Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. This report contains certain forward-looking statements that are based on the beliefs of management as well as assumptions made by and information currently available to management. The statements contained in this report relating to matters that are not historical facts are forward-looking statements that involve risks and uncertainties, including, but not limited to, future demand for our products and services, the successful commercialization of our products, general domestic and global economic conditions, government and environmental regulations, competition and customer strategies, changes in our business strategy or development plans, capital deployment, business disruptions, including those caused by fires, raw material supplies, environmental regulations, and other risks and uncertainties, certain of which are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ materially from those forward-looking statements set forth herein. When used in this report, the words “anticipate”, “believe”, “estimate” or “expect” or words of similar import are intended to identify forward-looking statements. For further discussion of certain of the matters described above and other risks and uncertainties, see below and in “Risk Factors” in Part 1 Item 1A of our 2017 annual report on Form 10K.
Undue reliance should not be placed on our forward-looking statements. Except as required by law, we disclaim any obligation to update any factors or to publicly announce the results of any revisions to any of the forward-looking statements contained in this quarterly report on Form 10-Q to reflect new information, future events or other developments.
The following discussion and analysis should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and Notes thereto appearing elsewhere in this Form 10-Q.
Overall Business Strategy
CurAegis Technologies, Inc. (“CurAegis”, “the Company”) was incorporated as a New York business corporation in September 1996 under the name Torvec, Inc. The Company’s name was changed to CurAegis Technologies, Inc. in 2016 in connection with the establishment of its two business divisions. The CURA (Circadian User Risk Assessment) division is engaged in the fatigue management business, and the Aegis division is engaged in the power and hydraulic business.
The Company develops and markets advanced technologies in the areas of safety, wellness and power. The Company is focused on the commercialization of a wellness and safety system (the CURA System) and a uniquely designed hydraulic pump that will be smaller, lighter, less expensive, and more efficient than current technology. The Company has not had any significant revenue-producing operations.
The Company has created the CURA System to market products that reduce fatigue risk in the workplace and help individuals manage their sleep and improve alertness. The CURA System consists of the following capabilities:
|
●
|
real-time alertness monitoring utilizing the CURA app,
|
|
●
|
the Group Wellness Index and
|
|
●
|
the Z-Coach wellness program.
|
The Aegis hydraulic pump technology has been designed to bring to the marketplace a unique concept in hydraulic pumps and motors that will be:
|
●
|
smaller, lighter and significantly less expensive than conventional pumps and motors,
|
|
●
|
unique in its ability to scale larger, allowing more powerful pumps and motors.
|
It is important to note, regarding both the CURA and Aegis products, that the cycle time from the initiation of the sales process to revenue realization can be highly variable especially for a start-up entity. In addition to the activities to be undertaken by us to implement our plan of operation detailed below, we may expand and/or refocus our marketing activities depending upon future circumstances and developments.
Information regarding the Company and all of our inventions, including regular updates on technological and business developments, can be found on our website www.curaegis.com. The website and its contents are not incorporated by reference into this report.
CURA Division: the myCadian ™ watch, the CURA System, and Z-Coach e-learning
The Company’s CURA division is developing a proprietary technology and suite of products designed to (i) measure the decrease in a person’s alertness and (ii) to train individuals on how to improve alertness levels. The CURA System will enable the user and third parties to anticipate and avert undesired or disastrous situations caused by the degradation of alertness. With the information provided from the CURA software analytics, employees can work with Z-Coach, our proprietary sleep training and education solution, to correct sleep issues and improve overall wellness.
CurAegis has engaged sleep study experts and neurologists to assist with the analysis and validation of our new technologies. The Company believes a solutions approach can be created to indicate a “degradation of alertness” and thus give immediate and important information to the user and other parties. Action taken upon a warning of a change in alertness will lead to a better and safer environment. The CURA system is designed to be a real-time alertness system that addresses sleep and fatigue management solutions. This is especially important when an individual’s alertness is essential in properly performing tasks, fulfilling responsibilities and averting disasters. The Company has filed for patent protection for these inventions.
