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 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 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 less expensive than conventional pumps and motors,
|
|
●
|
more efficient,
|
|
●
|
as reliable,
|
|
●
|
unique in its ability to scale larger, allowing more powerful pumps and motors.
|
It is important to note, regarding both the CURA and Aegis products, that the cycle time from the initiation of the sales process to revenue realization can be highly variable especially as a start-up entity. In addition to the activities to be undertaken to implement our plan of operations, we may expand and/or refocus our activities depending upon future circumstances and developments
.
Current Cash Outlook and Management Plans
As of March 31, 2019, we have cash on hand of $51,000, negative working capital of $2,511,000, a stockholders’ deficiency of $9,497,000 and an accumulated deficit of $88,297,000. During the three months ended March 31, 2019 we raised $575,000 in proceeds through the issuance of promissory notes, convertible notes and warrants. The proceeds from this private placement has been used to support the ongoing development and marketing of our core technologies and product initiatives.
Management estimates that the 2019 cash needs will be $3 to $3.5 million, based upon the cash used in operations in the fourth quarter of 2018. As of March 31, 2019, the Company’s cash on hand is not sufficient to cover the Company’s future working capital requirements. This raises substantial doubt as to the Company’s ability to continue as a going concern. Management continues to use its best efforts to develop financing opportunities to fund the development and commercialization of the CURA and Aegis products.
Since inception, we have financed our operations by the sale of our securities and debt financings. We need to raise additional funds to meet our working capital needs, to fund expansion of our business, to complete development, testing and marketing of our products, or to make strategic acquisitions or investments. No assurance can be given that necessary funds will be available for us to finance our development on acceptable terms, if at all. Furthermore, such additional financings will involve dilution to our shareholders or may require that we relinquish rights to certain of our technologies or products. In addition, we will experience operational difficulties and delays due to working capital restrictions. If adequate funds are not available from additional sources of financing, we will have to delay or scale back our growth plans.
The Company’s ability to fund its current and future commitments from its available cash depends on a number of factors. These factors include the Company’s ability to (i) launch and generate sales from the CURA division; (ii) generate revenue from the monetization of our hydraulic technologies or; (iii) decrease engineering and development and administrative expenses. If these and other factors are not met, the Company would need to raise funds in order to meet its working capital needs and pursue its growth strategy. Although there can be no such assurances, management believes that sources for these additional funds will be available through either current or future investors.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 (“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 of the information and footnotes required by 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 as of and for the year ended December 31, 2018 contained in the Company’s 2018 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 March 31, 2019, each of the subsidiaries is non-operational.
Use of Estimates:
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. These estimates are subject to a high degree of judgment and potential change. Actual results could differ from those estimates.
Reclassifications:
Certain reclassifications may have been made to prior year balances to conform to the current year’s presentation.
Cash:
We maintain cash at financial institutions which periodically may exceed federally insured amounts. We have a corporate credit card program through our primary financial institution, JPMorgan Chase Bank, N.A. In connection with this, the Company granted a security interest to the bank in our money market account to act as collateral for the activity within the corporate card program, up to $5,000.
Inventory
: Inventory is stated at the lower of cost or net realizable value with cost determined under the average cost method. We have recorded provisions for excess, obsolete or slow-moving inventory based on changes in customer demand and technology developments. Inventory on hand at March 31, 2019 and December 31, 2018 has been fully reserved reflecting a reserve of $1,747,000.
Right to use building asset
The FASB issued ASU No. 2016-02, “Leases,” which requires a lessee to recognize on its balance sheet the assets and liabilities related to long-term leases that were classified as operating leases under previous guidance. An asset is recognized related to the Company's ability to retain the economic benefits and control of the underlying asset. A corresponding liability is recognized related to the Company's obligation to make lease payments over the term of the lease.
