER MATTERS   

 

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, the Company does not provide for an employer match. During 2019 and 2018, we incurred administrative expenses of approximately $2,000 in each year related to this plan.

  

 

NOTE 17- SUBSEQUENT EVENTS 

 

2019 Convertible Notes 

Subsequent to December 31, 2019, the Company issued $435,000 in new 2019 convertible notes and 112,500 of new common shares to the investors in these notes.

 

Common Shares Issued in Payment of Interest Expense

Subsequent to December 31, 2019, the Company issued 94,772 shares of common stock representing $14,000 in payment of interest to noteholders.   

 

Stock Compensation Grants

Subsequent to December 31, 2019, the Company granted 2,100,000 incentive stock options exercisable for 10 years from the date of grant at prices ranging from $0.12 to $0.15 per share.

 

 

 

Item 9.      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 

 

None.

 

Item 9A.   CONTROLS AND PROCEDURES 

 

Disclosure Controls and Procedures

 

James R. Donnelly, our chief executive officer and Kathleen A. Browne our principal accounting officer, as of December 31, 2019, have informed the board of directors that, based upon their evaluation of the Company’s disclosure controls and procedures as of the end of the period covered by this annual report (Form 10-K), such disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports we submit under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to management (including the chief executive officer) as appropriate, to allow timely decisions regarding required disclosure.

 

Management’s Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining an adequate System of internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our consolidated financial statements. Our internal control over financial reporting is supported by a program of appropriate reviews by management, written policies and guidelines, careful selection and training of qualified personnel, and a written code of conduct adopted by our board of directors, applicable to all Company directors and all officers, consultants and employees.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and even when determined to be effective, can only provide reasonable assurance with respect to financial statement preparation and presentation. Also, projections or any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. The audit committee of our board of directors meets with our independent registered public accounting firm and management periodically to discuss internal control over financial reporting, auditing and financial reporting matters. The audit committee reviews with our independent registered public accountants the scope and the results of the audit effort. The audit committee’s report can be found in the definitive proxy statement issued in connection with the Company’s 2020 annual meeting of shareholders.

 

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in the 2013 “Internal Control—Integrated Framework”. Based upon its assessment, management concluded that as of December 31, 2019 internal control over financial reporting is effective.

 

This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.

 

This report shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liabilities of that section, and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.   

 

 

Item 9B.   OTHER INFORMATION 

 

None 

 

 

PART III

 

 

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Our directors are elected to serve until the next annual meeting of shareholders and until his successor shall have been duly elected and qualified. Certain information with respect to our directors is presented below.

    

Thomas F. Bonadio, age 70, has served as a director since November 2010. Mr. Bonadio is the Founder and Senior Counsel of the Bonadio Group. After graduation from St. John Fisher College in 1971, Mr. Bonadio spent seven years with Arthur Andersen & Co. in Rochester, New York. In 1978, he started the Bonadio Group, which now is the largest CPA firm in New York state (outside of Manhattan) and the 42nd largest in the United States. Current annual revenue of approximately $120 million, with more than 850 employees. Each year since 1988, the Bonadio Group has been named a Rochester Top 100 growth company by the Rochester Business Journal.

 

Mr. Bonadio is chairman of the CurAegis Audit Committee. He also serves on multiple private and public boards. In addition to other community activities, he has been active in many community organizations and not-for-profit boards. He has also served as a member of the Monroe County Jobs Creation Task Force and the St. John Fisher Alumni Activities Committee. He is a past chairman of the Board of Trustees of St. John Fisher College. Mr. Bonadio serves as a member of the Board of Directors of Paychex Inc. and is a member of that company’s Audit Committee; and he heads the audit committees of Royal Oak Realty Trust (formerly Buckingham Properties Group) and previously served as the head of the Audit Committee of Conceptus, Inc. a NASDAQ listed public entity. Mr. Bonadio was also a past member of the Board of Directors of Moore Stephens North America, the nation’s sixth-largest accounting firm association.

 

Mr. Bonadio’s success and contributions within the community have been recognized by multiple awards, including: the prestigious Herbert W. Vanden Brul Award presented by the Rochester Institute of Technology in 2016; Managing Partner Elite by Accounting Today in 2013, the Rochester Business Hall of Fame in 2010, Businessperson of the Year in 2009 by the Rochester Chamber of Commerce, and in 1990, the Accounting Alumnus of the Year Award from St. John Fisher College.  Recently, Mr. Bonadio was honored as a Rochester Business Journal business ICON.

 

Mr. Bonadio is a member of the American Institute of Certified Public Accountants and the New York State Society of Certified Public Accountants. Mr. Bonadio has a B.B.A. degree in accounting and an Honorary Doctorate from St. John Fisher College. He was certified as a CPA in 1973. 

 

James R. Donnelly, age 41, was appointed as a director of the board in March 2020.  Mr. Donnelly served as the chief operating officer of the Company since October 2019.  From January 2017 to October 2019, he served as the Company's senior vice-president of Sales and Marketing.  Prior to joining CurAegis, Jim served as the vice-president of Bbusiness Development for Six15 Technologies. Preceding the formation of Six15 in June 2012, Jim was director of Defense and Augmented Reality Sales for Vizix Corporation.  Jim holds a B.S. in Business Administration from LeMoyne College and sits on two non-profit boards in the Rocheste area.

 

Lance F. Drummond, age 65, Lance Drummond has served as a director since December 2018. Mr. Drummond is currently a board member for Federal Home Loan Mortgage Corporation (Freddie Mac) since 2015 where he has served on the Audit Committee and Chair of the Compensation and Human Capital Committee. He is a board member for United Community Bank Inc. since 2018, where he serves on the Risk Committee, Nominating and Governance Committee and Compensation Committee. He is also a member of the Public Board of Governors or the Financial Industry Regulatory Authority (FINRA) where he serves on the Management Compensation Committee and the Audit Committee.

 

Mr. Drummond earned a bachelor’s degree in Business Management from Boston University, a Master’s degree in Business Administration from the Simon Business School at the University of Rochester and a Master’s degree in Management Science from MIT. Mr. Drummond received the MIT Sloan Fellowship in 1994 and the Aspen Institute’s Henry Crown Fellowship in 1998.

 

 

Mr. Drummond’s professional experience includes: twenty-six years at Eastman Kodak Company in a variety of technology and general management positions including as Chief Operating Officer for the Kodak’s professional products division, Bank of America where he served as Service and Fulfillment Operations executive for Global Technology and Operations and Digital Channels executive for the Consumer Banking Division. At Fiserv, he was Executive Vice President of Human Resources and Shared Services. Prior to retiring from TD Canada Trust, he was Executive Vice President of Operations and Technology.

 

Keith E. Gleasman, age 72, is a co-founder of the Company and has served as a member of the Company’s board of directors since its inception in 1996. Mr. Gleasman served as president of the Company upon its inception through his retirement in September 2019. From 2010 to 2016, he served as the vice president of marketing. From 2005 to 2010 he also held the title of chief technology officer. From 1985-1988, Mr. Gleasman was the vice president of sales for the Power Systems Division of Gleason Works. Mr. Gleasman is a co-inventor on a notable number of the Company’s patents. His strengths include his marketing and sales executive experience, in addition to his design and development knowledge. His particular expertise has been in the area of defining and demonstrating products to persons within all levels of the automotive industry, race crew members, educators and students. He has spent virtually his entire career involved with inventing and manufacturing new and creative mechanical components for the automotive industry, working closely with his father, Vernon E. Gleasman. Mr. Gleasman earned his B.S. degree from Ashland University in Ashland, Ohio.

 

Walter A. L. Johnson, age 66, is the Executive Director of the Rochester Data Science Consortium and the New York State Center of Excellence for Data Science. He was Vice President of the Palo Alto Research Center (Xerox PARC), managing their Intelligent Systems Laboratory in Palo Alto until 2014 at which time he moved to Rochester to integrate Xerox’s Webster Research Center into PARC.  Previously, Dr. Johnson served as Senior Vice President of Operations at SkyGrid, Inc., a real-time financial news analytics startup, as well as the Vice President of Strategy and Business Development at Uppercase, Inc., a tablet PC startup acquired by Microsoft in a $45M transaction. He is a former scientist in PARC’s groundbreaking Human-Computer Interaction group, where he specialized in intelligent interfaces for mobile and ubiquitous computing applications. His work on an embedded document application environment for multifunction devices led to the creation of a special enterprise-level division of Xerox, for which he received the Xerox President’s Award and the PARC Excellence in Science and Technology award. He also served as the Vice President of Strategic Operations at 12 Entrepreneuring, a business incubator in San Francisco. He holds 15 United States patents. Dr. Johnson obtained his Ph.D. in Cognitive Psychology from the University of Pittsburgh, and B.A. and MA. degrees in Cognitive Psychology at the University of Arizona.

 

Richard A. Kaplan, age 74, has served as a director since October 2010. From 2010 to March 2020, Mr. Kaplan was the chief executive officer and president of the Company. 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 board of Viggi Corporation. He has 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, 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, and 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 RIT’s E. Philip Saunders College of Business in April 2007. Mr. Kaplan was 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 provided 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.

