Table of Contents

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

 

 

 

 

 

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

 

For the quarterly period ended September 30, 2020

OR

 

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

For the transition period from                      to                     

Commission File No. 000-24455

 

CURAEGIS TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

 

New York
(State or other jurisdiction of incorporation or organization)

16-1509512
(I.R.S. Employer Identification No.)

 

350 Linden Oaks Rochester, New York 14625
(Address of principal executive offices and Zip Code)

 

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

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

 

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

 

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

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

None

N/A

N/A

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

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

 

Class

 

Number of Shares Outstanding at November 12, 2020

Common Stock, $0.01 par value

 

51,452,810

 

 

 

 

CURAEGIS TECHNOLOGIES, INC.

INDEX 

 

 

  

Page

PART I – FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements

3

  

  

  

 

Condensed Consolidated Balance Sheets as of September 30, 2020 (Unaudited) and December 31, 2019

3

  

  

 

 

Condensed Consolidated Statement of Operations – Three- and Nine-Month Periods Ended September 30, 2020 and September 30, 2019 (Unaudited)

4

 

 

 

  

Condensed Consolidated Statement of Changes in Stockholders’ Deficiency – Three- and Nine-Month Periods Ended September 30, 2020 and September 30, 2019 (Unaudited)

5

 

 

 

 

Condensed Consolidated Statement of Cash Flows – Nine- Month Periods Ended September 30, 2020 and September 30, 2019 (Unaudited)

7

  

  

 

 

Notes to Condensed Consolidated Financial Statements

8

  

  

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

  

  

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

25

  

  

 

Item 4.

Controls and Procedures

25

  

  

 

PART II - OTHER INFORMATION

  

  

 

Item 1.

Legal Proceedings

25

  

  

 

Item 1A.

Risk Factors

25

  

  

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

25

  

  

 

Item 3.

Defaults Upon Senior Securities

25

  

  

 

Item 4.

Mine Safety Disclosures

25

  

  

 

Item 5.

Other Information

25

  

  

 

Item 6.

Exhibits

26

  

  

 

SIGNATURE PAGE

27

  

  

 

EXHIBITS

 

 

  

 

 

Exhibit 31.1

  

 

Exhibit 31.2

  

 

Exhibit 32

  

 

 

 

CURAEGIS TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   

September 30,
2020

(Unaudited)

   

December 31,

2019

 

ASSETS

               

Current Assets:

               

Cash

  $ 87,000     $ 18,000  

Prepaid expenses

    12,000       2,000  

Total current assets

    99,000       20,000  
                 

Right to use asset (net)

    156,000       193,000  

Property and equipment (net)

    29,000       38,000  

Total non-current assets

    185,000       231,000  
                 

Total Assets

  $ 284,000     $ 251,000  
                 

LIABILITIES AND STOCKHOLDERS' DEFICIENCY

               

Current Liabilities:

               

Liability for inventory

  $ 1,740,000     $ 1,764,000  

Demand notes

    650,000       650,000  

Promissory notes

    425,000       425,000  

Accounts payable

    366,000       420,000  

Accrued interest

    877,000       509,000  

Current right-to-use obligation

    67,000       64,000  

Other current liabilities

    20,000       36,000  

Accrued wages and benefits

    58,000       50,000  

Total current liabilities

    4,203,000       3,918,000  
                 

Non-current right-to-use obligation

    83,000       126,000  

PPP loan

    228,000       -  

Senior convertible notes (net)

    9,992,000       8,410,000  

Total Liabilities

    14,506,000       12,454,000  
                 

Commitments and other matters

               
                 

Stockholders' Deficiency:

               

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

               

Series C, voting, convertible, no dividend, shares issued and outstanding at September 30, 2020 and December 31, 2019: 15,687,500 and 15,687,500, respectively

    157,000       157,000  

Series C-2, voting, convertible, no dividend, shares issued and outstanding at September 30, 2020 and December 31, 2019: 24,500,000 and 24,500,000, respectively

    245,000       245,000  

Series C-3, voting, convertible, no dividend, shares issued and outstanding at September 30, 2020 and December 31, 2019: 3,238,000 and 3,238,000, respectively