The CURA platform is designed to predict and detect a degradation of alertness in a user and reveal sleep and fatigue problems. The CURA platform was expanded during 2018 to support other wearable technology and has been designed to include an API (Application Programming Interface) to facilitate safety reporting for corporate customers. The CURA Platform will include:
|
●
|
a proprietary tool that combines signal processing and pattern recognition to guide users and third parties about the alertness of the wearer,
|
|
●
|
a risk assessment that identifies the degradation of alertness potentially affecting the wearer’s ability to perform tasks,
|
|
●
|
a comprehensive assessment for wellness, alertness and sleep,
|
|
●
|
real-time reporting that distills complex data into actionable information on mobile and desktop platforms,
|
|
●
|
predictive reporting for a user to take action when alertness begins to wane - before fatigue becomes dangerous,
|
|
●
|
flexible settings to provide employers a customized tool within existing safety definitions and to create protocols for a unique environment, and
|
|
●
|
pricing that makes it affordable across a broad-based workforce.
|
The Company developed marketing and sales programs in support of the CURA app soft-launch that occurred in May 2018 and is now pursuing prospective customer orders. At this time, we cannot predict the duration of this initial cycle of the sales process and project the timing to close future sales.
The Company has invested in controlled clinical studies at the Sleep and Chronobiology Laboratory at the University of Colorado-Boulder and at the University of Rochester Medical Center. These studies have been used to validate our actigraphy data collection as well as calibrate our proprietary technologies and algorithms.
The Z-Coach tool is a critical component of the CURA platform and was created by highly respected fatigue management scientists. We acquired the Z-Coach tool in 2015. Z-Coach learning topics include: Risks and Costs of Fatigue, Fundamentals of Sleep, Fatigue Mitigation and Countermeasures. Z-Coach participants gain an awareness of the dangers inherent in the lack of sleep and learn to utilize lifestyle tools to make changes to improve their health, mood, productivity and safety. The Z-Coach modules have been designed for a range of industry professionals, including aviation, trucking and busing industry and for corporate workers. These Z-Coach modules are a key component to the CURA™ System.
Aegis Division: Hydraulic Pump
On May 4, 2018, the Company signed a Memorandum of Understanding (the "MOU") with a major hydraulics manufacturer to assess the Aegis pump/motor technology. This manufacturer visited the Company’s headquarters the week of September 24, 2018 to further evaluate our pump and motor technology. The result of these discussions was a verbal commitment to initiate negotiations on an agreement to form a relationship with the Company. The Company had not formalized the nature of this relationship at the time of this filing but will continue active discussions on this objective. The Company believes the Aegis pump/motor technology can significantly change the hydraulics industry in the future.
The development of our hydraulic pump has taken on added significance in light of U.S. government emissions regulations for off road diesel engines. To help achieve these standards, companies are attempting to run diesel engines, and their hydraulic pumps, at lower rotational speeds. This requires larger displacement hydraulic pumps to be installed to compensate for the decrease in rotational speed. Among other advantages, the Aegis hydraulic technology allows a larger displacement pump to fit into the same or smaller footprint than that of existing pumps. This enables manufacturers to keep the current equipment layout without the need for expensive modifications to accommodate larger hydraulic pumps.
Our Aegis engineering team has completed a production prototype and is working to align the prototype capability with specific customer applications. The Company reached significant milestones in the design and testing of this production prototype in 2017 and 2018. Engineering testing, design and expansion of pump and motor functionalities is continuing.
We have invested in software, test equipment and personnel to enhance our development efforts of our hydraulic pump to improve the overall performance while maintaining the advantages we have in size and weight. We have built our own testing facility, which would have otherwise taken place at a third-party testing facility. Our engineer and design team has progressively made adjustments to the valve and piston technology and each change has resulted in an improvement in the measured efficiency of the pump. We have filed for patent protection for our novel non-rotating group pump concept, and we are also working on additional patents as a result of engineering breakthroughs in our design process.