 

Aaron Newman, age 48, is a serial entrepreneur having founded five successful startups: BlocWatch, CloudCheckr, Techrigy, DbSecure, and Application Security, Inc. He currently sits on the board of CloudCheckr. Aaron authored the books Enterprise 2.0, printed by McGraw-Hill, and the Oracle Security Handbook, printed by Oracle Press. He is an acclaimed international speaker on technology topics and has been awarded multiple patents in database security and social media. Prior to DbSecure, Aaron held technology positions at Price Waterhouse, Bankers Trust, and as an independent IT consultant. Aaron proudly served in the U.S. Army during the First Gulf War. Aaron currently serves as a Trustee of the Strong National Museum of Play, Nazareth College, MCC Foundation, Greater Rochester Chamber of Commerce, and the Rochester Police Foundation.  

 

E. Philip Saunders, age 82, has served as a director since November 2010. Since 1990, Mr. Saunders has been the chief executive officer of Saunders Management Co., a firm that he owns. He also is chairman of the board of Genesee Regional Bank and Valley Fuels and serves on the board of directors for American Rock Salt, Lewis Tree, Paul Smiths, Passero Associates, Royal Oak Realty Trust, Western New York Energy, University of Rochester, Rochester Institute of Technology and the Young Entrepreneurs Academy.  

Mr. Saunders’ previous business history includes owner/founder of Truckstops of America, owner/founder of Travel Ports of America, Inc. which later merged with TravelCenters of America, owner of W.W. Griffith Oil Corp., owner/founder of Sugar Creek Corp., owner of Econocar International, owner of Richardson Foods, chief executive officer of American Rock Salt, and senior vice president of Ryder Systems.

 

 

Mr. Saunders’ past services have included membership on the boards of directors of several organizations, including Rochester General Hospital, Excellus Blue Cross/Blue Shield, Security-Norstar Ryder Systems, and the Boy Scouts of America-Steuben Area Council. He has received numerous awards for his contributions to the community, including the Herbert W. Vanden Brul Entrepreneurial Award from the Rochester Institute of Technology’s College of Business (now known as the E. Philip Saunders College of Business), a Doctorate of Commercial Science from Paul Smiths College, the Teddi Award from Camp Good Days and Special Times and the Livingston County Citizen of the Year. He was elected to the Rochester Business Hall of Fame in 2004. Mr. Saunders is a member of Livonia Central School Athletic Hall of Fame and the National Association of Travel Centers Hall of Fame and was the recipient of the 2018 Rochester Business Journal Icon Award.

 

Gary A. Siconolfi, age 68, has served as a director since October 2002, and has been the Company’s board chair since 2005. Since 1995, Mr. Siconolfi has been the sole owner of his own commercial real estate business. Mr. Siconolfi acted as an advisor to the Company from 1999 through 2002, at which time he joined the board. From 1984 to 1995, he was the owner and president of Panorama Dodge, Inc., Penfield, New York and from 1989 to 1995 he was the owner and president of Panorama Collision, Inc., East Rochester, New York, where he started and managed a highly successful auto/truck dealership and collision business. Prior to opening the dealership and collision business, Mr. Siconolfi acquired extensive knowledge in the automotive industry, working in sales, sales management and general management at various automotive businesses. He has completed more than 100 programs sponsored by Chrysler Corporation, Ford Motor Company and General Motors in fields such as management, sales management, sales, customer relations, human resources and service training, and he has earned numerous awards given by these companies.  

 

Information About Executive Officers 

The Company’s executive officers are James R. Donnelly, the Company's Chief Executive Officer and Kathleen A. Browne, Chief Financial Officer and Secretary.

 

Relationships and Agreements

There are no family relationships among any of the directors or executive officers of the Company. There are no agreements or arrangements for the nomination or the appointment of any persons to the board of directors. 

 

Kathleen A. Browne, age 64, has served as chief financial officer, corporate secretary, and principal accounting officer since April 2015. From 2007 to 2015, Ms. Browne managed her own professional services and consulting business. Ms. Browne provided consulting services to the Company from April 2015 through August 2015 and joined the Company in September 2015. From 2007 to 2015 she served as chief financial officer in several development stage 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.

 

 

CORPORATE GOVERNANCE

 

CurAegis believes it is important to disclose to you a summary of our major corporate governance practices. Some of these practices have been in place since the Company’s inception. Others have been adopted in response to legislative and regulatory changes.

 

We will continue to assess our corporate governance practices and refine them as are appropriate due to changed circumstances. We will share any future changes with you on an ongoing basis.

 

A.   Role of the Board of Directors---Board Leadership Structure 

All corporate authority resides in the board of directors as the representative of the shareholders. The board has delegated authority to management to implement the Company’s mission of maximizing long-term shareholder value while adhering to the laws of the jurisdictions where we operate and at all times observing the highest ethical standards. With respect to its relationship to management, the board’s role is not to manage but to provide independent oversight of management’s decisions.

 

Management’s responsibilities include the development and implementation of the Company’s strategic plans, utilization of company resources, authorization of spending limits and the authority to hire consultants and employees and terminate their services. The board retains responsibility to recommend candidates to the shareholders for election to the board of directors. The board retains responsibility for selection and evaluation of the chief executive officer, determination of senior management compensation, approval of the annual budget, and assurance of adequate financial and accounting systems, procedures and controls. The board also provides advice and counsel to senior management on a regular basis. 

 

All major decisions are considered by the board as a whole; however, the board has chosen to exercise certain of its responsibilities through committees of the board. The board has established three standing committees - an Audit Committee, a Nominating Committee, and a Governance and Compensation Committee.

 

Consistent with the Company’s view of our board of directors’ and management’s distinct but mutually supportive roles described above, the Company has chosen to separate the positions of board chairman and chief executive officer. The role of the board chairman is to set board agendas, priorities and procedures to facilitate the board in its review and oversight function. The role of the chief executive officer is to establish and implement the Company’s strategic direction, subject to board oversight.

  

Risk Oversight

The board oversees the Company’s risk management process through regular discussions of the Company’s credit, liquidity, operational, compliance and similar risks with senior management both during and outside of regularly scheduled board meetings. In addition, the Audit Committee assists the board by administering such oversight function with respect to risks relating to the Company’s accounting and financial controls.

 

Annual Meeting Attendance

It is the Company's policy that all directors attend the annual shareholders meeting. All persons who were directors on the date of last year's annual shareholders' meeting attended such meeting either in person or by telephonic conference, except for Thomas F. Bonadio, Thomas Labus, E. Philip Saunders, and Gary Siconolfi.

 

B.   Operation of the Board of Directors 

During 2019 the Board of Directors met 5 times and took official action 7 times during the period from January 1, 2019 through December 31, 2019. During this period, our directors as a group participated in, either in person or by telephonic conference as permitted by the Company's Bylaws, approximately 90% of the total number of meetings held and/or actions taken during the period for which they were directors and 88% of the total number of meetings and/or actions taken by the committees of the board on which they served during the period for which were members of such committee(s).

  

Code of Ethics / Committee Charters

The board has adopted, implemented and published on the Company’s website (www.CurAegis.com) the Company’s code of business conduct which applies to all members of the Board, all executive and financial officers and all employees and consultants of the Company, its divisions and its subsidiaries. The code mandates that all Company personnel observe the highest standards of business and personal conduct in the performance of their duties and responsibilities, especially in dealing with other Company personnel, our shareholders, the general public, the business community, customers, suppliers, and governmental authorities. It addresses conflicts of interest, corporate opportunities, confidentiality, fair dealing, protection and proper use of corporate assets, compliance with laws, rules, and regulations and requires the reporting of any illegal or unethical behavior.

 

We require our employees, our officers, and directors to talk to supervisors, managers or other appropriate personnel to report and discuss any known or suspected unethical, illegal or criminal activity involving the Company and/or its employees. We have established a process which allows employees, officers, and directors to anonymously report any known or suspected violation of policies and rules set forth in the code of business conduct.

 

 

Waivers or amendments of the code's provisions are generally not permitted, may be granted only by the board of directors, and if granted, will be disclosed promptly by the Company by posting the waiver or amendment on the Company’s website and by filing a current report (Form 8-K) with the Securities and Exchange Commission. There were no waivers and/or amendments of the code during 2019.

 

The board has also adopted, implemented and posted on the Company’s website the Company’s financial integrity and compliance program. The program mandates that the Company's results of operations and financial position must be recorded in accordance with the requirements of law and generally accepted accounting principles and that all books, records, and accounts must be maintained in reasonable detail so that they accurately and fairly reflect the business transactions and disposition of assets of the Company. The written policy requires all personnel responsible for the preparation of financial information to ensure that the Company's financial policies and internal control procedures are followed and holds each person involved in creating, processing and recording financial information accountable for the integrity of the financial reporting process. The program establishes a network for the receipt, retention, and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters and provides for the submission (including the confidential anonymous submission) by Company personnel of any concerns they might have regarding questionable accounting or auditing practices.

 

The board adopted an Audit Committee charter delineating the composition and the responsibilities of the Audit Committee which became effective on April 17, 2000. The charter was revised by the board effective January 15, 2003 and July 21, 2011. The charter is on the Company's website.

 

On November 9, 2004, the board adopted a Nominating Committee charter delineating the composition and responsibilities of the Nominating Committee. The Nominating Committee charter is on the Company’s website. 