The standard became effective for the Company January 1, 2019. The Company utilized the modified retrospective approach to measure the right-to-use operating lease agreement associated with the office building used for our business operations located in Rochester, New York and utilized the practical expedient to not separate lease components from non-lease components. 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 are as follows:
Software (in years)
|
|
3
|
|
Office equipment (in years)
|
5
|
-
|
7
|
Leasehold improvements
|
lesser of useful life or lease term
|
Depreciation and amortization are computed using the straight-line method. Betterments, renewals and significant repairs that extend the life of the assets are capitalized. Other repairs and maintenance costs are expensed when incurred. When disposed, the cost and accumulated depreciation applicable to assets retired are removed from the accounts and the gain or loss on disposition is recognized in other income (expense). Depreciation and software amortization expense for the three months ended March 31, 2019 and 2018 amounted to $11,000 and $44,000, respectively.
Whenever events or circumstances indicate, our long-lived assets including any intangible assets with finite useful lives are tested for impairment by using the estimated future cash flows directly associated with, and that are expected to arise as a direct result of, the use of the assets. If the carrying amount exceeds the estimated undiscounted cash flows, impairment may be indicated. The carrying amount is compared to the estimated discounted cash flows and if there is an excess such amount is recorded as impairment.
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 March 31, 2019 and December 31, 2018. The carrying amount of cash, prepaid expenses and other current assets, accounts payable, and accrued expenses approximates their fair value due to their short maturity. The senior convertible notes can be converted into common stock with an underlying value of $5,454,000 as of March 31, 2019 based on the trading price on March 31, 2019.
Revenue Recognition and Deferred Revenue:
On January 1, 2018, the Company adopted FASB ASC 606, "Revenue from Contracts with Customers" and all related amendments for all contracts using the modified retrospective method. There was no impact upon the adoption of ASC 606. The Company has determined that the adoption of this standard did not require a cumulative effect adjustment. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. For contracts where performance obligations are satisfied at a point in time, the Company recognizes revenue when the product is shipped to the customer. For contracts where the performance obligation is satisfied over time, as in the Z-Coach sales, the Company recognizes revenue over the subscription period. Revenue from the sale of the Company's products is recognized net of cash discounts, sales returns and allowances. The Company has two sources of revenue: (i) from the sale of CURA System products and (ii) from stand-alone Z-Coach subscriptions.
The Company's net revenue is derived primarily from domestic customers. For the three months ended March 31, 2019 net revenue from products transferred over time amounted to $7,000 and there was no revenue from products transferred at a point in time. One customer accounted for 89% of total Z-Coach subscription sales made during the three months ended March 31, 2019. Our collection terms provide customers standard terms of net 30 days. Future performance obligations are reflected in deferred revenue.
CURA revenue is recognized (a) upon receipt of payment at the point of sale of the CURA app, (b) upon the delivery of myCadian products and (c) upon the company’s satisfaction of all performance obligations as described in customer agreements. The Z-Coach Program provides fatigue training over an annual subscription period of twelve months. The Z-Coach Program allows the user unlimited access during the annual subscription period. Customers are billed at the acceptance of the subscription, and revenue is recognized ratably over the subscription period as our performance obligations are satisfied and when collection is reasonably assured. Our collection terms provide customers standard terms of net 30 days. Future performance obligations are reflected in deferred revenue.
Engineering and Development and Patents:
Engineering and development costs and patent expenses are charged to operations as incurred. Engineering and development include personnel-related costs, materials and supplies, depreciation and consulting services. Patent costs for the three months ended March 31, 2019 and 2018 amounted to $10,000 and $31,000, respectively, and are included in general and administrative expenses.
Stock-based Compensation:
FASB Accounting Standards Codification (“ASC”) 718-10 requires all share-based payments to be recognized as compensation expense over the service period (generally the vesting period) in the consolidated financial statements based on their fair values on the grant date. The impact of forfeitures that may occur prior to vesting is also estimated and considered in the amount recognized. In addition, the realization of tax benefits in excess of amounts recognized for financial reporting purposes will be recognized as a financing activity in accordance with ASC 718-10. No tax benefits were attributed to the stock-based compensation expense because a valuation allowance was maintained for substantially all net deferred tax assets.