    32,000       32,000  

Class A, non-voting, convertible, cumulative dividend $.40 per share per annum, shares issued and outstanding at September 30, 2020 and December 31, 2019: 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 September 30, 2020 and December 31, 2019: 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 September 30, 2020 and December 31, 2019: 51,452,810 and 50,979,964 respectively

    515,000       510,000  

Additional paid-in capital

    77,695,000       78,272,000  

Accumulated deficit

    (92,872,000

)

    (91,425,000

)

Total Stockholders' Deficiency

    (14,222,000

)

    (12,203,000

)

Total Liabilities and Stockholders' Deficiency

  $ 284,000     $ 251,000  

 

See notes to condensed consolidated financial statements. 

 

 

 

 CURAEGIS TECHNOLOGIES, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

 

   

For the Three Months

Ended September 30,

   

For the Nine Months

Ended September 30,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

Revenue and Cost of revenue:

                               

CURA revenue

  $ 2,000     $ 4,000     $ 7,000     $ 13,000  

Cost of revenue

    2,000       2,000       15,000       11,000  

Gross Profit (Loss)

    -       2,000       (8,000

)

    2,000  
                                 

Costs and expenses:

                               

Recovery on inventory reserve

    (74,000

)

    (13,000 )     (97,000

)

    (13,000

)

Engineering and development

    98,000       178,000       254,000       727,000  

General and administrative (recovery)

    (456,000

)

    339,000       200,000       1,326,000  

Total costs and expenses (income)

    (432,000

)

    504,000       357,000       2,040,000  

Income (Loss) from operations

    432,000       (502,000

)

    (365,000

)

    (2,038,000

)

                                 

Non-operating expense:

                               

Interest expense

    (352,000

)

    (320,000

)

    (1,030,000

)

    (898,000

)

Debt issuance cost

    -       (304,000

)

    -       (304,000

)

Vendor penalty

    -       (300,000

)

    -       (300,000

)

Other (expense) income

    47,000       9,000       (52,000

)

    10,000  

Non-operating expense

    (305,000

)

    (915,000

)

    (1,082,000

)

    (1,492,000

)

                                 

Income (Loss) before income taxes

    127,000       (1,417,000

)

    (1,447,000

)

    (3,530,000

)

Income taxes

    -       -       -       -  

Net Income (Loss)

    127,000       (1,417,000

)

    (1,447,000

)

    (3,530,000

)

                                 

Preferred stock dividends

    54,000       55,000       163,000       163,000  

Net loss attributable to common stockholders

  $ 73,000     $ (1,472,000

)

  $ (1,610,000

)

  $ (3,693,000

)

                                 

Net loss per common share attributable to common stockholders

                               

Basic and Diluted

  $ 0.00     $ (0.03

)

  $ (0.03

)

  $ (0.07

)

Weighted average number of shares of common stock

                               

Basic and Diluted

    51,447,000       50,776,000       51,325,000       50,565,000  

     

See notes to condensed consolidated financial statements.

 

 

 

CURAEGIS TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIENCY

(Unaudited) 

 

 

                              For the Three and Nine Months Ended September 30. 2020                                  
                                                       
   

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 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 )
                                                                                                                         

Stock-based compensation

                                                                                                    39,000               39,000  

Common shares issued for interest

                                                                                    94,772       1,000       16,000               17,000  

Common shares issued with convertible notes

                                                                                    112,500       1,000       9,000               10,000  

Net Loss

                                                                                                            (753,000 )     (753,000 )
                                                                                                                         

Balance at March 31, 2020

    15,687,500       157,000       24,500,000       245,000       3,238,000       32,000       468,221       5,000       67,500       1,000       51,187,236       512,000       78,336,000       (92,178,000 )     (12,890,000 )
                                                                                                                         

Stock-based compensation

                                                                                                    (28,000 )             (28,000 )

Common shares issued for interest

                                                                                    123,074       1,000       20,000               21,000  

Common shares issued with convertible notes

                                                                                    105,000       1,000       9,000               10,000  

Net Loss

                                                                                                            (821,000 )     (821,000 )
                                                                                                                         