 

Committees of the Board 

The Audit Committee

 

Members:

Thomas F. Bonadio, chairman

Lance F. Drummond

E. Philip Saunders

 

Number of Meetings in 2019: 4

 

The primary function of the Audit Committee as stated in its charter is to assist the board of directors in fulfilling its oversight responsibilities relating to: (i) the integrity of the Company’s financial statements; (ii) the Company’s compliance with legal and regulatory requirements, including requirements for implementing effective internal controls over financial reporting and programs to detect fraud; (iii) the independent auditor’s qualifications and independence; and (iv) the performance of the Company’s independent auditor, who shall be ultimately accountable and report to the Committee.

 

The Committee shall prepare the report required by the rules of the Securities and Exchange Commission to be included in the Company’s annual proxy statement.

 

In addition to the powers and responsibilities expressly delegated to the Committee pursuant to the Audit Committee charter, the Committee is empowered to exercise any other powers and carry out any other responsibilities delegated to it by the board of directors from time to time consistent with the Company’s bylaws. While acting within the scope of the powers and responsibilities specified in the charter and delegated to it by the board, the Committee has and may exercise all the powers and authority of the board.

   

All members of the Audit Committee are "independent" as independence is defined in Nasdaq Marketplace Rule 4200(a)(15) and as defined by Rule 10A-3(b)(1)(ii) promulgated by the Securities and Exchange Commission. Thomas F. Bonadio has been appointed the Audit Committee's "financial expert" as defined by the Audit Committee's charter in accordance with rules promulgated by the Securities and Exchange Commission.

 

The Nominating Committee

 

Gary A. Siconolfi, chairman

 

Number of Meetings in 2019: 1

 

 

As specified in its charter, the purpose of the Nominating Committee is to identify, consider and recommend qualified individuals to the Board for election as directors, including the slate of directors that the board proposes for election by shareholders at the annual meeting. The charter sets forth the following policy and procedures with respect to the consideration of any director candidates recommended by security holders.

  

Shareholders wishing to directly nominate candidates for election to the board of directors at an annual meeting must do so by giving notice in writing to the chairman of the Nominating Committee, CurAegis Technologies, Inc., 350 Linden Oaks Rochester, New York 14625. The notice with respect to any annual meeting must be delivered to the chairman not less than 120 days prior to the first anniversary of the preceding year's annual meeting. The notice shall set forth (a) the name and address of the shareholder who intends to make the nomination; (b) the name, age, business address and residence address of each nominee; (c) the principal occupation or employment of each nominee; (d) the class and number of shares of CurAegis securities which are beneficially owned by each nominee and by the nominating shareholder; (e) any other information concerning the nominee that must be disclosed in nominee and proxy solicitations pursuant to Regulation 14A of the Securities Exchange Act of 1934; and (f) the executed consent of each nominee to serve as a director of CurAegis if elected.

 

Nominations submitted in accordance with the foregoing procedure will be considered and voted upon by the Nominating Committee. Any shareholder nominee recommended by the Committee and proposed by the board for election at the next annual meeting of shareholders shall be included in the Company's proxy statement for such annual meeting.

 

The Nominating Committee charter also sets forth the qualifications and a specific description of skills that members of the board of the Company should possess, regardless of by whom nominated.

 

In recommending candidates, the Committee shall consider the candidates' mix of skills, experience with businesses and other organizations of comparable size, reputation, background and time availability (in light of anticipated needs), the interplay of the candidate's experience with the experience of other board members, the extent to which the candidate would be a desirable addition to the board and any committees of the board and any other factors the Committee deems appropriate. At a minimum, the Committee shall address the following skill sets in evaluating director candidates: accounting or finance, business or management experience, industry knowledge, customer base experience or perspective, international marketing, and business experience, strategic planning and leadership experience.

 

Directors should possess the highest personal and professional ethics, integrity and values, and be committed to representing the long-term interest of the shareholders. They must also have an inquisitive and objective perspective, practical wisdom and mature judgment. The board should represent diverse experience at policy-making levels in business, government, education and technology, and in areas that are relevant to the Company's worldwide activities. 

 

Directors must be willing to devote sufficient time to carrying out their duties and responsibilities effectively and should be committed to serving on the board for an extended period of time. Directors should consider offering their resignation in the event that significant change in their personal circumstances, including their health, family responsibilities, or a change in their principal job responsibilities, would preclude them from devoting sufficient time to carrying out their responsibilities effectively.

 

The board does not believe that arbitrary term limits on director service are appropriate, nor does it believe that directors should expect to be re-nominated automatically. The contribution of each member as a member of a committee or the board shall be evaluated each year by the Committee before his re-nomination is recommended to the board.

 

All members of the Nominating Committee are “independent” as defined in Rule 10A-3(b)(1)(ii) promulgated by the Securities and Exchange Commission and as defined by Nasdaq Marketplace Rule 4200(a)(15).

 

The Governance and Compensation Committee

 

Number of Meetings in 2019: 1

  

The purpose of the Governance and Compensation Committee is to monitor the effectiveness of management’s policies and decisions including the execution of the Company's strategies in order to ensure that the Company represents the shareholders' interests, including optimizing long term as well as short term financial returns. The Committee develops and recommends to the board corporate governance principles and guidelines and reviews the charter and composition of each committee of the board and makes recommendations to the board for the adoption of or revisions to committee charters, the creation of additional committees or the elimination of committees.

 

 

The Committee also:

 

 

(1)

establishes and reviews the overall executive compensation philosophy and strategy of the Company and oversees the Company’s various compensation programs and plans;

 

(2)

reviews on its own and taking into account shareholder advice on executive compensation policies, makes recommendations to the board of directors on employment and business consultants compensation policies, forms and levels of annual compensation, including specifically, the performance and level of annual compensation of the executive officers and top management personnel of the Company;

 

(3)

specifically reviews the annual compensation of the chief executive officer in the light of established goals and objectives and based upon such evaluation and taking into consideration shareholder advice on such compensation, makes specific recommendations to the board regarding such compensation;

 

(4)

reviews and makes recommendations to the board on the operation, performance, and administration of the Company's employee benefit plans.

  

All members of the Committee must be independent within the meaning of Rule 10A-3(b)(1)(ii) promulgated by the Securities and Exchange Commission and Nasdaq Marketplace Rule 4200(a)(15).

 

C. Shareholder Communications

 

We encourage all shareholders to communicate with management and with our directors, including our independent directors. Any shareholder wishing to communicate directly with management should e-mail or address regular mail to:

 

Officer

Mailing Address

E-mail

 

James Donnelly

Chief Executive Officer and President

CurAegis Technologies, Inc.

350 Linden Oaks

Rochester, New York 14625

 

jdonnelly@curaegis.com

Kathleen A. Browne

Chief Financial Officer 

CurAegis Technologies. Inc.

350 Linden Oaks

Rochester, New York 14625

kbrowne@curaegis.com

 

 

Any shareholder wishing to communicate directly with any of our independent directors should e-mail as follows:

 

Thomas F. Bonadio

tbonadio@bonadio.com

 

 

Lance F. Drummond

Lance.drummond@outlook.com

 

 

Keith Gleasman

keithgleasman@gmail.com

   

Walter A. L. Johnson

waljohnson@rochester.edu

   
Richard A. Kaplan dickkaplan3@gmail.com

 

 

Aaron C. Newman

aaron@newman-family.com

 

 

E. Philip Saunders

PhilS@saundersmgt.com

 

 

Gary A. Siconolfi

garysic1951@gmail.com

 

 

Regular mail may be addressed to:

CurAegis Independent Directors

c/o CurAegis, Inc.

350 Linden Oaks

Rochester, New York 14625

Attention: Kathleen A. Browne

 

 

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires our directors, our executive officers and persons who own more than 10% of our common stock to file initial reports of ownership (Form 3) and reports of changes in ownership of our common stock (Forms 4 and 5) with the Securities and Exchange Commission. These persons are required by SEC regulations to furnish us with copies of all section 16(a) reports they file.

 

Based upon Company records and other information, we believe that for the year ended December 31, 2019, and for the period January 1, 2019, through March 29, 2020, all directors and executive officers complied with all applicable Section 16(a) filing requirements.

 

 

ITEM 11. EXECUTIVE COMPENSATION

 

SUMMARY COMPENSATION TABLE

FOR YEARS ENDED DECEMBER 31, 2019 and 2018

 

Name and

Principal

Position

 

Year

 

 

 

Salary

   

Bonus

   

Stock

Awards

   

Option

Awards

(4)

   

Non-

Equity

Incentive

Plan

Compensation

   

Change in Pension

Value and

Non-

qualified

Deferred
Compensation

Earnings

   

All

Other

Compensation

   

Total

 

(a)

 

(b)

 

(c)

   

(d)

   

(e)

   

(f)

   

(g)

   

(h)

   

(i)

   

(j)

 
                                                                     

Richard A. Kaplan,

 

2019

  $ 50,000     $ 0     $ 0     $ 0     $ 0     $ 0     $ 15,000     $ 65,000  
CEO (1)  

2018

  $ 50,000     $ 0     $ 0     $ 0     $ 0     $ 0     $ 15,000     $ 65,000  
                                                                     

James R. Donnelly,
COO (2)

 

2019

  $ 175,000     $ 0     $ 0     $ 0     $ 0     $ 0     $ 0     $ 175,000  
                                                                     

Kathleen A.