During 2018, the Company adopted FASB ASU 2018-07, “Equity-Based Payments to Non-Employees,” which requires all share-based payments to non-employees, including grants of stock options, to be recognized in the consolidated financial statements as expense generally over the service period of the consulting arrangement or as performance conditions are expected to be met. FASB ASC 718-20 requires that modifications of the terms or conditions of equity awards be treated as an exchange of the original award for a new award. Incremental compensation cost is measured as the excess, if any, of the fair value of the modified award over the fair value of the original award immediately before its terms are modified. The Company utilized a modified retrospective approach effective as of January 1, 2018 in the adoption of this accounting guidance which resulted in a reduction of $10,000 in stock compensation expense previously recorded costs for options outstanding to non-employees.
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 March 31, 2019, and December 31, 2018, there were no accrued interest or penalties related to uncertain tax positions.
Loss per Common Share:
FASB’s ASC 260-10 (“Earnings Per Share”) requires the presentation of basic earnings per share, which is based on weighted average common stock outstanding, and dilutive earnings per share, which gives effect to options, warrants and convertible securities in periods when they are dilutive. At March 31, 2019 and 2018, we excluded 96,927,383 and 84,560,427 potential common shares, respectively, relating to convertible preferred stock, convertible notes, options and warrants outstanding from the diluted net loss per common share calculation because their inclusion would be anti-dilutive. In addition, we excluded 625,000 warrants from the diluted net loss per common share calculation at March 31, 2019 and 2018 as the conditions for their vesting are not time-based.
NOTE 3 – INVENTORY AND RELATED VENDOR LIABILITY
The Company had the following inventory held at our manufacturing vendor and on hand as of March 31, 2019 and December 31, 2018:
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Raw materials
|
|
$
|
1,678,000
|
|
|
$
|
1,678,000
|
|
Finished goods
|
|
|
69,000
|
|
|
|
69,000
|
|
|
|
|
1,747,000
|
|
|
|
1,747,000
|
|
Less: Reserve for quality
|
|
|
(1,747,000
|
)
|
|
|
(1,747,000
|
)
|
Inventory (net)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Liability for inventory held at vendor
|
|
$
|
1,462,000
|
|
|
$
|
1,462,000
|
|
During 2017, the Company initiated a purchase order with a third-party vendor to manufacture and assemble the myCadian watch. In connection with this agreement, the Company agreed to a cancellation charge for products purchased on behalf of the Company in the instance that the purchase order is subsequently modified, delayed or cancelled. The Company has recorded $1,678,000 in inventory and components which were purchased by the vendor on our behalf and a related liability of $1,462,000 for amounts payable in connection with this agreement.
During the 2018, the Company recorded an additional reserve of $1,741,000 in connection with a review of inventory on-hand. This recognizes a reserve for myCadian related components and finished goods on hand at that date. Management will continue to evaluate this reserve in future reporting periods.
NOTE 4 - SENIOR CONVERTIBLE NOTES AND WARRANTS
At March 31, 2019, the Company had $9,610,000 in convertible notes outstanding which have been presented net of unamortized debt discounts of $2,455,000, resulting in a carrying value of $7,155,000. As of December 31, 2018, the Company had $9,160,000 in convertible notes outstanding, presented net of unamortized debt discounts of $2,557,000 resulting in a carrying value of $6,603,000. Scheduled maturities on the Company’s convertible note are: none in the twelve months ending December 31, 2019 and 2020; $2,990,000 in the twelve months ending December 31, 2021; $2,775,500 in the twelve months ending in December 31, 2022; $3,395,000 in the twelve months ending December 31, 2023 and $450,000 thereafter.