Results of Operations for the three months ended
September
30, 2018 and 2017
Revenue, Cost of Revenue and Loss on Revenue
|
|
For the three months ended
September 30,
|
|
|
Variance
Incr (decr)
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
CURA Revenue
|
|
$
|
10,000
|
|
|
$
|
6,000
|
|
|
$
|
4,000
|
|
Cost of Revenue
|
|
|
27,000
|
|
|
|
37,000
|
|
|
|
(10,000
|
)
|
Loss on Revenue
|
|
$
|
(17,000
|
)
|
|
$
|
(31,000
|
)
|
|
$
|
(14,000
|
)
|
During the third quarter of 2018 sixteen Z-Coach Aviation subscriptions were sold to five customers. During the third quarter of 2017 thirty-six Z-Coach Aviation subscriptions were sold to three customers. Quarter-to-date revenue earned from the sales of the CURA app as of September 30, 2018 was $3,000. The Company did not have revenue from sales of CURA system units in the three months ended September 30, 2017.
As of September 30, 2018, and December 31, 2017, the Company has deferred revenue of $14,000 and $5,000, respectively attributed to Z-Coach subscription revenue that will be recognized ratably as our performance obligations are satisfied.
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 modules have been designed for a range of industry professionals, including aviation, trucking and busing industry and for corporate workers. Z-Coach provides fatigue safety training over a twelve-month subscription period. The user has unlimited access to this tool during the subscription period. Customers are billed at the acceptance of the subscription and revenue is recognized ratably over the subscription period as our performance obligations are satisfied and when collection is reasonably assured.
Provision for inventory and asset impairment
The Company recorded a provision for the myCadian watch components and finished goods of $1,741,000 during the three month period ended September 30, 2018. This inventory was sourced in 2017 from a third-party vendor engaged to manufacture and assemble the myCadian watch. The Company is currently offering the CURA app which does not require the use of the myCadian watch. Management is developing an alternate CURA medical product that may use this inventory but this product offering has not been finalized or offered for sale.
The Company also recorded an asset impairment for $17,000 related to the write off of the book value of CURA capital assets that had been assigned a five year life upon acquisition. This impairment loss reflects a shorter useful life on these assets as of September 30, 2018.
Engineering and
d
evelopment
c
osts and
e
xpenses
|
|
For the three months ended
September 30,
|
|
|
Variance
|
|
|
|
2018
|
|
|
2017
|
|
|
Incr (decr)
|
|
Wages and benefits
|
|
$
|
161,000
|
|
|
$
|
98,000
|
|
|
$
|
63,000
|
|
Professional fees
|
|
|
36,000
|
|
|
|
4,000
|
|
|
|
32,000
|
|
Parts and shop supplies
|
|
|
45,000
|
|
|
|
73,000
|
|
|
|
(28,000
|
)
|
Computer and software maintenance
|
|
|
9,000
|
|
|
|
16,000
|
|
|
|
(7,000
|
)
|
Depreciation and amortization
|
|
|
11,000
|
|
|
|
11,000
|
|
|
|
-
|
|
Other costs and expenses
|
|
|
5,000
|
|
|
|
-
|
|
|
|
5,000
|
|
|
|
|
267,000
|
|
|
|
202,000
|
|
|
|
65,000
|
|
Stock-based compensation
|
|
|
11,000
|
|
|
|
9,000
|
|
|
|
2,000
|
|
Total Engineering and Development
|
|
$
|
278,000
|
|
|
$
|
211,000
|
|
|
$
|
67,000
|
|
The $67,000 increase in engineering and development costs is primarily attributed to wages and professional fees reflecting the advanced stage of development for the CURA and AEGIS products. As the Company gets closer to product commercialization and development milestones are achieved, the engineering efforts become more focused resulting in lower parts and shop supplies. The Company will continue to invest in the CURA and Aegis product development efforts during 2018.
The increase in stock compensation expense reflects 450,000 new options granted during the third quarter of 2018, there were no option grants in the third quarter of 2017.