 

2019

  $ 200,000     $ 0     $ 0     $ 0     $ 0     $ 0     $ 0     $ 200,000  
Browne, CFO (3)  

2018

  $ 200,000     $ 0     $ 0     $ 21,000     $ 0     $ 0     $ 0     $ 221,000  

 

 

 

(1)

Mr. Kaplan served as the Company’s chief executive officer for the years ended December 31, 2019 and 2018. He received an annual salary of $50,000 and $15,000 annual car allowance each year in this role.

 

(2)

Mr. Donnelly served as the Company’s chief operating officer for the year ended December 31, 2019.

 

(3)

Ms. Browne served as the Company’s chief financial officer for the years ended December 31, 2019 and 2018.

 

(4)

Represents the total grant date fair value of option awards computed in accordance with FASB ASC 718. Ms. Browne received one award in 2018: 100,000 shares on May 7, 2018, with an exercise price of $0.23 per share, 10-year expiration and vesting in 25% tranches annually. The Black-Scholes option-pricing model was used to value the cost of the option grants at approximately $21,000, which is being recognized ratably over the estimated vesting periods of the respective grants.

 

 

OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2019

 

   

Option Awards

   

Stock Awards

 

Name

 

Number of

Securities

Underlying

Unexercised

Options:

Exercisable

   

Number of

Securities

Underlying

Unexercised

Options:

Unexer-

cisable

   

Equity

Incentive

Plan

Awards:

Number

of

Securities

Underlying

Unexercised

Unearned

Options

   

Option

Exercise

Price

($)

   

Option

Expira-

tion

Date

   

Number

of

Shares

or Units

of

Stock

That

Have

Not

Vested

   

Market

Value

of

Shares

or Units

of Stock

That

Have

Not

Vested

($)

   

Equity

Incentive

Plan

Awards:

Number

of

Unearned

Shares,

Units or

Other

Rights

That Have

Not

Vested

   

Equity

Incentive

Plan

Awards:

Market or

Payout

Value of

Unearned

Shares,

Units or

Other

Rights

That have

Not

Vested

($)

 

(a)

 

(b)

   

(c)

   

(d)

   

(e)

   

(f)

   

(g)

   

(h)

   

(i)

   

(j)

 
                                                                         

Richard A. Kaplan, CEO (1)

    3,000,000       2,150,000       0     $ 0.36       2020       0     $ 0       0     $ 0  
                                                                         

James R. Donnelly, COO (2)

    100,000       150,000       0     $ 0.23       2028       0     $ 0       0     $ 0  
                                                                         

Kathleen A. Browne, CFO (3)

    25,000       0       0     $ 0.28       2025       0     $ 0       0     $ 0  
      0       25,000       0     $ 0.53       2026       0     $ 0       0     $ 0  
      75,000       25,000       0     $ 0.62       2026       0     $ 0       0     $ 0  
      50,000       50,000       0     $ 0.23       2028       0     $ 0       0     $ 0  

 

 

(1)

On September 30, 2010, Mr. Kaplan was granted an option to acquire 5,150,000 shares of the Company's $.01 par value common stock exercisable for a period of ten years at $.36 per common share. The option vests as follows: 1,000,000 shares immediately; 1,000,000 shares upon the closing price of the Company's common stock reaching $1.00 per share; another 1,000,000 upon the closing price reaching $2.00 per share; another 1,000,000 upon the closing price reaching $3.00 per share and the balance of 1,150,000 upon the closing price reaching $4.00 per share. As of December 31, 2019, 3,000,000 options have vested under the option agreement.

   

(2)

On May 7, 2018, Mr. Donnelly was granted an option to acquire 250,000 shares of the Company’s $0.01 par value common stock exercisable for a period of ten years at $0.23 per common share. The option vests as flows: 37,500 shares on the grant date; 62,500 on the first, second and third anniversaries of the grant; and 25, 000 on the fourth anniversary of the grant. At December 31, 2019, 100,000 options have vested under the option agreement.

   

(3)

On September 1, 2015, Ms. Browne was granted an option to acquire 25,000 shares of the Company’s $.01 par value common stock exercisable for a period of ten years at $.28 per common share. The grant vests in 25% tranches on each successive anniversary of the grant. At December 31, 2019, 25,000 options have vested under the option agreement.

 

On January 14, 2016, Ms. Browne was granted an option to acquire 25,000 shares of the Company’s $.01 par value common stock exercisable for a period of ten years at $.53 per common share. The shares vests upon the closing price of the Company's common stock reaching $5.00 per share. At December 31, 2019, none of these options have vested.

 

On December 21, 2016, Ms. Browne was granted an option to acquire 100,000 shares of the Company’s $.01 par value common stock exercisable for a period of ten years at $.62 per common share. The grant vests in 25% tranches on each successive anniversary of the grant. At December 31, 2019, 75,000 of these options have vested.

 

On May 7, 2018, Ms. Browne was granted an option to acquire 100,000 shares of the Company’s $.01 par value common stock exercisable for a period of ten years at $.23 per common share. The grant vests annually in 25% tranches. At December 31, 2019, 50,000 of these options have vested.

 

 

DIRECTOR COMPENSATION TABLE FOR THE YEAR ENDED DECEMBER 31, 2019

 

Name (a)

 

Fees

Earned

or Paid

in Cash

(b)

   

Stock

Award

(c)

   

Option

Awards 

(d)

   

Non-Equity

Incentive Plan

Compensation

(e)

   

Change in

Pension

Value and

Nonqualified

Deferred

Compensation

Earnings

(f)

   

All Other

Compensation

(g)

   

Total

(h)

 

Thomas F. Bonadio

  $ 0     $ 0     $ 21,750     $ 0     $ 0     $ 0     $ 21,750  

William W. Destler

  $ 0     $ 0     $ 21,750     $ 0     $ 0     $ 0     $ 21,750  

Lance F. Drummond

  $ 0     $ 0     $ 58,500     $ 0     $ 0     $ 0     $ 58,500  

E. Philip Saunders

  $ 0     $ 0     $ 21,750     $ 0     $ 0     $ 0     $ 21,750  

 

On August 1, 2018, the Company made a grant of 75,000 options to the following board members: Thomas F. Bonadio, William W. Destler and E. Phil Saunders. These options have an exercise price of $0.32 per share, exercisable for 10 years, and with annual vesting of 25% upon the anniversary date of the option grant.

 

On November 11, 2018, the Company made a grant of 150,000 options to Lance F. Drummond with an exercise price of $0.26 per share, exercisable for 10 years which were fully vested upon the date of the grant. Also, on November 11, 2018, the Company made a grant of 100,000 options to Lance F. Drummond with an exercise price of $0.26 per share, exercisable for 10 years with annual vesting of 25% upon the anniversary date of the option grant.

 

A. Discussion of Director Compensation

 

Participation in the Company’s 2011 and 2016 Stock Option Plans

 

Directors are eligible to be granted options under the company’s 2011 and 2016 Stock Option Plan (“the Option Plans”) as a component of the board’s strategy for recruiting and retaining outstanding individuals in the service of the Company and for aligning their interests with the interests of the Company’s shareholders. The Company’s shareholders approved the Option Plans at annual meetings of shareholders. The Option Plans are the only Company plans the members of the board of directors are entitled to receive equity compensation for their performance of services as directors and members of committees created by the board.

 

Reimbursement of Board Expenses

 

The board has a policy of providing for the reimbursement of expenses incurred by members of the Company’s board of directors. The reimbursement policy applies to all non-employee directors and provides for the reimbursement of all reasonable out-of-pocket expenditures incurred on behalf of the Company, including but not limited to: 

 

a)

travel costs for board meeting attendance, such as hotel, meals, and transportation;

 

b)

airfare based upon reasonable commercial rates; and

 

c)

mileage for personal vehicles used for CurAegis business reimbursed at the applicable Internal Revenue Service rate in force at the time the vehicle is used.

 

No reimbursement is to be made unless authorized by the Company’s chief executive officer or its chief financial officer.

 

 

B. Discussion of Management Compensation

 

In recent years, corporate governance commentators and advisors have advocated and increasingly, governmental regulatory authorities, including the Securities and Exchange Commission, are mandating, that public companies, such as CurAegis, initiate procedures to ensure that our shareholders have input on our named executive officer compensation programs (the “say on pay” movement). Basically, our named executive officer compensation policies and programs are designed to attract, motivate, and retain the key executives who are responsible to drive our success and enhance shareholder value. Pay that reflects performance and alignment of that pay with the interests of long-term shareholders are key principles that underlie our executive officer compensation program design.

 

Our board of directors values and encourages constructive dialogue on executive compensation and other important governance topics with our shareholders, to whom it is ultimately accountable. At the 2011 annual meeting, the Company’s shareholders approved the board’s proposal to seek shareholder advice on executive compensation on an annual basis, consistent with the board’s view such an annual procedure is the most effective means to obtain current information on investor sentiment about our executive compensation philosophy, policies, and procedures.

 

On September 30, 2010, the Company granted a stock option for 5,150,000 common shares exercisable for ten years at an exercise price of $0.36 per common share to Richard A. Kaplan upon his appointment as the Company’s chief executive officer. The option vests and is exercisable as follows: 1,000,000 options vest and are exercisable immediately upon grant; a second 1,000,000 options vest and are exercisable upon the trading price of the Company’s common stock closing at a minimum of $1.00 per share; a third 1,000,000 options vest and are exercisable upon the trading price of the Company’s common stock closing at a minimum of $2.00 per share; a fourth 1,000,000 options vest and are exercisable upon the trading price of the Company’s common stock closing at a minimum of $3.00 per share and the balance of the options, namely 1,150,000 options, vest and are exercisable upon the trading price of the Company’s common stock closing at a minimum of $4.00 per share.