Balance at June 30, 2020

    15,687,500       157,000       24,500,000       245,000       3,238,000       32,000       468,221       5,000       67,500       1,000       51,415,310       514,000       78,337,000       (92,999,000 )     (13,708,000 )
                                                                                                                         

Stock-based compensation

                                                                                                    (645,000 )             (645,000 )

Common shares issued for interest

                                                                                                                    -  

Common shares issued with convertible notes

                                                                                    37,500       1,000       3,000               4,000  

Net Income

                                                                                                            127,000       127,000  
                                                                                                                         

Balance at September 30, 2020

    15,687,500     $ 157,000       24,500,000     $ 245,000       3,238,000     $ 32,000       468,221     $ 5,000       67,500     $ 1,000       51,452,810     $ 515,000     $ 77,695,000     $ (92,872,000 )   $ (14,222,000 )

 

 

                             

For the Three and Nine Months Ended September 30, 2019

                                         
                                                                                                                         

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 )
                                                                                                                         

Stock-based compensation

                                                                                                    59,000               59,000  

Common shares issued for interest

                                                                                    35,996               8,000               8,000  

Warrants issued with convertible note

                                                                                                    63,000               63,000  

Net Loss

                                                                                                            (1,148,000 )     (1,148,000 )
                                                                                                                         

Balance at March 31, 2019

    15,687,500       157,000       24,500,000       245,000       3,268,000       33,000       468,221       5,000       67,500       1,000       50,400,545       504,000       77,855,000       (88,297,000 )     (9,497,000 )
                                                                                                                         

Stock-based compensation

                                                                                                    45,000               45,000  

Common shares issued for interest

                                                                                    39,156               10,000               10,000  

Common shares issued with convertible notes

                                                                                    90,000       1,000       11,000               12,000  

Warrants issued with convertible note

                                                                                                    2,000               2,000  

Net Loss

                                                                                                            (965,000 )     (965,000 )
                                                                                                                         

Balance at June 30, 2019

    15,687,500       157,000       24,500,000       245,000       3,268,000       33,000       468,221       5,000       67,500       1,000       50,529,701       505,000       77,923,000       (89,262,000 )     (10,393,000 )
                                                                                                                         

Employeee stock-based compensation

                                                                                                    7,000               7,000  

Common shares issued for interest

                                                                                    33,973       1,000       8,000               9,000  

Common shares issued with convertible notes

                                                                                    75,000       1,000       6,000               7,000  

Common shares issued with demand notes

                                                                                    165,000       1,000       16,000               17,000  

Share rights issued with demand notes

                                                                                                    250,000               250,000  

Net Loss

                                                                                                            (1,417,000 )     (1,417,000 )
                                                                                                                         

Balance at September 30, 2019

    15,687,500     $ 157,000       24,500,000     $ 245,000       3,268,000     $ 33,000       468,221     $ 5,000       67,500     $ 1,000       50,803,674     $ 508,000     $ 78,210,000     $ (90,679,000 )   $ (11,520,000 )

 

See notes to condensed consolidated financial statements.

 

 

 

 CURAEGIS TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   

For the Nine Months Ended

September 30,

 
   

2020

   

2019

 

Cash flows from operating activities:

               

Net loss

  $ (1,447,000

)

  $ (3,530,000

)

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

               

Amortization of debt discount reported as interest

    607,000       546,000  

Depreciation and amortization

    46,000       109,000  

Fair market value of share rights issued with demand notes

    -       250,000  

Stock-based compensation

    (634,000

)

    111,000  

Interest paid in shares

    38,000       27,000  

Changes in working capital items:

               

Prepaid expenses

    (10,000

)

    22,000  

Liability for inventory

    (24,000

)

    315,000  

Accounts payable

    (57,000

)

    73,000  

Accrued interest

    330,000       210,000  

Other current liabilities

    (16,000

)

    35,000  

Accrued wages and benefits

    8,000       14,000  

Net cash used in operating activities

    (1,159,000

)

    (1,818,000

)

                 

Cash flows from financing activities:

               

Proceeds from issuance of senior convertible notes (net)

    1,000,000       825,000  

Proceeds from demand notes

    -       550,000  

Proceeds from issuance of unsecured subordinated notes

    -       575,000  

Proceeds from PPP loan

    228,000       -  

Cash used in repayment of unsecured promissory notes

    -       (150,000

)