General and
a
dministrative
c
osts and
e
xpenses
|
|
For the three months ended
September 30,
|
|
|
Variance
|
|
|
|
2018
|
|
|
2017
|
|
|
Incr (decr)
|
|
Wages and benefits
|
|
$
|
276,000
|
|
|
$
|
418,000
|
|
|
$
|
(142,000
|
)
|
Professional fees
|
|
|
80,000
|
|
|
|
111,000
|
|
|
|
(31,000
|
)
|
Facilities and occupancy
|
|
|
35,000
|
|
|
|
40,000
|
|
|
|
(5,000
|
)
|
Insurance
|
|
|
19,000
|
|
|
|
22,000
|
|
|
|
(3,000
|
)
|
Conferences and travel
|
|
|
11,000
|
|
|
|
34,000
|
|
|
|
(23,000
|
)
|
Computer expense
|
|
|
9,000
|
|
|
|
6,000
|
|
|
|
3,000
|
|
Marketing
|
|
|
10,000
|
|
|
|
-
|
|
|
|
10,000
|
|
Stockholder support
|
|
|
5,000
|
|
|
|
10,000
|
|
|
|
(5,000
|
)
|
Depreciation and amortization
|
|
|
2,000
|
|
|
|
2,000
|
|
|
|
-
|
|
Other costs and expenses
|
|
|
6,000
|
|
|
|
-
|
|
|
|
6,000
|
|
|
|
|
453,000
|
|
|
|
643,000
|
|
|
|
(190,000
|
)
|
Stock-based compensation
|
|
|
31,000
|
|
|
|
19,000
|
|
|
|
12,000
|
|
Total General and Administrative
|
|
$
|
484,000
|
|
|
$
|
662,000
|
|
|
$
|
(178,000
|
)
|
The decrease of $178,000 in general and administrative expenses in the third quarter of 2018 compared to the prior year period is attributed primarily to employee turnover, reduced spending with professional advisors and reduced travel costs. There were eleven employees in general and administrative functions at September 30, 2018 compared to fifteen at the same date in 2017.
Non-operating
e
xpense
|
|
For the three months ended
September 30,
|
|
|
Variance
Incr (decr)
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
Interest expense
|
|
$
|
(271,000
|
)
|
|
$
|
(204,000
|
)
|
|
$
|
67,000
|
|
Other income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
(271,000
|
)
|
|
$
|
(204,000
|
)
|
|
$
|
67,000
|
|
During the three months ended September 30, 2018, the Company recognized $112,000 in interest expense on the 6% convertible notes and $159,000 of amortization on debt discount classified as interest expense related to convertible notes. At September 30, 2018 and September 30, 2017, the Company had $8,486,000 and $4,626,000, respectively in convertible notes outstanding. (See Note 4.)
Net Loss for the three months ended
September
30, 2018 and 2017
The net loss for the three months ended September 30, 2018 was $2,808,000, compared with a net loss in the three months ended September 30, 2017 of $1,108,000. The net loss attributable to common stockholders for the three months ended September 30, 2018 was $2,863,000 as compared to $1,170,000 for the three months ended September 30, 2017. The weighted average basic and diluted common shares outstanding amounted to 49,646,000 and 48,321,000 for each of the three months ended September 30, 2018 and 2017, respectively. Basic and diluted loss per common share for each of the three months ended September 30, 2018 and 2017 was $0.06 and $0.02.
Results of Operations for the
nine
months ended
September
30, 2018 and 2017
Revenue, Cost of Revenue and Loss on Revenue
|
|
For the nine months ended
September 30,
|
|
|
Variance
Incr (decr)
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
CURA Revenue
|
|
$
|
26,000
|
|
|
$
|
23,000
|
|
|
$
|
3,000
|
|
Cost of revenue
|
|
|
97,000
|
|
|
|
111,000
|
|
|
|
(14,000
|
)
|
Loss on revenue
|
|
$
|
(71,000
|
)
|
|
$
|
(88,000
|
)
|
|
$
|
(17,000
|
)
|
The Company recorded $26,000 and $ 23,000 in revenue during the nine months ended September 30, 2018 and September 30,2017, respectively. Z-Coach sales aggregated $19,000 and CURA app and device sales aggregated $7,000 during the nine months ended September 30, 2018. During the nine months ended September 30, 2018, two hundred and six Z-Coach Aviation subscriptions were sold to nine customers. During the nine months ended September 30, 2017, one hundred and forty-seven Z-Coach Aviation subscriptions were sold to eight customers. As of September 30, 2018, and December 31, 2017, the Company has deferred revenue of $14,000 and $5,000, respectively attributed to Z-Coach subscription revenue that will be recognized ratably as our performance obligations are satisfied.