Included in the face value of convertible notes outstanding at March 31, 2019 and December 31, 2018, the Company had outstanding $2,252,500 in convertible notes payable to six of our directors and $1,170,000 in convertible notes payable to an investor that is deemed an affiliate.
|
|
Total
|
|
|
JULY 2018
Convertible
Notes
|
|
|
2018
Convertible
Notes
|
|
|
2017
6%
Convertible
Notes
|
|
|
2016
6%
Convertible
Notes
|
|
Face value December 31, 2018
|
|
$
|
9,160,000
|
|
|
$
|
1,175,000
|
|
|
$
|
625,000
|
|
|
$
|
4,370,000
|
|
|
$
|
2,990,000
|
|
Notes issued in current period
|
|
|
450,000
|
|
|
|
450,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Face value March 31, 2019
|
|
$
|
9,610,000
|
|
|
$
|
1,625,000
|
|
|
$
|
625,000
|
|
|
$
|
4,370,000
|
|
|
$
|
2,990,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt discount December 31, 2018
|
|
$
|
(2,557,000
|
)
|
|
$
|
(360,000
|
)
|
|
$
|
(231,000
|
)
|
|
$
|
(456,000
|
)
|
|
$
|
(1,510,000
|
)
|
Debt discount on notes issued in current period
|
|
|
(63,000
|
)
|
|
|
(63,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Amortization of discount reported as interest
|
|
|
165,000
|
|
|
|
13,000
|
|
|
|
11,000
|
|
|
|
15,000
|
|
|
|
126,000
|
|
Debt discount March 31, 2019
|
|
$
|
(2,455,000
|
)
|
|
$
|
(410,000
|
)
|
|
$
|
(220,000
|
)
|
|
$
|
(441,000
|
)
|
|
$
|
(1,384,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Convertible Notes (net)
|
|
$
|
7,155,000
|
|
|
$
|
1,215,000
|
|
|
$
|
405,000
|
|
|
$
|
3,929,000
|
|
|
$
|
1,606,000
|
|
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.
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 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 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 month period ending March 31, 2019, the Company issued $450,000 in new notes and allocated $63,000 of the proceeds to debt discount based on the computed fair value of the warrants and the debt issuance costs on the date of investment. During the three month periods ending March 31, 2019 and March 31, 2018, the Company recorded $13,000 and $0 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. Investments received on the 2018 SPA totaled $625,000 and included the issuance of 460,000 common stock warrants.
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 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 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 month periods ending March 31, 2019 and March 31, 2018, the Company recorded $11,000 and $0, 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”). Total investments received on the 2017 SPA totaled $4,420,000 and included the issuance of 2,307,207 common stock warrants. 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 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 month period ending March 31, 2019 the Company recorded $80,000 in interest expense including $15,000 of amortization of debt discount. During the three month period ended March 31, 2018, the Company recorded $74,000 in interest expense including $21,000 of 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 initial year of interest expense was paid to the note holders on the first anniversary of each note's issuance and will be paid quarterly thereafter. Principal is due in full on each note's maturity date.
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 period ending March 31, 2019, the Company recorded $169,000 in interest expense including amortization of debt discount of $126,000. During the three month period ended March 31, 2018 the Company recorded $163,000 in interest expense including amortization of debt discount of $118,000.
NOTE
5
– UNSECURED SUBORDINATED PROMISSORY NOTES
During the first quarter of 2018, the Company issued $125,000 in unsecured subordinated promissory notes to the Company’s Chief Executive Officer and to another board member. These notes bear an interest rate of 6% per annum and have a maturity date of ninety days from the date of grants.
NOTE
6
– 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. The Company utilized the modified retrospective approach to measure the right-to-use operating lease agreement associated with the office building used as our headquarters located in Rochester, New York. The adoption of this accounting standard did not impact our consolidated loss from operations and had no impact on cash flows.
The Company measured the present value of future lease costs at $257,000 which included monthly rental, common area costs, and taxes in measuring the present value of the right-to-use building asset on January 1, 2019. The Company assumed an incremental borrowing rate of 6% as the building lease agreement does not include an implicit rate. The right-to-use asset includes two, one year renewal options that run through May 2021.
Operating lease costs for the first quarter of 2019 were $30,000 with future maturing lease liabilities as follows: 2019: $85,000 for the remaining nine months of 2019; $114,000 in 2020 and $57,000 in 2021. Total future lease payments are $256,000 including imputed interest of $18,000.