 

On October 1, 2019, the Company named James Donnelly as its chief operating officer. Mr. Donnelly receives a salary of $175,000 per annum for the year ended December 31, 2019. Mr. Donnelly is entitled to participate in all employee benefit plans as are provided from time to time for senior executives. On May 7, 2018, Mr. Donnelly was granted an option to acquire 250,000 shares of the Company’s $0.01 par value common stock exercisable for a period of ten years at $0.23 per common share. The option vests as flows: 37,500 shares on the grant date; 62,500 on the first, second and third anniversaries of the grant; and 25,000 on the fourth anniversary of the grant. At December 31, 2019, 100,000 options have vested under the option agreement.

 

On September 1, 2015, the Company engaged Kathleen A. Browne as its chief financial and accounting officer. Ms. Browne’s compensation was $200,000 per annum for the years ended December 31, 2019 and 2018. Ms. Browne is entitled to participate in all employee benefit plans as are provided from time to time for senior executives. If the Company terminates the executive, removes her as CFO, or a change in control of the Company occurs, the executive is entitled to 6 months’ severance pay.

 

On September 1, 2015, Ms. Browne was granted an option exercisable for 10 years to acquire 25,000 shares of the Company’s common stock at $0.28 per share. The option vests and is exercisable as follows: 6,250 options vest and become exercisable on each of September 1, 2016, 2017, 2018 and 2019. On January 14, 2016, Ms. Browne was granted an option to acquire 25,000 shares of the Company’s $.01 par value common stock exercisable for a period of ten years at $.53 per common share. The shares vests upon the price of the Company's common stock reaching $5.00 per share. On December 21, 2016, the executive was granted an option to acquire 100,000 shares of the Company’s $.01 par value common stock exercisable for a period of ten years at $.62 per common share. This grant vests in 25% tranches on each successive anniversary of the grant. On May 7, 2018, Ms. Browne was granted an option to acquire 100,000 shares of the Company’s $.01 par value common stock exercisable for a period of ten years at $0.23 per common share, This grant vests in 25% tranches annually.

 

 

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

STOCK OWNERSHIP BY DIRECTORS, OFFICERS AND 5 PERCENT OWNERS

 

Common Stock

The following table sets forth certain information regarding the beneficial ownership of the Company’s common stock by (i) each person who is known by the Company to own of record or beneficially more than 5% of the outstanding common stock, (ii) each of the Company’s directors, nominees and named executive officers, and (iii) all current directors and executive officers of the Company as a group. The first two columns of the table set forth beneficial ownership information for such persons as of March 1, 2020. For purposes of this table, beneficial ownership has been determined in accordance with the provisions of Rule 13d-3 under the Exchange Act, under which, in general, a person is deemed to be the beneficial owner of a security if that person has or shares the power to vote or to direct the voting of the security or the power to dispose or to direct the disposition of the security, or if he or she has the right to acquire the beneficial ownership of the security within 60 days.

 


Name of Beneficial Owner

 



Position with the Company

 

Number of
Shares
Owned

 

Percent of

Shares
Outstanding (1)

                 

Thomas F. Bonadio

 

Director

    731,415   (2)    1.4

Lance F. Drummond

 

Director

    262,583   (3) 

< 1

Keith E. Gleasman

 

Director

    4,862,575   (4)    9.5

Walter A. L. Johnson

 

Director

    50,000   (5) 

< 1

Richard A. Kaplan   Director     9,327,210 (6) 15.5

Aaron C. Newman

 

Director

    50,000   (7) 

< 1

E. Philip Saunders

 

Director

    5,145,627   (8)    9.1

Gary A. Siconolfi

 

Chairman of the Board

    1,149,333   (9)    2.2
                 

James R. Donnelly

 

Chief Executive Officer, President and Director

    100,000   (10) 

< 1

Kathleen A. Browne

 

Chief Financial & Principal Accounting Officer

    350,000   (11) 

< 1

                 

All Directors and Executive Officers as a Group

    22,028,743   (2)-(13)    30.5
                 

B. Thomas Golisano

 

Investor

    48,969,250   (12)    49.0

Robert August

 

Investor

    2,840,811   (13)    5.3

 

(1)

The calculations in these columns are based upon 51,187,236 shares of common stock outstanding on March 1, 2020, plus the number of shares of common stock subject to outstanding options, warrants and convertible debt held by the person with respect to whom the percentage is reported on such date. The shares of common stock underlying such options, warrants, convertible debt and similar rights, are deemed outstanding for purposes of computing the percentage of the person holding such options but are not deemed outstanding for the purpose of computing the percentage of any other person. The calculations also assume the convertibility of each share of Series C Preferred Stock, C-2 Preferred Stock and Series C-3 Preferred Stock into one share of common stock.

 

(2)

Thomas F. Bonadio: includes (i)150,150 shares issuable upon conversion of Convertible Note issued November 7, 2017; (ii) 15,015 shares issuable upon the exercise of a warrant issued November 7, 2017 exercisable for 10 years at an exercise price of $0.333 per share; (iii)  160,000 Series C-3 Preferred shares issued on February 20, 2016 convertible into common shares; (iv) 125,000 Class C Preferred shares and a warrant issued on September 23, 2011 for 12,500 common shares exercisable for 10 years at an exercise price equal to the greater of $.01 per share or 80% of the volume weighted average sale price per share of the Company’s common stock for the 10 consecutive trading days immediately prior to exercise; (v) 18,750 common shares that may be purchased through the exercise of a common stock option granted on August 1, 2018, exercisable for 10 years from the date of grant at an exercise price of $0.32 per share; and (vi) 250,000 common shares which may be purchased through the exercise of a 10-year stock option granted on January 27, 2011 at an exercise price of $.90 per common share.

 

 

 

(3)

Lance F. Drummond: includes (i) 75,075 shares issuable upon conversion of a Convertible Note issued March 2, 2018; (ii) 7,508 shares issuable upon the exercise of a warrant issued on March 2, 2018 exercisable for 10 years at an exercise price of $0.333 per share; (iii) 175,000 shares issuable upon the exercise of an option granted November 28, 2018 with an exercise price of $0.26 per share exercisable for 10 years from the date of grant; and (iv) 5,000 shares issuable upon the exercise of an option granted January 12, 2018 exercisable for 10 years at an exercise price of $0.31 per share.

 

(4)

Keith E. Gleasman: The address for Mr. Gleasman is 350 Linden Oaks. Rochester, NY 14625.

   
(5) Walter A. L. Johnson: includes 50,000 shares issuable upon the exercise of an option granted February 24, 2020 with an exercise price of $0.09 per share exercisable for 10 years from the date of grant.

 

(6) Richard A. Kaplan: includes (i) 1,200,000 shares issuable upon conversion of Convertible Notes issued during the period from September 4, 2018 and December 26, 2018; (ii) 120,000 shares issuable upon the exercise of warrants issued during the period from September 4, 2018 and December 26, 2018 exercisable for 10 years at an exercise price of  $0.25 per share; (iii) 100,000 shares issuable upon the conversion of a Convertible Note issued on July 10, 2018; (iv) 10,000 shares issuable upon the exercise of warrants issued on July 10, 2018 exercisable for 10 years at an exercise price of $0.25 per share; (v) 1,501,052 shares issuable upon conversion of Convertible Notes issued during the period July 12, 2017 and April 17, 2018; (vi) 375,375 shares issuable upon the exercise of warrants issued during the period July 12, 2017 and April 17, 2018 exercisable for 10 years at an exercise price of $0.333 per share; (vii) 570,000 shares issuable upon conversion of a Convertible Note issued December 16, 2016; (viii) 57,000 shares issuable upon the exercise of warrants issued on December 16, 2016 exercisable for 10 years at an exercise price of $0.25 per share; (ix) 900,000 Series C-3 Preferred shares issued on February 20, 2016 convertible into common shares; (x) 3,000,000 common shares which may be acquired upon the exercise of a 10-year non-qualified stock option granted on September 30, 2010 at an exercise price of $.36 per share. The balance of the option, namely 2,150,000 common shares will vest when the Company’s stock price reaches certain targets as set forth in the stock option agreement; and (xi) 1,333,333 future share rights issuable upon conversion of a Convertible Note issued August 16, 2019 at an exercise price of $0.15 per share. 

 

(7)

Aaron C. Newman: includes 50,000 shares issuable upon the exercise of an option granted February 24, 2020 with an exercise price of $0.09 per share exercisable for 10 years from the date of grant.

 

(8)

E. Philip Saunders: includes (i) 1,501,502 shares issuable upon the conversion of a Convertible Note issued November 20, 2017; (ii) 375,375 shares issuable upon the exercise of a warrant issued November 20, 2017 for 10 years at an exercise price of $0.333 per share; (iii) 2,000,000 shares issuable upon conversion of a Convertible Note issued August 25, 2016; (iv) 200,000 shares issuable upon the exercise of warrants issued on August 25, 2016 exercisable for 10 years at an exercise price of $0.25 per share; (v) 400,000 Series C-3 Preferred shares issued on February 20, 2016 convertible into common shares; (vi) 18,750 common shares which may be purchased through the exercise of stock option granted on August 1, 2018, exercisable for 10 years from the date of grant at an exercise price of $0.32 per share; (vii) 250,000 common shares which may be purchased through the exercise of a 10-year stock option granted on January 27, 2011, at an exercise price of $.90 per common share; and (viii) 400,000 future share rights issuable upon conversion of a Convertible Note issued in the first quarter of 2020 at an exercise price of $0.15 per share.