Net cash provided by financing activities

    1,228,000       1,800,000  
                 

Net increase (decrease) in cash

    69,000       (18,000

)

Cash at beginning of period

    18,000       53,000  

Cash at end of period

  $ 87,000     $ 35,000  
                 

Supplemental Disclosures:

               
                 

Cash used for payment of interest expense

  $ 19,000     $ 86,000  

Debt discount related to issuance of convertible notes

  $ 24,000     $ 65,000  

Common shares issued in payment of interest expense

  $ 38,000     $ -  

Right to use asset

  $ 156,000     $ 212,000  

 

See notes to condensed consolidated financial statements.

 

 

CURAEGIS TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION 

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

 

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

  

The Company has created the CURA app to offer products that reduce fatigue risk in the workplace and help individuals manage their sleep and improve alertness. The CURA System consists of a real-time alertness measurement and the Z-Coach wellness program.

 

The Aegis hydraulic pump technology brings to the hydraulic industry a unique technology that is designed to be: smaller, lighter, less expensive, and more efficient than conventional pumps and motors. During 2019, the Company initiated discussions with investment advisors and certain hydraulics companies to evaluate the possible monetization of the Aegis technologies.  On April 8, 2020, the Company reported that it had initiated a temporary suspension of this evaluation process. This decision was linked to the COVID-19 pandemic which adversely impacted and is expected to continue to adversely impact the Company’s ability to generate industry interest in the Aegis technologies. Recent updates with interested parties have indicated that companies in the hydraulics industry are currently focused on internal processes, technology, and employees.

 

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

 

Current Cash Outlook and Management Plans

As of September 30, 2020, we had cash on hand of $87,000, negative working capital of $4,104,000, an accumulated deficit of $92,872,000 and a stockholders' deficiency of $14,222,000. During the nine months ended September 30, 2020 we raised $1,000,000 in proceeds through the issuance of convertible notes and $235,000 from the PPP loan and SBA EIDL grant. The proceeds from these sources 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 run between $1.7 and $2 million, based upon the cash used in operations in the nine months ended September 30, 2020. As of September 30, 2020, 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 will continue 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 on acceptable terms, if at all. Furthermore, 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 plans. 

 

The Company’s ability to fund its current and future commitments from its available cash depends on its ability to launch and generate sales from the CURA app. If the Company cannot generate revenue from the CURA app, it 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  

Basis of Presentation: The Company’s unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U. S. GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 8-03 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Accordingly, the condensed consolidated financial statements do not include all information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of the Company’s management, all adjustments considered necessary for a fair presentation (consisting of normal recurring adjustments) have been included. The results for interim periods are not necessarily indicative of what the results will be for the fiscal year. The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2019 contained in the Company’s 2019 Annual Report on Form 10-K filed with the SEC.

 

Consolidation: The condensed consolidated financial statements include the accounts of the Company, our wholly owned subsidiary Iso-Torque Corporation, and our majority-owned subsidiary, Ice Surface Development, Inc. (56% owned). As of September 30, 2020, each of the subsidiaries are non-operational.

 

Use of Estimates: The preparation of financial statements in conformity with 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 that periodically may exceed federally insured amounts. We have a corporate credit card program through JPMorgan Chase Bank, N.A. In connection with this, the Company granted a security interest to the bank to act as collateral for the activity within the corporate card program, up to $5,000. 

 

Inventory: Inventory is stated at the lower of cost or net realizable value with cost determined using the average cost method. Inventory on hand at September 30, 2020 and December 31, 2019 has been fully reserved. 

  

Depreciation and amortization: Depreciation and amortization are computed using the straight-line method.   Depreciation and amortization expense for the three and nine months ended September 30, 2020 and 2019 are as follows:

 

   

For the Three Months Ended September 30,

   

For the Nine Months Ended September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Right-to use building

  $ 17,000     $ 29,000     $ 37,000     $ 81,000  

Software amortization

    -       2,000       -       8,000  

Property and equipment

    3,000       6,000       9,000       20,000  
    $ 20,000     $ 37,000     $ 46,000     $ 109,000  

 

Right to use building asset:  ASU No. 2016-02, “Leases,” 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 when the Company can 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 on 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. 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 non-operating 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.