NOTE
7
-
SOFTWARE
The Company investments in software for the CURA system are amortized over an estimated useful life of 3 years. Amortization expense recognized for the three months ended March 31, 2019 and 2018 was $4,000 and $31,000, respectively. The net value of capitalized software at March 31, 2019 and 2018 was $6,000 and $71,000, respectively. Future amortization expense is expected to be $6,000 in 2019.
NOTE
8
- PROPERTY AND EQUIPMENT
At March 31, 2019 and December 31, 2018 property and equipment consist of the following:
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Office equipment
|
|
$
|
249,000
|
|
|
$
|
249,000
|
|
Shop equipment
|
|
|
182,000
|
|
|
|
182,000
|
|
Leasehold improvements
|
|
|
253,000
|
|
|
|
253,000
|
|
|
|
|
684,000
|
|
|
|
684,000
|
|
Less accumulated depreciation
|
|
|
(629,000
|
)
|
|
|
(622,000
|
)
|
Net property and equipment
|
|
$
|
55,000
|
|
|
$
|
62,000
|
|
Depreciation expense for the three months ending March 31, 2019 and 2018 was $7,000 and $13,000 respectively.
NOTE
9
- 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 March 31, 2019
for the Company’s business segments follows:
|
|
CURA
|
|
|
Aegis
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
7,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,000
|
|
Earnings on revenue
|
|
|
1,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,000
|
|
Total costs and expenses
|
|
|
339,000
|
|
|
|
169,000
|
|
|
|
367,000
|
|
|
|
875,000
|
|
Loss from operations
|
|
|
338,000
|
|
|
|
169,000
|
|
|
|
367,000
|
|
|
|
874,000
|
|
Interest and other expense
|
|
|
-
|
|
|
|
-
|
|
|
|
274,000
|
|
|
|
274,000
|
|
Net loss
|
|
$
|
338,000
|
|
|
$
|
169,000
|
|
|
$
|
641,000
|
|
|
$
|
1,148,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
$
|
8,000
|
|
|
$
|
8,000
|
|
|
$
|
43,000
|
|
|
$
|
59,000
|
|
Depreciation and amortization
|
|
$
|
6,000
|
|
|
$
|
5,000
|
|
|
$
|
-
|
|
|
$
|
11,000
|
|
Assets at March 31, 2019
|
|
$
|
9,000
|
|
|
$
|
50,000
|
|
|
$
|
296,000
|
|
|
$
|
355,000
|
|
Segment information for the
three months ending March 31, 2018
for the Company’s business segments follows:
|
|
CURA
|
|
|
Aegis
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
8,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8,000
|
|
Loss on revenue
|
|
|
29,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
29,000
|
|
Total costs and expenses
|
|
|
523,000
|
|
|
|
131,000
|
|
|
|
376,000
|
|
|
|
1,030,000
|
|
Loss from operations
|
|
|
552,000
|
|
|
|
131,000
|
|
|
|
376,000
|
|
|
|
1,059,000
|
|
Interest and other expense
|
|
|
-
|
|
|
|
-
|
|
|
|
236,000
|
|
|
|
236,000
|
|
Net loss
|
|
$
|
552,000
|
|
|
$
|
131,000
|
|
|
$
|
612,000
|
|
|
$
|
1,295,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
$
|
(16,000
|
)
|
|
$
|
2,000
|
|
|
$
|
16,000
|
|
|
$
|
2,000
|
|
Depreciation and amortization
|
|
$
|
37,000
|
|
|
$
|
5,000
|
|
|
$
|
2,000
|
|
|
$
|
44,000
|
|
Assets at March 31, 2018
|
|
$
|
1,860,000
|
|
|
$
|
70,000
|
|
|
$
|
227,000
|
|
|
$
|
2,157,000
|
|
NOTE
10
- PREFERRED and COMMON STOCK
Common Stock
We have authorized 400,000,000 shares of common stock, with a par value of $0.01 per share.