The Company recorded $97,000 in cost of revenue during the nine-month period ended September 30, 2018 and $111,000 in the nine-month period ended September 30, 2017. The cost of revenue includes: (i) software amortization and hosting fees incurred to provide the Z-Coach product to subscribers and (ii) product costs incurred in the delivery of pilot programs shipped during the period related to the CURA system. Software amortization is based upon the straight-line amortization of the capitalized software over an estimated useful life of 36 months.
The Z-Coach modules have been designed for a range of industry professionals, including aviation, trucking and busing industry and for corporate workers. Z-Coach provides fatigue safety training over a twelve-month subscription period. The user has unlimited access to this tool during the subscription period. Customers are billed at the acceptance of the subscription and revenue is recognized ratably over the subscription period as our performance obligations are satisfied and when collection is reasonably assured.
Provision for inventory and asset impairment
The Company recorded a provision for the myCadian watch components and finished goods of $1,741,000 in the third quarter of 2018. The Company is currently offering the CURA app which does not require the use of the myCadian watch. Management is developing an alternate CURA medical product that may use this inventory but that product offering is not yet finalized and offered for sale.
Also during the third quarter of 2018, the Company recorded an asset impairment of $17,000 related to the write off of the net book value of capitalized assets that had been assigned a five year life upon acquisition. The impairment life reflects a shorter useful life on these assets at September 30, 2018.
E
ngineering and
d
evelopment
c
osts and
e
xpenses
|
|
For the nine months ended
September 30,
|
|
|
Variance
|
|
|
|
2018
|
|
|
2017
|
|
|
Incr (decr)
|
|
Wages and benefits
|
|
$
|
592,000
|
|
|
$
|
595,000
|
|
|
$
|
(3,000
|
)
|
Professional fees
|
|
|
236,000
|
|
|
|
213,000
|
|
|
|
23,000
|
|
Parts and shop supplies
|
|
|
93,000
|
|
|
|
245,000
|
|
|
|
(152,000
|
)
|
Computer and software maintenance
|
|
|
31,000
|
|
|
|
44,000
|
|
|
|
(13,000
|
)
|
Depreciation and amortization
|
|
|
32,000
|
|
|
|
34,000
|
|
|
|
(2,000
|
)
|
Other costs and expenses
|
|
|
10,000
|
|
|
|
15,000
|
|
|
|
(5,000
|
)
|
|
|
|
994,000
|
|
|
|
1,146,000
|
|
|
|
(152,000
|
)
|
Stock-based compensation
|
|
|
18,000
|
|
|
|
25,000
|
|
|
|
(7,000
|
)
|
Total Engineering and Development
|
|
$
|
1,012,000
|
|
|
$
|
1,171,000
|
|
|
$
|
(159,000
|
)
|
Engineering and development expenses decreased by $159,000 during the nine months ended September 30, 2018 compared to the comparable period in 2017. Non-cash stock-based compensation attributable to stock options during the period was $18,000, reflecting $66,000 in forfeitures related to employee turnover experienced during the period. The decrease in engineering and development costs is primarily attributed to decreased spending for parts and supplies which reflects the advanced stage of development for the CURA and AEGIS products. As the Company get closer to product commercialization and development milestones are achieved, the engineering efforts become more focused resulting in lower cost of wages and parts and shop supplies. The Company will continue to invest in the CURA and Aegis product development efforts during 2018.