 

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 September 30, 2020 and December 31, 2019. The carrying amount of cash, prepaid expenses, accounts payable, accrued expenses, demand and promissory notes approximates their fair value due to their short maturity. The senior convertible and demand notes can be converted into common stock with an underlying value of $2,977,000 as of September 30, 2020 based on the trading price on that date. 

 

Revenue Recognition and Deferred Revenue: The Company accounts for revenue in accordance with FASB ASC 606, "Revenue from Contracts with Customers" and all related amendments. 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's revenue is derived primarily from domestic customers. For the three- and nine-month periods ended September 30, 2020 revenue from products transferred over time amounted to $2,000 and $ 7,000 respectively. One customer accounted for 100% of total Z-Coach subscription sales made during the three- and nine-month periods ended September 30, 2020. 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 performance of all obligations as described in customer agreements. The Z-Coach program provides fatigue training over an annual subscription period of twelve months and 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 performance obligations are satisfied.

 

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

 

General and Administrative: Patent expenses are charged to operations as incurred. Patent costs for the three months ended September 30, 2020 and 2019 amounted to $0 and $14,000 respectively and are included in general and administrative expenses. Patent costs for the nine months ended September 30, 2020 and 2019 amounted to $17,000 and $35,000 respectively

 

Stock-based Compensation: FASB Accounting Standards Codification (“ASC”) 718-10 requires all share-based payments be recognized as expense over the service period (generally the vesting period) based on the fair value on the grant date. The realization of tax benefits in excess of amounts recognized for financial reporting purposes are recognized as a financing activity in accordance with ASC 718-10. No tax benefits were attributed to the stock-based compensation expense because a valuation allowance was maintained for substantially all net deferred tax assets.   

 

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 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 September 30, 2020, and December 31, 2019, 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 September 30, 2020 and 2019, we excluded 107,992,768 and 104,288,815 potential common shares, respectively, relating to convertible preferred stock, convertible notes, future share rights issued with the demand notes, options and warrants outstanding from the diluted net loss per common share calculation because their inclusion would be anti-dilutive. We excluded 625,000 warrants from the diluted net loss per common share calculation at September 30, 2020 and 2019 as the conditions for their vesting are not time-based.  

   

 

 

NOTE 3 – INVENTORY AND VENDOR LIABILITY 

 

 

September 30,

2020

 

 

December 31,

2019

 

Raw materials

 

$

1,568,000

 

 

$

1,665,000

 

Finished goods

 

 

69,000

 

 

 

69,000

 

 

 

 

1,637,000

 

 

 

1,734,000

 

Less: Reserve

 

 

(1,637,000

)

 

 

(1,734,000

)

Inventory (net)

 

$

-

 

 

$

-

 

 

 

 

 

 

 

 

 

 

Liability for inventory

 

$

1,740,000

 

 

$

1,764,000

 

 

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. The Company has recorded a reserve for all inventory and components.

 

During the nine months ended September 30, 2020, the Company recovered $97,000 upon the sale of certain raw material and component parts. Management will continue to evaluate this reserve in future reporting periods.

  

 

 

NOTE 4 - DEMAND NOTE  

On July 23, 2019, the Company entered into a credit facility with a commercial bank 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 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 as 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 as debt issuance costs in the results of operations. The price per share for these future share purchase 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.

 

As of September 30, 2020, 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 were reported as 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 were reported as 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 3.25% as of September 30, 2020. The Company recognized $5,000 in interest expense on the demand notes during each of the three months ended September 30, 2020 and September 30, 2019. The Company recognized $19,000 and 12,000 in interest expense on the demand notes during the nine months ended September 30, 2020 and September 30, 2019, respectively.

 

The common shares issued with these demand notes 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 – PAYCHECK PROTECTION PLAN LOAN 

On April 20, 2020 the Company received a $228,000 loan under the Small Business Administration Paycheck Protection Program (the “PPP”). The note was issued under the Coronavirus Aid, Relief, and Economic Security (CARES) Act which, according to guidance from the SBA and U.S. Department of Treasury, provides for certain loan forgiveness based on a calculation of the Company’s payroll expenses and qualified rent and utilities payments made within eight weeks after the disbursement of the loan. The loan has an interest rate of 1% per annum and payments of interest and principal begin 6 months after the date of disbursement, with the balance payable over a remaining 18 month period.