During the three months ending March 31, 2019 we issued 35,996 shares of common stock at $0.25 per share in payment of interest on the Company’s 2016 and 2017 Convertible Notes. During the three months ended March 31, 2018 we issued 80,000 shares of common stock in connection with a conversion notice received from a Series C-3 convertible preferred stockholder.
Preferred Stock
Our certificate of incorporation permits the Company to issue up to 100,000,000 shares of $.01 par value preferred stock.
Class A Preferred Stock
At March 31, 2019 and December 31, 2018 there were 468,221 outstanding shares of Class A Preferred stock, of which 8,709 shares resulted from the settlement of dividends due to conversion, and those shares no longer accrue dividends. The value of dividends payable upon the conversion of the remaining 459,512 outstanding shares of Class A Preferred stock was $2,576,000 at March 31, 2019 and $2,530,000 at December 31, 2018.
In the event of a liquidation, dissolution and winding up of the Company, and subject to the liquidation rights and privileges of our Class C Preferred stockholders, Class A Preferred stockholders have a liquidation preference with respect to all accumulated and unsettled dividends. The value of the Class A Preferred stockholders’ liquidation preference was $2,576,000 and $2,530,000 at March 31, 2019 and December 31, 2018, respectively. In the event of liquidation, dissolution or winding up of the Company, unpaid accumulated dividends on the Class A Preferred are payable in Class A Preferred at a rate of 1 share of Class A Preferred for each $4.00 of dividends.
Class B Preferred Stock
At March 31, 2019 and December 31, 2018, there were 67,500 outstanding shares of Class B Preferred stock. The value of dividends payable upon the conversion of the outstanding shares of Class B Preferred stock was $462,000 at March 31, 2019 and $454,000 at December 31, 2018.
In the event of liquidation, dissolution and winding up of the Company, and subject to the liquidation rights and privileges of our Class C Preferred stockholders and our Class A Preferred stockholders, Class B Preferred stockholders have a liquidation preference with respect to all accumulated and unsettled dividends. The value of the Class B Preferred stockholders’ liquidation preference was $462,000 and $454,000 at March 31, 2019 and December 31, 2018, respectively. In the event of a liquidation, dissolution or winding up of the Company, unpaid accumulated dividends on the Class B Preferred are payable in Class B Preferred shares at a rate of 1 share of Class B Preferred for each $5.00 of dividends.
Series C Preferred Stock
At March 31, 2019 and December 31, 2018, there were 15,687,500 shares of Series C Preferred stock outstanding. The value of the Series C Preferred stockholders’ liquidation preference was $6,275,000 at March 31, 2019 and at December 31, 2018.
The Series C Preferred shares have a liquidation preference at their stated value per share of $0.40 that is senior to our common stock, and the Company’s Class A Non-Voting Cumulative Convertible Preferred Shares and Class B Non-Voting Cumulative Convertible Preferred Shares. The liquidation preference is payable upon a liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, or upon a deemed liquidation of the Company.
The Series C Preferred shares have no right to receive dividends and have no redemption right. The Series C Preferred shares vote with the common stock on an as-converted basis.
Series C-
2
Preferred Stock
At March 31, 2019 and December 31, 2018, there were 24,500,000 shares of Preferred C-2 stock outstanding. The value of the Series C-2 Preferred stockholders’ liquidation preference was $4,900,000 at March 31, 2019 and December 31, 2018.