 

(9)

Gary A. Siconolfi: includes (i) 240,000 shares issuable upon conversion of a Convertible Note issued December 19, 2016; (ii) 24,000 shares issuable upon the exercise of warrants issued on December 19, 2016 exercisable for 10 years at an exercise price of $0.25 per share; (iii) 25,000 common shares issuable upon exercise for a warrant for 10 years at an exercise price equal to the greater of $.01 per share or 80% of the volume weighted average sale price per share of the Company’s common stock for the 10 consecutive trading days immediately prior to exercise; and (iv) 100,000 common shares which may be purchased through the exercise of a 10-year stock option granted on November 15, 2013 at an exercise price of $.36 per common share.

 

 

(10)

James R. Donnelly: includes 100,000 common shares issuable upon exercise of a stock option granted May 7, 2018 exercisable for 10 years from date of grant at an exercise price of $0.23 per share.

 

(11)

Kathleen A. Browne: includes (i) 200,000 shares issuable upon conversion of 200,000 shares of Series C-3 Preferred shares issued on February 20, 2016; (ii) 25,000 common shares issuable upon exercise of a 10-year stock option granted September 1, 2015 at an exercise price of $0.28 per share; (iii) 75,000 common shares issuable upon the exercise of a stock option granted on December 21, 2016 exercisable for 10 years from the date of grant at an exercise price of $0.62 per share; and (iv) 50,000 common shares issuable upon exercise of a stock option granted May 7, 2018 exercisable for 10 years from date of grant at an exercise price of $0.23 per share.

 

(12)

B. Thomas Golisano: includes (i) 4,680,000 shares issuable upon the conversion of a Convertible Note issued November 7, 2016; (ii) 468,000 shares issuable upon the exercise of warrants issued on November 7, 2016, exercisable for 10 years at an exercise price of $0.25 per share; (iii) 15,212,500 Series C Preferred shares and 24,475,000 Series C-2 Preferred shares, (iv) a warrant issued on September 23, 2011, for 1,521,250 common shares exercisable for 10 years at an exercise price equal to the greater of $.01 per share or 80% of the volume weighted average sale price per share of the Company’s common stock for the 10 consecutive trading days immediately prior to exercise; and (v) 2,500,000 future share rights issuable upon conversion of a Convertible Note issued during the first quarter of 2020 at an exercise price of $0.15 per share. The address for Mr. Golisano is c/o Fishers Asset Management, 1 Fishers Road, Pittsford, New York 14534.

 

(13)

Robert W. August: includes (i) 750,751 shares issuable upon the conversion of a Convertible Note issued December 29, 2017; (ii) 300,300 shares issuable upon the conversion of a Convertible Note issued February 9, 2018; (iii) 300,300 shares issuable upon the conversion of a Convertible Note issued on May 14, 2018; (iv) 400,000 shares issuable upon the conversion of a Convertible Note issued March 11, 2019; (vi) 666,667 future share rights issuable upon conversion of a Convertible Note issued July 23, 2019 at an exercise price of $0.15 per share; and (vii) 392,793 shares issuable upon the exercise of warrants issued on December 29, 2017, February 9, 2018, May 14, 2018 and March 11, 2019 exercisable for 10 years from the date of grant at exercise prices ranging from $0.15 to $0.333 per share.

 

Preferred Stock

The following table sets forth certain information regarding the beneficial ownership of the Company’s Series C Preferred Stock, Series C-2 Preferred Stock and Series C-3 Preferred Stock by each person who is known by the Company to own of record or beneficially more than 5% of the outstanding shares of such stock.

 

Name

 

Number of

Shares

Beneficially

Owned

   

 

Percent of

Shares Outstanding

(1)

 

B. Thomas Golisano

    39,687,500 (2)     91.4%  

 

(1)

The calculations in these columns are based upon 15,687,500 shares of Series C Preferred Stock, 24,500,000 shares of Series C-2 Preferred Stock and 3,238,000 shares of Series C-3 Preferred Stock outstanding on March 1, 2020, plus the number of shares of common stock subject to outstanding options, warrants and convertible stock held by the person with respect to whom the percentage is reported on such date.

 

 

(2)

Represents 15,212,500 shares of Series C Preferred Stock and 24,475,000 shares of Series C-2 Preferred Stock Series. The address for Mr. Golisano is c/o Fishers Asset Management, 1 Fishers Road, Pittsford, New York 14534. 

  

 

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

Director Independence

The Company’s common stock is traded on the OTC Pink Current Information marketplace under the symbol “CRGS”. The Company’s common stock is not “listed” for trading on any stock exchange. Despite the Company’s common stock not being so listed, the board has voluntarily adopted and implemented the Nasdaq Marketplace Rules regulating the composition and operation of the board and its committees as in effect from time to time. Under Nasdaq Marketplace Rules applicable to listed companies, a majority of the board must be independent. This requirement means that a majority of the Company’s board must be composed of persons who are not executive officers or employees of the Company or who have a relationship with the Company which, in the board’s opinion, would interfere with the exercise of independent judgment in carrying out his responsibilities as a director. In addition, a director cannot be considered independent if he is compensated by the Company for any reason other than for service rendered as a member of the board and/or its committees.

 

Based upon these independence standards and all of the relevant facts and circumstances, the board has affirmatively determined that Thomas F. Bonadio, Lance F. Drummond, Keith Gleasman, Walter A. L. Johnson, Aaron Newman, E. Philip Saunders and Gary A. Siconolfi (constituting 7 members of an 8-person board) are independent. In making this determination, the board noted that none of these directors is an executive officer or employee of the Company.

  

Policy / Procedure for Review / Approval of Related Party Transactions

Business transactions between the Company and its officers or directors, including companies in which a director or officer (or an immediate family member) has a substantial ownership interest or a company where such director or officer (or an immediate family member) serves as an executive officer (“related party transactions”) are not prohibited. In fact, certain related party transactions can be beneficial to the Company and to its shareholders.

 

It is important, however, to ensure that any related party transactions are beneficial to the Company. Accordingly, any related party transaction, regardless of amount, is submitted to the Governance and Compensation Committee or the full board of directors in advance for review and approval upon the advice of counsel, which may be outside legal counsel. All existing related party transactions are reviewed at least annually by the Governance and Compensation Committee or the full board of directors. 

 

No related party transaction may be approved by the Committee if such transaction, regardless of its benefit to the Company, would violate the Company’s written code of business conduct and/or its written financial integrity and compliance program.

 

Any director or officer with an interest in a related party transaction is expected to remove himself from considering the matter and abstain from voting upon it. In all cases, a director or officer with an interest in a related party transaction may not attempt to influence Company personnel in making any decision with respect to the transaction.

 

Executive Sessions of Independent Directors

The Company’s independent directors regularly meet in executive session without management or non-independent directors present. Currently, Gary A. Siconolfi presides at such executive sessions of the independent directors.

 

Director and Officer Loans

During the year ended December 31, 2019, the Company issued unsecured subordinated promissory notes to Richard A. Kaplan, a director of the Company on January 23, April 4, May 1, May 15, July 11, September 18, October 3, October 16, November 25, December 11 and December 16, 2019, in the aggregate principal amount of $775,000, and to William Destler, a former director of the Company, on March 26, 2019, in the aggregate principal amount of $25,000.  These notes bear interest at a rate of 6% per annum, and the maturity date of each of the notes was initially ninety days from the date of issuance.  However, the maturity date of all outstanding notes has been extended to June 30, 2020. The Destler note was repaid in full in July 2019 and is no longer outstanding.  As of December 31, 2019, the aggregate principal balance of the notes is $425,000. 

 

During 2019, the Company repaid $150,000 aggregate principal amount of the notes and converted $225,000 aggregate principal amount of the notes to 2019 Convertible Notes.  The Company recognized interest expense of $15,000 on the notes during the year ended December 31, 2019.

 

 

 

 

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

Audit Fees

The aggregate amount the Company paid and/or accrued for professional services rendered by Freed Maxick CPAs, P.C. as the Company’s independent registered public accounting firm for each of 2019 and 2018 for the audit of the Company's annual consolidated financial statements included in the Company’s Annual Report on Form 10-K, for the review of the Company's consolidated financial statements included in the Company's Quarterly Reports on Form 10-Q, and for services normally provided in connection with statutory and regulatory filings or engagements was:

 

Aggregate fees for professional services rendered for the Company for 2019 and 2018 were:

 

   

2019

   

2018

 

Audit Fees

  $ 78,400     $ 76,500  

Audit Related Fees

  $ -     $ -  

Tax Fees

  $ -     $ -  

All Other Fees

  $ -     $ -  

Total Fees

  $ 78,400     $ 76,500  

 

Audit-Related Fees

The Company did not engage Freed Maxick CPAs, P.C. for any audit-related services in the years ended December 31, 2019 or 2018.

 

Tax Fees

The Company did not engage Freed Maxick CPAs, P.C. for any tax services for the year ended December 31, 2019, and 2018.

