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 technology 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: smaller, lighter and less expensive, is more efficient and as reliable as 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 March 31, 2020, we had cash on hand of $157,000, negative working capital of $3,839,000, an accumulated deficit of $92,178,000 and a stockholders' deficiency of $12,890,000. During the three months ended March 31, 2020 we raised $560,000 in proceeds through the issuance of convertible notes. The proceeds from these private placements have been used to support the ongoing development and marketing of our core technologies and product initiatives.
Management estimates that the 2020 cash needs will run between $1.7 and $2 million, based upon the cash used in operations in the three months ended March 31, 2020. As of March 31, 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 to finance our development 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 March 31, 2020, each of the subsidiaries is 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 March 31, 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 months ended March 31, 2020 and 2019 are as follows:
|
|
For Three Months ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Amortization right-to-use asset
|
|
$
|
16,000
|
|
|
$
|
19,000
|
|
Software
|
|
|
-
|
|
|
|
4,000
|
|
Property and equipment
|
|
|
3,000
|
|
|
|
7,000
|
|
|
|
$
|
19,000
|
|
|
$
|
30,000
|
|
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. 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 March 31, 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 $4,668,000 as of March 31, 2020 based on the trading price on March 31, 2020.
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 net revenue is derived primarily from domestic customers. For the three months ended March 31, 2020 net revenue from products transferred over time amounted to $3,000. One customer accounted for 100% of total Z-Coach subscription sales made during the three months ended March 31, 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 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.
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, 2020 and 2019 amounted to $3,000 and $10,000 respectively and are included in general and administrative expenses.
Stock-based Compensation: FASB Accounting Standards Codification (“ASC”) 718-10 requires all share-based payments be recognized as compensation expense over the service period (generally the vesting period) based on their fair values on the grant date. 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.
The Company recognizes stock compensation expense in accordance with FASB ASU 2019-07, “Equity-Based Payments to Non-Employees,” which requires share-based payments to non-employees be recognized as expense over the service period of the consulting arrangement or as performance conditions are expected to be met. FASB ASC 718-20 requires modifications to terms or conditions of equity awards be treated as an exchange of the original award for a new award. Incremental compensation cost is measured as the excess, if any, of the fair value of the modified award over the fair value of the original award immediately before its terms are modified.
Income Taxes: We account for income taxes using the asset and liability method, the objective of which is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting and the tax basis of our assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. A valuation allowance related to deferred tax assets is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
We account for uncertain tax positions using a more-likely-than-not recognition threshold based on the technical merits of the tax position taken. Tax benefits that meet the more-likely-than-not recognition threshold should be measured as the largest amount of tax benefits, determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement in the financial statements. It is our policy to recognize interest and penalties related to income tax matters as general and administrative expenses. As of March 31, 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 March 31, 2020 and 2019, we excluded 110,877,833 and 96,927,383 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. In addition, we excluded 625,000 warrants from the diluted net loss per common share calculation at March 31, 2020 and 2019 as the conditions for their vesting are not time-based.
NOTE 3 – INVENTORY AND VENDOR LIABILITY
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
Raw materials
|
|
$
|
1,648,000
|
|
|
$
|
1,665,000
|
|
Finished goods
|
|
|
69,000
|
|
|
|
69,000
|
|
|
|
|
1,717,000
|
|
|
|
1,734,000
|
|
Less: Reserve
|
|
|
(1,717,000
|
)
|
|
|
(1,734,000
|
)
|
Inventory (net)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Liability for inventory
|
|
$
|
1,747,000
|
|
|
$
|
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 three months ended March 31, 2020, the Company recovered $16,000 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 of the Company's personal property and fixtures.
The co-borrowers participating in this credit facility received 30,000 common shares for each $100,000 in principal co-borrowed. The fair market value of these shares was estimated on the date of the note issuance and is reflected 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 March 31, 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 March 31, 2020. The Company recognized $7,000 in interest expense on the demand notes during the three months ended March 31, 2020.