The Series C-2 Preferred Shares are not entitled to receive preferred dividends and have no redemption right, but are entitled to participate, on an as converted basis; with holders of outstanding shares of common stock in dividends and distributions on liquidation after all preferred shares have received payment in full of any preferred dividends or liquidation preferences. The Series C-2 Preferred Shares vote with the common stock on an as-converted basis. We may not, without approval of the holders of at least two-thirds of the Series C-2 Preferred Shares, (i) create any class or series of stock that is pari passu or senior to the Series C-2 Preferred Shares, (ii) create any class or series of stock that would share in the liquidation preference of the Series C-2 Preferred Shares or that is entitled to dividends payable other than in common stock or Series C-2 Preferred Shares of its own series, (iii) acquire any equity security or pay any dividend, except dividends on a class or series of stock that is junior to the Series C Preferred Shares, payable in such junior stock, (iv) reissue any Series C-2 Preferred Shares, (v) declare or pay any dividend that would impair the payment of the liquidation preference of the Series C-2 Preferred Shares, (vi) authorize or issue any additional Preferred Shares, (vii) change the Certificate of Incorporation to adversely affect the rights of the holders of the Series C-2 Preferred Shares, or (viii) authorize, commit to or consummate any liquidation, dissolution or winding up in which the liquidation preference of the Series C-2 Preferred Shares would not be paid in full.
Series C-
3
Preferred Stock
At March 31, 2019 and December 31, 2018, there were 3,268,000 shares of Preferred C-3 stock outstanding. The Company issued 6,042,000 shares of Series C-3 Voting Convertible Preferred Stock in a private placement transaction during 2016.
NOTE
1
1
- STOCK OPTIONS
2016
Stock Option Plan
The shareholders approved the 2016 Stock Option Plan (the “2016 Plan”) which provides for the grant of up to 3,000,000 common stock options to provide equity incentives to directors, officers, employees and consultants. Two types of options may be granted under the 2016 Plan: non-qualified stock options and incentive stock options. As of March 31, 2019, 1,220,000 options have been granted under the 2016 plan and 1,780,000 options are available for future grant.
2011
Stock Option Plan
The shareholders approved the 2011 Stock Option Plan (the “2011 Plan”) which provides for the grant of up to 3,000,000 common stock options to provide equity incentives to directors, officers, employees and consultants. Two types of options may be granted under the 2011 Plan: non-qualified stock options and incentive stock options. As of March 31, 2019, there are 91,500 options are available for future grant under the 2011 Plan.
Under the 2016 and 2011 Stock Option Plans, non-qualified stock options may be granted to our officers, directors, employees and outside consultants. Incentive stock options may be granted only to our employees, including officers and directors who are also employees. In the case of incentive stock options, the exercise price may not be less than such fair market value and in the case of an employee who owns more than 10% of our common stock, the exercise price may not be less than 110% of such market price. Options generally are exercisable for ten years from the date of grant, except that the exercise period for an incentive stock option granted to an employee who owns more than 10% of our stock may not be greater than five years.
During the three months ended March 31, 2019, no stock options were granted. During the three months ended March 31, 2018, 150,000 stock options were granted.
Non-Plan Options
On occasion, we have granted non-qualified stock options to certain officers, directors and employees that have been outside of established Company Stock Option Plans. All such option grants have been subsequently authorized by shareholder approval.
Summary
For the three months ended March 31, 2019 and 2018, compensation expense related to stock option awards amounted to $59,000 and $2,000, respectively. As of March 31, 2019, there was approximately $238,000 of total unrecognized compensation costs related to outstanding stock options, which are expected to be recognized over a weighted average of 1.1 years.
The weighted average grant date fair value of stock options granted during the three months ended March 31, 2019 and 2018 was zero and $0.33, respectively. The total grant date fair value of stock options vested during the three months ended March 31, 2019 and 2018 was approximately $4,000 and $22,000, respectively.
The fair value of each option granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
|
|
2019
|
|
|
2018
|
|
Expected term (years)
|
|
|
-
|
|
|
|
6.3
|
|
Expected forfeiture rate
|
|
|
-
|
|
|
|
0%
|
|
Risk-free rate
|
|
|
-
|
|
|
|
2.6%
|
|
Volatility
|
|
|
-
|
|
|
|
130%
|
|
Dividend yield
|
|
|
-
|
|
|
|
0.0%
|
|
The average risk-free interest rate is based on the U.S. treasury security rate in effect as of the grant date. We determined expected volatility using the historical closing stock price. The expected life was generally determined using the simplified method as we do not believe we have sufficient historical stock option exercise experience on which to base the expected term.