General and a
dministrative
c
osts and
e
xpenses
|
|
For the nine months ended
September 30,
|
|
|
Variance
|
|
|
|
2018
|
|
|
2017
|
|
|
Incr (decr)
|
|
Wages and benefits
|
|
$
|
959,000
|
|
|
$
|
1,230,000
|
|
|
$
|
(271,000
|
)
|
Professional fees
|
|
|
255,000
|
|
|
|
427,000
|
|
|
|
(172,000
|
)
|
Facilities and occupancy
|
|
|
113,000
|
|
|
|
114,000
|
|
|
|
(1,000
|
)
|
Insurance
|
|
|
65,000
|
|
|
|
59,000
|
|
|
|
6,000
|
|
Conferences and travel
|
|
|
35,000
|
|
|
|
104,000
|
|
|
|
(69,000
|
)
|
Computer expense
|
|
|
29,000
|
|
|
|
35,000
|
|
|
|
(6,000
|
)
|
Marketing Expense
|
|
|
30,000
|
|
|
|
2,000
|
|
|
|
28,000
|
|
Stockholder support
|
|
|
42,000
|
|
|
|
61,000
|
|
|
|
(19,000
|
)
|
Depreciation and amortization
|
|
|
6,000
|
|
|
|
8,000
|
|
|
|
(2,000
|
)
|
Other costs and expenses
|
|
|
43,000
|
|
|
|
42,000
|
|
|
|
1,000
|
|
|
|
|
1,577,000
|
|
|
|
2,082,000
|
|
|
|
(505,000
|
)
|
Stock-based compensation
|
|
|
61,000
|
|
|
|
135,000
|
|
|
|
(74,000
|
)
|
Total General and Administrative
|
|
$
|
1,638,000
|
|
|
$
|
2,217,000
|
|
|
$
|
(579,000
|
)
|
The decrease of $579,000 in general and administration expenses for the nine month period ended September 30, 2018 reflects the reduction in headcount, reduction in cost of professional services, reduced travel, conferences and marketing brochures. There were eleven employees in general and administrative functions at September 30, 2018 compared to fifteen at the same date in 2017.
Non-operating Income and Expense
|
|
For the nine months ended
September 30,
|
|
|
Variance
|
|
|
|
2018
|
|
|
2017
|
|
|
Incr (decr)
|
|
Interest expense
|
|
$
|
(767,000
|
)
|
|
$
|
(525,000
|
)
|
|
$
|
242,000
|
|
Other income
|
|
|
1,000
|
|
|
|
2,000
|
|
|
|
(1,000
|
)
|
|
|
$
|
(766,000
|
)
|
|
$
|
(523,000
|
)
|
|
$
|
243,000
|
|
During the nine months ended September 30, 2018, the Company recognized $319,000 in interest expense on the 6% convertible notes and $448,000 of amortization on debt discount classified as interest expense related to convertible notes. As of September 30, 2018, the company has $8,486,000 in debt outstanding that earns of 6% per annum compared to $4,626,000 at September 30, 2017.
Net Loss for the
nine
months ended
September
30, 2018 and 2017
The net loss for the nine months ended September 30, 2018 was $5,245,000, compared with a net loss in the nine months ended September 30, 2017 of $3,999,000. The net loss attributable to common stockholders for the nine months ended September 30, 2018 was $5,408,000 as compared to $4,185,000 for the nine months ended September 30, 2017. The weighted average basic and diluted common shares outstanding amounted to 50,189,000 and 47,768,000 for each of the nine months ended September 30, 2018 and 2017, respectively. Basic and diluted loss per common share for each of the nine months ended September 30, 2018 and 2017 was $0.11 and $0.09.
Preferred stock dividends accrued totaled $163,000 in the nine months ended September 30, 2018 and $186,000 in September 30, 2017.
Liquidity and Capital Resources
As of September 30, 2018, cash on-hand totaled $95,000, a net decrease of $99,000 since the beginning of the year. During the nine months ended September 30, 2018 we used $2,813,000 of cash in operating activities. A net loss of $5,245,000 was adjusted for $2,408,000 in non-cash expenses for inventory reserves, depreciation, amortization, stock-based compensation, and a non-cash charge for asset impairment during the period. There also were $24,000 in changes in working capital components during the nine-month period. The decrease in cash used in operations in the nine months of 2018 compared to 2017 was driven by the change in net loss and total accounts payable and accrued liabilities from 2017 to 2018. In the nine months of 2017, the net loss of $3,999,000 was adjusted for $669,000 in non-cash expenses for depreciation, amortization and stock-based compensation and $293,000 in changes in components of working capital.
The Company did not invest in capitalized software and property and equipment in the nine months ended September 30, 2018 and invested $419,000 in capital investments in the nine months ended September 20, 2017.
During the nine months ended September 30, 2018, the Company generated $2,714,000 in net cash from financing activities resulting from the issuance of convertible notes and a warrant conversion. During the nine months ended September 30, 2017, the Company generated $1,627,000 in cash from financing activities from issuance of convertible notes and from the exercise of a common stock warrant.