 

 

NOTE 6 - SENIOR CONVERTIBLE NOTES  

At September 30, 2020, the Company had $11,310,000 in convertible notes outstanding which have been presented net of unamortized debt discounts of $1,318,000, resulting in a carrying value of $9,992,000. As of December 31, 2019, the Company had $10,310,000 in convertible notes outstanding, presented net of unamortized debt discounts of $1,901,000 resulting in a carrying value of $8,409,000.

 

 

Scheduled maturities on the Company’s convertible notes is as follows: $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, $1,150,000 in the twelve months ending December 31, 2024 and $1,000,000 thereafter.

  

Included in the face value of convertible notes outstanding at September 30, 2020 and December 31, 2019, is $2,402,000 and $2,477,000 respectively in convertible notes payable to various directors of the Company. Also included in the face value of the convertible notes are $2,070,000 and $1,170,000 as of September 30, 2020 and December 31, 2019, respectively, 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 December 31, 2019

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

Notes issued

    1,000,000       1,000,000       -       -       -       -  

Face value September 30, 2020

  $ 11,310,000     $ 1,650,000     $ 1,675,000     $ 625,000     $ 4,370,000     $ 2,990,000  
                                                 

Debt discount December 31, 2019

  $ (1,901,000

)

  $ (3,000

)

  $ (354,000

)

  $ (185,000

)

  $ (362,000

)

  $ (997,000

)

Debt discount issued

    (24,000

)

    (24,000

)

    -       -       -       -  

Amortization reported as interest

    607,000       21,000       62,000       36,000       83,000       405,000  

Debt discount September 30, 2020

  $ (1,318,000

)

  $ (6,000

)

  $ (292,000

)

  $ (149,000

)

  $ (279,000

)

  $ (592,000

)

                                                 

Senior Convertible Notes (net)

  $ 9,992,000     $ 1,644,000     $ 1,383,000     $ 476,000     $ 4,091,000     $ 2,398,000  

 

2019 Convertible Notes

In April 2019, 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 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 three- and nine- month periods ended September 30, 2020, the Company issued $275,000 and $1,000,000, respectively, in new notes and allocated $5,000 and $24,000, respectively, of the proceeds to debt discount based on the estimated fair value of the common shares issued on the date of investment. During the three and nine month periods ended September 30, 2020, the Company recorded $32,000 and $78,000 in interest expense which includes amortization of debt discount. During the three- and nine- month periods ended September 30, 2019, the Company recorded $15,000 and $19,000, in interest expenses respectively which includes amortization of debt discount.

  

JULY 2018 Convertible Notes 

In July 2018, 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 three- and nine-month periods ended September 30, 2020 the Company recorded $21,000 and $62,000 respectively in interest expense which reflects the amortization of debt discount.  During the three- and nine-month periods ended September 30, 2019 the Company recorded $20,000 and $52,000 respectively in interest expense which reflects the amortization of debt discount.  

 

2018 Convertible Notes 

In May 2018, the board of directors authorized the issuance of up to $1 million in non-interest bearing Senior Convertible Promissory Notes and Warrants (the “2018 Convertible Notes”) in connection with the May 8, 2018 Securities Purchase Agreement (the “2018 SPA”). The 2018 Convertible Notes have five-year maturity. 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 three-and nine-month periods ended September 30, 2020 the Company recorded $12,000 and $36,000 respectively in interest expense which reflects the amortization of debt discount. During the three-and nine-month periods ended September 30, 2019 the Company recorded $11,000 and $34,000 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 2019 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 three-and nine- month periods ended September 30, 2020 the Company recorded $94,000 and $279,000, respectively, in interest expense including amortization of debt discount. During the three-and nine- month periods ended September 30, 2019 the Company recorded $92,000 and $264,000, respectively, in interest expense including amortization of debt discount. 