The following summarizes the activity of all of our outstanding stock options for the quarter ended March 31, 2019:
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term (years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2019
|
|
|
11,028,500
|
|
|
$
|
0.49
|
|
|
|
3.8
|
|
|
$
|
94,000
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Canceled or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2019
|
|
|
11,028,500
|
|
|
$
|
0.49
|
|
|
|
3.5
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2019
|
|
|
7,068,500
|
|
|
$
|
0.58
|
|
|
|
2.7
|
|
|
$
|
-
|
|
During the quarter ended March 31, 2019, no options were granted, exercised, cancelled or expired unexercised. During the quarter ended March 31, 2018, no options were exercised, or expired unexercised. During the quarter ended March 31, 2018, the Company cancelled 191,875 options as a result of employee turnover. As of March 31, 2019, there were 2,908,500 stock options outstanding under the 2011 Plan, 2,048,500 of which were vested at that date; leaving 91,500 options available for future grant under the 2011 Plan. Also, as of March 31, 2019, there were 1,220,000 stock options outstanding under the 2016 Plan, 270,000 of which were vested at that date; leaving 1,780,000 options available for future grant under the 2016 Plan.
As of March 31, 2019, the exercise prices of all outstanding stock options ranged from $.22 per share to $1.58 per share.
NOTE
1
2
- WARRANTS
The following summarizes the activity of our outstanding warrants for the three months ended March 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Remaining
|
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Exercise
|
|
|
|
Contractual
|
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
|
Term
|
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2019
|
|
|
7,381,707
|
|
|
$
|
0.46
|
|
(A)
|
|
|
7.0
|
|
(B)
|
|
$
|
39,000
|
|
Granted
|
|
|
330,000
|
|
|
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Canceled or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2019
|
|
|
7,711,707
|
|
|
$
|
0.45
|
|
(A)
|
|
|
6.9
|
|
(B)
|
|
$
|
31,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2019
|
|
|
7,070,786
|
|
|
$
|
0.44
|
|
|
|
|
7.0
|
|
(C)
|
|
$
|
30,000
|
|
|
(A)
|
The weighted average exercise price for warrants outstanding as of March 31, 2019 and 2018 excludes 1,750,000 warrants in each period with no determined exercise price.
|
|
(B)
|
The weighted average remaining contractual term for warrants outstanding as of March 31, 2019 and 2018 excludes 743,500 warrants with no expiration date.
|
|
(C)
|
The weighted average remaining contractual term for warrants exercisable as of March 31, 2019, and 2018 excludes 118,500 warrants with no expiration date.
|
NOTE
1
3
- RELATED PARTY TRANSACTIONS
As of March 31, 2019, and December 31, 2018, the Company had outstanding $2,252,500 in principal amounts of senior convertible notes held by six members of our board of directors. These notes represent 7,888,378 of potential shares of common stock at March 31, 2019 and December 31, 2018. Underlying warrants outstanding associated with these notes represent 1,239,285 of potential shares of common stock at March 31, 2019 and December 31, 2018.
During the first quarter of 2019, the Company issued unsecured subordinated promissory notes totaling $125,000 to our Chief Executive Officer and to a board member. These notes have a ninety day term and accrued interest at 6% per annum.
NOTE 1
4
- SUBSEQUENT
EVENTS
JULY 2018 Convertible Notes
Subsequent to March 31, 2019, the Company issued $50,000 in new JULY 2018 Convertible Notes and 20,000 warrants.
Unsecured
S
ubordinated
P
romissory
N
otes
with Related Party
On each of April 4, 2019 and May 1, 2019, the Company entered into $100,000 unsecured subordinated promissory notes with Richard A. Kaplan the Company’s Chief Executive Officer and a director of the Company. The maturity date of the first note is July 3, 2019, and the maturity date of the second note is July 30, 2019. Interest accrues on the outstanding notes at a rate of 6% per annum.
Common shares Issued in Payment of Interest Expense
Subsequent to March 31, 2019, the Company issued 34,356 shares of common stock representing $8,589 in payment of interest to noteholders.