Current Cash Outlook and Management Plans
As of September 30, 2018, we have cash on hand of $95,000, negative working capital of $1,869,000, a stockholders’ deficit of $7,688,000 and an accumulated deficit of $86,086,000. During nine months ended September 30, 2018 we raised $2,720,000 in gross proceeds through the issuance of convertible notes and warrants, the proceeds of which have been used to support the ongoing development and marketing of our core technologies and product initiatives.
Management estimates that the twelve-month 2018 cash needs, based on its current development and product plans, will be approximately $4.0 million. As of September 30, 2018, the Company’s cash on hand is not sufficient to cover the Company’s future working capital requirements. This raises substantial doubt as to the Company’s ability to continue as a going concern. Management continues to use its best efforts to develop financing opportunities to fund the development and commercialization of the CURA and Aegis products.
Since inception, we have financed our operations by the sale of our securities and debt financings. We need to raise additional funds to meet our working capital needs, to fund expansion of our business, to complete development, testing and marketing of our products, or to make strategic acquisitions or investments. No assurance can be given that necessary funds will be available to us to finance our development on acceptable terms, if at all. Furthermore, such additional financings may involve dilution to our stockholders or may require that we relinquish rights to certain of our technologies or products. In addition, we may experience operational difficulties and delays due to working capital restrictions. If adequate funds are not available from additional sources of financing, we will have to delay or scale back our growth plans.
The Company’s ability to fund its current and future commitments from its available cash depends on a number of factors. These factors include the Company’s ability to (i) launch and generate sales from the CURA division; (ii) generate revenue from the licensing or sale of our hydraulic technologies or; (iii) decrease engineering and development and administrative expenses. If these and other factors are not met, the Company will need to raise funds in order to meet its working capital needs and pursue its growth strategy. Although there can be no such assurances, management believes that sources for these additional funds will be available through either current or future investors.
Critical Accounting Policies
Revenue Recognition
The Company has two sources of revenue: (i) from the sale of CURA platform products and (ii) from stand-alone Z-Coach subscriptions. Revenue from the sale of CURA products is recognized upon the shipment of myCadian devices to a customer and upon the company’s satisfaction of all performance obligations as described in customer agreements. The Z-Coach Program provides fatigue training over an annual subscription period of twelve months. The Z-Coach Program allows the user unlimited access during the annual subscription period. Customers are billed at the acceptance of the subscription, and revenue is recognized ratably over the subscription period as our performance obligations are satisfied and when collection is reasonably assured. Our collection terms provide customers standard terms of net 30 days. Future performance obligations are reflected in deferred revenue.
Income Taxes
We account for income taxes using the asset and liability method, the objective of which is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting and the tax basis of our assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. A valuation allowance related to deferred tax assets is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
We account for uncertain tax positions using a more-likely-than-not recognition threshold based on the technical merits of the tax position taken. Tax benefits that meet the more-likely-than-not recognition threshold should be measured as the largest amount of tax benefits, determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement in the financial statements. It is our policy to recognize interest and penalties related to income tax matters as general and administrative expenses. As of September 30, 2018, and December 31, 2017, there were no accrued interest or penalties related to uncertain tax positions.
Stock-Based Compensation
FASB ASC 718-10 requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense over the requisite service period (generally the vesting period) in the consolidated financial statements based on their fair values on the grant date. The impact of forfeitures is recognized as incurred. In addition, the realization of tax benefits in excess of amounts recognized for financial reporting purposes will be recognized as a financing activity in accordance with FASB ASC 718-10. The Company adopted FASB ASC 718-10 during the third quarter of 2018.
No tax benefits were attributed to the stock-based compensation expense because a valuation allowance was maintained for substantially all net deferred tax assets. We elected to adopt the alternative method of calculating the historical pool of windfall tax benefits as permitted by FASB ASC 718-10-65. This is a simplified method to determine the pool of windfall tax benefits that is used in determining the tax effects of stock compensation in the results of operations and cash flow reporting for awards that were outstanding as of the adoption of FASB ASC 718-10.