 

2016 Convertible Notes

During 2016, the board of directors authorized, and the Company issued, $3 million in 6% Senior Convertible Promissory Notes and Warrants (the “2016 Convertible Notes”) in connection with the August 25, 2016 Securities Purchase Agreement (the “2016 SPA”). The 2016 Convertible Notes have five-year maturity dates ranging from August 2021 through December 2021 and a fixed annual interest rate of 6%.

 

The 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 three-and nine- month periods ended September 30, 2020 the Company recorded $182,000 and $539,000, respectively, in interest expense including amortization of debt discount. During the three-and nine- month periods ended September 30, 2019 the Company recorded $174,000 and $516,000, respectively, in interest expense including amortization of debt discount. 

  

 

 

NOTE 7 - UNSECURED SUBORDINATED PROMISSORY NOTES 

The Company had $425,000 in unsecured subordinated promissory notes payable to a board member as of September 30, 2020 and December 31, 2019. These notes bear interest at a rate of 6% per annum and have a maturity date of October 15, 2020. During the three- and nine- months ended September 30, 2020, the Company recognized interest expense of $6,000 and $19,000, respectively, on these notes. During the three- and nine- months ended September 30, 2019, the Company recognized interest expense of $4,000 and $10,000, respectively, on these notes. Interest accrued and outstanding on the promissory notes was $34,000 and $15,000 as of September 30, 2020 and December 31, 2019, respectively.

   

 

 

NOTE 8 - 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. 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. 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 the three-and nine- month periods ended September 30, 2019 for the terminated lease obligation was $19,000 and $80,000, respectively.

 

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 three- and nine-month periods ended September 30, 2020 were $15,000 and $46,000, respectively. Future maturing lease obligations as follows: $17,000 for the remainder of 2020; $67,000 in 2021 and $67,000 in 2022. Total future lease payments are $162,000 including imputed interest of $11,000.

   

 

 

NOTE 9 - PROPERTY AND EQUIPMENT 

At September 30, 2020 and December 31, 2019 property and equipment consist of the following:

 

   

September 30,

2020

   

December 31,

2019

 

Office equipment

  $ 199,000     $ 199,000  

Shop equipment

    132,000       132,000  

Gross Property and equipment

    331,000       331,000  

Less accumulated depreciation

    (302,000

)

    (293,000

)

Net property and equipment

  $ 29,000     $ 38,000  

 

 

 

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 three months ending September 30, 2020 for the Company’s business segments follows: 

 

   

CURA

   

Aegis

   

Corporate

   

Total

 
                                 

Revenue

  $ 2,000     $ -     $ -     $ 2,000  

Gross Profit (Loss)

    -       -       -       -  

Total costs and expenses

    42,000       5,000       (479,000 )     (432,000

)

Income (Loss) from operations

    (42,000

)

    (5,000

)

    479,000       432,000  

Non-operating expense (Income)

    -       (3,000 )     (302,000

)

    (305,000

)

Net income (loss)

  $ (42,000

)

  $ (8,000 )   $ 177,000     $ 127,000  
                                 

Stock based compensation

  $ 17,000     $ -     $ (662,000

)

  $ (645,000

)

Depreciation and amortization

  $ -     $ 3,000     $ -     $ 3,000  

Assets at September 30, 2020

  $ -     $ 29,000     $ 255,000     $ 284,000  

 

 

 Segment information for the nine months ending September 30, 2020 for the Company’s business segments follows: 

 

   

CURA

   

Aegis

   

Corporate

   

Total

 
                                 

Revenue

  $ 7,000     $ -     $ -     $ 7,000  

Gross Loss

    (8,000 )     -       -       (8,000

)

Total costs and expenses

    225,000       57,000       75,000       357,000  

(Loss) from operations

    (233,000

)

    (57,000

)

    (75,000

)

    (365,000

)

Non-operating expense

    -       (3,000

)

    (1,079,000

)

    (1,082,000

)

Net loss

  $ (233,000

)

  $ (60,000

)

  $ (1,154,000

)

  $ (1,447,000

)

                                 

Stock based compensation

  $ 57,000     $ (33,000

)

  $ (658,000

)

  $ (634,000

)

Depreciation and amortization

  $ -     $ 9,000     $ 37,000     $ 46,000  

Assets at September 30, 2020

  $