 

All Other Fees

The Company did not engage Freed Maxick CPAs, P.C. for any other services for the years ended December 31, 2019, and 2018.

 

Total Fees

The Company has paid and/or accrued fees totaling $78,400 and $76,500 to Freed Maxick CPAs, P.C. for the years ended December 31, 2019, and 2018 respectively. 

 

Pre-Approval Policies and Procedures

Article II of our Audit Committee charter, as amended, specifically provides that the Audit Committee must pre-approve all auditing and legally permissible non-auditing services to be performed by the Company's registered public accounting firm. In accordance with such mandate, the Audit Committee has established a set of procedures governing the pre-approval process. Under the procedure, for each fiscal year, the Committee first shall determine the general nature and scope of the audit, audit-related, tax and other legally permissible non-audit services to be performed by the Company's registered accounting firm. Prior to the performance of any services, the Committee shall require such firm to submit to the Committee one or more engagement letter(s) delineating specific audit, audit-related, tax, and other legally permissible non-audit services to be rendered (together with a schedule of fees with respect to each of such services). Upon receipt of such engagement letter(s), the Committee shall review and approve such engagement letter(s) in advance of the performance of any such services, including the specific advance approval of fees in connection with each of such services. Upon approval and execution of each of such engagement letter(s) by the Committee, the registered public accounting firm shall perform such pre-approved services in accordance with the terms and conditions of each engagement letter and shall not engage in any other services unless each of said services, if any, shall have been specifically approved (including the specific approval of all fees associated therewith) by the Audit Committee in advance of the rendering any such service.   

 

 

PART IV

 

Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 

 

The following exhibits are filed as part of and incorporated by reference into this annual report:

 

 

EXHIBIT INDEX

 

3.1

Certificate of Incorporation, incorporated by reference to Form 10-SB/A, Registration Statement, registering Company’s $.01 par value common stock under section 12(g) of the Securities Exchange Act of 1934 

 

3.2

Certificate of Amendment to the Certificate of Incorporation dated August 30, 2000, incorporated by reference to Form SB-2 filed October 19, 2000 

 

3.3

Certificate of Correction dated March 22, 2002, incorporated by reference to Form 10-KSB filed for fiscal year ended December 31, 2002

 

3.4

By-laws as amended on January 24, 2002, incorporated by reference to Form 10-KSB filed for fiscal year ended December 31, 2002

 

3.5

Certificate of Amendment to the Certificate of Incorporation dated October 21, 2004 setting forth terms and conditions of Class B Preferred, incorporated by reference to Form 10-QSB filed for fiscal quarter ended December 31, 2004

 

3.6

Certificate of Amendment to the Certificate of Incorporation dated January 26, 2007 increasing authorized common shares from 40,000,000 to 400,000,000, incorporated by reference to Form 10-K filed for fiscal year ended December 31, 2006

 

3.7

Certificate of Amendment to the Certificate of Incorporation dated September 21, 2011 setting forth terms and conditions of Class C Preferred, incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on September 26, 2011

 

3.8

Certificate of Amendment to the Certificate of Incorporation of CurAegis, Inc., dated March 28, 2014 setting forth terms and conditions of Series C-2 Preferred, incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on March 28, 2014

 

3.9

Certificate of Amendment to the Certificate of Incorporation of CurAegis, Inc., dated February 29, 2016 setting forth terms and conditions of Series C-3 Preferred, incorporated by reference to Exhibit 3.9 of Form 10-K filed for the fiscal year ended December 31, 2015.

 

3.10

Certificate of Amendment of Certificate of Incorporation of CurAegis Technologies, Inc., dated June 16, 2016, changing the name to CurAegis Technologies, Inc., incorporated by reference to Exhibit 3.1 to Form 8-K filed with the Securities and Exchange Commission on August 11, 2016

 

10.1

Stock Option Agreement dated December 31, 2010 between the company and Richard A. Kaplan, incorporated by reference to current report (Form 8-K) filed October 6, 2010*

 

10.2

Employment Agreement dated October 4, 2010 between the company and Richard A. Kaplan, incorporated by reference to current report (Form 8-K) filed October 6, 2010*

 

10.3

Stock Option Agreement dated October 18, 2010 between the company and Robert W. Fishback, incorporated by reference to current report (Form 8-K) filed October 22, 2010*

 

10.4

2011 Stock Option Plan and template agreements to be used to grant options thereunder, incorporated by reference to Annual Report (Form 10-K) filed March 29, 2011*

 

10.5

Agreement dated December 13, 2010 between Heinrocket Inc. as Consultant and CurAegis, Inc., incorporated by reference to Annual Report (Form 10-K) filed March 29, 2011*

 

10.6

Securities Purchase Agreement by and among CurAegis, Inc., a New York corporation, B. Thomas Golisano, and each purchaser listed on the Schedule of Purchasers attached thereto, dated September 23, 2011, incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on September 26, 2011

 

 

 

10.7

Form of Warrant to Purchase Common Stock of CurAegis, Inc., incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on September 26, 2011

 

 

10.8

Form of Directors Subscription Agreement, incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on September 26, 2011

 

 

10.9

Investors’ Rights Agreement by and between CurAegis, Inc., a New York corporation, B. Thomas Golisano, Charles T. Graham, and David Still, dated September 23, 2011, incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on September 26, 2011

 

 

10.10

Letter Agreement between CurAegis, Inc. and SCIRE Corporation, incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on December 5, 2013*

 

 

10.11

Securities Purchase Agreement by and among CurAegis, Inc., B. Thomas Golisano, and each purchaser listed on the Schedule of Purchasers attached thereto, dated March 28, 2014, incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on March 28, 2014

 

 

10.12

Amended and Restated Investors’ Rights Agreement by and between CurAegis, Inc., B. Thomas Golisano, Charles T. Graham, and David Still, dated March 28, 2014, incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on March 28, 2014

 

 

10.13

Letter Agreement between CurAegis, Inc. and SCIRE Corporation, incorporated by reference to the Annual Report on Form 10-K filed March 3, 2015*

  

10.14

First Amendment to the CurAegis, Inc. 2011 Stock Option Plan, incorporated by reference to the Annual Report on Form 10-K filed March 3, 2015*

 

 

10.15

Compensation Agreement, dated March 3, 2016, between Kathleen A. Browne and CurAegis Technologies, Inc., incorporated by reference to Exhibit 10.1 to Form 10-Q filed with the Securities and Exchange Commission on May 12, 2016*

 

 

10.16

Letter Agreement, dated March 24, 2016, between CurAegis Technologies, Inc. and Richard A. Kaplan, incorporated by reference to Exhibit 4.1 to Form 8-K filed with the Securities and Exchange Commission on March 25, 2016*

 

 

10.17

Securities Purchase Agreement, dated August 25, 2016, between CurAegis Technologies, Inc. and the investors listed therein, incorporated by reference to Exhibit 4.1 to Form 8-K filed with the Securities and Exchange Commission on September 1, 2016

 

 

10.18

Form of Convertible Promissory Note, incorporated by reference to Exhibit 4.2 to Form 8-K filed with the Securities and Exchange Commission on September 1, 2016

 

 

10.19

Form of Common Stock Purchase Warrant, incorporated by reference to Exhibit 4.3 to Form 8-K filed with the Securities and Exchange Commission on September 1, 2016

 

 

10.20 

Form of Securities Purchase Agreement, dated May 31, 2017, incorporated by reference to Exhibit 4.1 to CurAegis Technologies, Inc. Current Report on Form 8-K filed with the Securities and Exchange Commission on July 14, 2017

 

 

10.21

Form of 2017 Convertible Promissory Note, incorporated by reference to Exhibit 4.2 to CurAegis Technologies, Inc. Current Report on Form 8-K filed with the Securities and Exchange Commission on July 14, 2017

 

 

10.22

Form of Common Stock Purchase Warrant, incorporated by reference to Exhibit 4.3 to CurAegis Technologies, Inc. Current Report on Form 8-K filed with the Securities and Exchange Commission on July 14, 2017

 

 

10.23

Form of Non-Plan Nonqualified Stock Option Agreement, incorporated by reference to Exhibit 4.10 to CurAegis Technologies, Inc. Registration Statement on Form S-8 filed with the Securities and Exchange Commission on August 29, 2017

 

 

 

10.24

Form of First Amendment to Non-Plan Nonqualified Stock Option Agreement, incorporated by reference to Exhibit 4.11 to CurAegis Technologies, Inc. Registration Statement on Form S-8 filed with the Securities and Exchange Commission on August 29, 2017

 

 

10.25

Form of Non-Plan Stock Option Agreement, incorporated by reference to Exhibit 4.12 to CurAegis Technologies, Inc. Registration Statement on Form S-8 filed with the Securities and Exchange Commission on August 29, 2017

   

10.26

Amendment to Securities Purchase Agreement, made as of August 4, 2017, incorporated by reference to Exhibit 10.1 to CurAegis Technologies, Inc. Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 13, 2017

 

 

10.27

Amendment to Employment Agreement, dated November 10, 2017, between CurAegis Technologies, Inc., and Richard A. Kaplan, incorporated by reference to Exhibit 10.2 to CurAegis Technologies, Inc. Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 13, 2017

 

 

10.28

Amendment No. 2 to Securities Purchase Agreement, made as of November 30, 2017, incorporated by reference to Exhibit 10.1 to CurAegis Technologies, Inc. Current Report on Form 8-K filed with the Securities and Exchange Commission on December 6, 2017

 

 

10.29

Amendment No. 3 to Securities Purchase Agreement, made as of February 21, 2018, incorporated by reference to Exhibit 10.1 to CurAegis Technologies, Inc. Current Report on Form 8-K filed with the Securities and Exchange Commission on February 26, 2018

 

 

10.30

Amendment No.4 to Securities Purchase Agreement, made as of March 27, 2018 among the Company and each purchaser executing a signature page thereto, incorporated by reference to Exhibit 10.1 to CurAegis Technologies, Inc. Current Report on Form 8-K filed with the Securities and Exchange Commission on March 30, 2018. 

 

 

10.31

Securities Purchase Agreement dated May 18, 2018, by and between CurAegis Technologies, Inc. and the investors listed therein, incorporated by reference to Exhibit 4.1 to CurAegis Technologies, Inc. Current Report on Form 8-K filed with the Securities and Exchange Commission on July 13,2018. 

 

 

10.32

Form of Convertible Promissory Note, incorporated by reference to Exhibit 4.2 to CurAegis Technologies, Inc. Current Report on Form 8-K filed with the Securities and Exchange Commission on July 13, 2018. 

 

 

10.33

Form of Common Stock Purchase Warrant, incorporated by reference to Exhibit 4.3 to CurAegis Technologies, Inc. Current Report on Form 8-K filed with the Securities and Exchange Commission on July 13, 2018. 

 

 

10.34

Securities Purchase Agreement dated July 24, 2018, by and between CurAegis Technologies, Inc. and the investors listed therein, incorporated by reference to Exhibit 10.1 to CurAegis Technologies, Inc. Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 7, 2018. 

 

 

10.35

Form of Convertible Promissory Note, incorporated by reference to Exhibit 10.2 to CurAegis Technologies, Inc. Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 7, 2018. 

 

 

10.36

Form of Common Stock Purchase Warrant, incorporated by reference to Exhibit 10.3 to  CurAegis Technologies, Inc. Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 7, 2018. 

 

 

10.37

Unsecured Subordinated Promissory Note Agreement dated January 23, 2019 by CurAegis Technologies, Inc. for the benefit of Richard A. Kaplan, incorporated by reference to Exhibit 10.1 to CurAegis Technologies, Inc. Current Report on Form 8-K filed with the Securities and Exchange Commission on January 29, 2019. 

 

 

10.38

Unsecured Subordinated Promissory Note Agreement, dated April 4, 2019, incorporated by reference to Exhibit 10.1 to CurAegis Technologies, Inc. Current Report on Form 8-K filed with the Securities and Exchange Commission on April 8, 2019.

   

10.39

Unsecured Subordinated Promissory Note Agreement, dated March 26, 2019, incorporated by reference to Exhibit 10.2 to CurAegis Technologies, Inc. Current Report on Form 8-K filed with the Securities and Exchange Commission on April 8, 2019.

   

10.40

Unsecured Subordinated Promissory Note Agreement, dated May 1, 2019, incorporated by reference to Exhibit 10.1 to CurAegis Technologies, Inc. Current Report on Form 8-K filed with the Securities and Exchange Commission on May 3, 2019.

   

10.41

Unsecured Subordinated Promissory Note Agreement, dated May 15, 2019, incorporated by reference to Exhibit 10.1 to CurAegis Technologies, Inc. Current Report on Form 8-K filed with the Securities and Exchange Commission on May 16, 2019.

   

10.42

Form of 2019 SPA, incorporated by reference to Exhibit 4.1 to CurAegis Technologies, Inc. Current Report on Form 8-K filed with the Securities and Exchange Commission on June 3, 2019.

   

10.43

Form of 6% Senior Convertible Promissory Note, incorporated by reference to Exhibit 4.2 to CurAegis Technologies, Inc. Current Report on Form 8-K filed with the Securities and Exchange Commission on June 3, 2019.

   

10.44

Unsecured Subordinated Promissory Note Agreement, dated July 11, 2019, incorporated by reference to Exhibit 10.1 to CurAegis Technologies, Inc. Current Report on Form 8-K filed with the Securities and Exchange Commission on July 17, 2019.

   

10.45

Form of Subscription Agreement, incorporated by reference to Exhibit 10.1 to CurAegis Technologies, Inc. Current Report on Form 8-K filed with the Securities and Exchange Commission on July 29, 2019.

   

10.46

Form of Demand Note, incorporated by reference to Exhibit 10.2 to CurAegis Technologies, Inc. Current Report on Form 8-K filed with the Securities and Exchange Commission on July 29, 2019.

   

10.47

General Security Agreement, incorporated by reference to Exhibit 10.3 to CurAegis Technologies, Inc. Current Report on Form 8-K filed with the Securities and Exchange Commission on July 29, 2019.

   

10.48

Unsecured Subordinated Promissory Note Agreement, dated September 18, 2019 incorporated by reference to Exhibit 10.1 to CurAegis Technologies, Inc. Current Report on Form 8-K filed with the Securities and Exchange Commission on September 24, 2019.

   

10.49

Unsecured Subordinated Promissory Note Agreement, dated October 3, 2019, incorporated by reference to Exhibit 10.1 to CurAegis Technologies, Inc. Current Report on Form 8-K filed with the Securities and Exchange Commission on October 7, 2019.

   

10.50

Unsecured Subordinated Promissory Note Agreement, dated October 16, 2019, incorporated by reference to Exhibit 10.1 to CurAegis Technologies, Inc. Current Report on Form 8-K filed with the Securities and Exchange Commission on October 17, 2019.

   

10.51

Unsecured Subordinated Promissory Note Agreement, dated November 25, 2019, incorporated by reference to Exhibit 10.1 to CurAegis Technologies, Inc. Current Report on Form 8-K filed with the Securities and Exchange Commission on December 2, 2019.

   

10.52

Unsecured Subordinated Promissory Note Agreement, dated December 11, 2019, incorporated by reference to Exhibit 10.1 to CurAegis Technologies, Inc. Current Report on Form 8-K filed with the Securities and Exchange Commission on December 13, 2019.

   

10.53

Unsecured Subordinated Promissory Note Agreement, dated December 16, 2019, incorporated by reference to Exhibit 10.1 to CurAegis Technologies, Inc. Current Report on Form 8-K filed with the Securities and Exchange Commission on December 20, 2019.

 

 

21

Subsidiaries of the registrant

 

Ice Surface Development, Inc. (New York)

 

Iso-Torque Corporation (New York)

 

 

23.1

Consent of Independent Registered Public Accounting Firm

 

 

24

Power of Attorney (included on the signature page to this report)

 

 

31.1

Rule 13(a)-14(a)/15(d)-14(a) Certification of Chief Executive Officer

 

31.2

Rule 13(a)-14(a)/15(d)-14(a) Certification of Principal Accounting Officer

 

 

32

Section 1350 Certification of Chief Executive Officer and Principal Accounting Officer

 

 

101.CAL

XBRL Taxonomy Extension Calculation Linkbase

 

 

101.DEF

XBRL Taxonomy Extension Definition Linkbase

 

 

101.INS  

XBRL Instance Document

 

 

101.LAB

XBRL Taxonomy Extension Label Linkbase

 

 

101.PRE

XBRL Taxonomy Extension Presentation Linkbase

 

 

101.SCH 

XBRL Taxonomy Extension Schema Linkbase

 

* Management contract or compensatory plan or arrangement.

 

 

SIGNATURES

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

 

 

CURAEGIS, INC.

Dated: March 27, 2020

By:  

/s/ James R. Donnelly 

 

 

James R. Donnelly,

 

 

Chief Executive Officer and President

 

Dated: March 27, 2020

By:  

/s/ Kathleen A. Browne  

 

 

Kathleen A. Browne,  

 

 

Chief Financial and Accounting Officer 

 

 

POWER OF ATTORNEY

 

KNOW ALL BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints James R. Donnelly and Kathleen A, Browne, or either of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and re-substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and any documents related to this report and filed pursuant to the Securities and Exchange Act of 1934, as amended and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes may lawfully do or cause to be done by virtue hereof.

 

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

 

Dated: March 27, 2020

By:

/s/ James R. Donnelly

 

James R. Donnelly,
Chief Executive Officer, President and Director

 

 

 

Dated: March 27, 2020

By:

/s/ Kathleen A. Browne

Kathleen A. Browne

Chief Financial and Accounting Officer

     

Dated: March 27, 2020

By:

/s/ Thomas F. Bonadio

Thomas F. Bonadio, Director

 

 

 

Dated: March 27, 2020

By:

/s/ Lance F. Drummond

Lance F. Drummond, Director

 

 

 

Dated: March 27, 2020

By:

/s/ Keith E. Gleasman

Keith E. Gleasman, Director

 

 

 

Dated: March 27, 2020

By:

/s/ Walter A. L. Johnson

 Walter A. L. Johnson Director

     

Dated: March 27, 2020

By:

/s/Richard A. Kaplan

Richard A. Kaplan Director

     

Dated: March 27, 2020

By:

/s/ Aaron C. Newman

Aaron C. Newman Director

     

Dated: March 27, 2020

 By:

/s/ E. Philip Saunders

E. Philip Saunders, Director

 

 

 

Dated: March 27, 2020

By:

/s/ Gary A. Siconolfi

Gary A. Siconolfi, Director

 

 

 

63

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