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 - SENIOR CONVERTIBLE NOTES
At March 31, 2020, the Company had $10,870,000 in convertible notes outstanding which have been presented net of unamortized debt discounts of $1,716,000, resulting in a carrying value of $9,154,000. As of December 31, 2019, the Company had $10,310,000 in convertible notes outstanding, presented net of unamortized debt discounts of $1,990,000 resulting in a carrying value of $8,410,000.
During the first quarter of 2020, the 2019 Convertible Notes have been reclassified as long-term liabilities as the expected monetization of the Aegis technologies is not anticipated in the coming twelve-month period.
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 and $1,710,000 thereafter.
Included in the face value of convertible notes outstanding at March 31, 2020 and December 31, 2019, is $2,363,000 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 $1,670,000 and $1,170,000 as of March 31, 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
|
|
|
560,000
|
|
|
|
560,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Face value March 31, 2020
|
|
$
|
10,870,000
|
|
|
$
|
1,210,000
|
|
|
$
|
1,675,000
|
|
|
$
|
625,000
|
|
|
$
|
4,370,000
|
|
|
$
|
2,990,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt discount December 31, 2019
|
|
$
|
(1,900,000
|
)
|
|
$
|
(3,000
|
)
|
|
$
|
(353,000
|
)
|
|
$
|
(185,000
|
)
|
|
$
|
(362,000
|
)
|
|
$
|
(997,000
|
)
|
Debt discount issued
|
|
|
(16,000
|
)
|
|
|
(16,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Amortization reported as interest
|
|
|
200,000
|
|
|
|
8,000
|
|
|
|
20,000
|
|
|
|
11,000
|
|
|
|
28,000
|
|
|
|
133,000
|
|
Debt discount March 31, 2020
|
|
$
|
(1,716,000
|
)
|
|
$
|
(11,000
|
)
|
|
$
|
(333,000
|
)
|
|
$
|
(174,000
|
)
|
|
$
|
(334,000
|
)
|
|
$
|
(864,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Convertible Notes (net)
|
|
$
|
9,154,000
|
|
|
$
|
1,199,000
|
|
|
$
|
1,342,000
|
|
|
$
|
451,000
|
|
|
$
|
4,036,000
|
|
|
$
|
2,126,000
|
|
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 of the assets of the Aegis division or five years from the date of issuance.
The conversion rate of the notes is fixed at the greater of: $0.15 per share and the closing market price of the Company’s common stock on the trading day immediately prior to the issuance of the note. Investors receive 30,000 shares of common stock for each $100,000 investment in the 2019 Convertible Notes. The notes were offered in a private placement exempt from registration under Section 4(a)(2) of the Securities Act of 1933 as amended (the "Securities Act") and Rule 506(c) of Regulation D as promulgated by the Securities and Exchange Commission. The offering was available only to “accredited investors” as defined in Rule 501(a) of Regulation D under the Securities Act.
During the three-month period ended March 31, 2020, the Company issued $560,000 in new notes and allocated $16,000 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-month period ended March 31, 2020, the Company recorded $22,000 in interest expense 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-month periods ended March 31, 2020 and March 31,2019, the Company recorded $20,000 and $13,000 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-month periods ended March 31, 2020 and March 31, 2019, the Company recorded $12,000 and $11,000 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-month periods ended March 31, 2020 and March 31, 2019 the Company recorded $92,000 and $80,000, 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-month periods ended March 31, 2020 and March 31, 2019 the Company recorded $177,000 and $169,000, respectively, in interest expense including amortization of debt discount.
NOTE 6- UNSECURED SUBORDINATED PROMISSORY NOTES
The Company had $425,000 in unsecured subordinated promissory notes payable to a board member as of March 31, 2020 and December 31, 2019. These notes bear interest at a rate of 6% per annum and have a maturity date of June 30, 2020. During the three months ended March 31, 2020 and March 31, 2019, the Company recognized interest expense of $6,000 and $1,000, respectively, on these notes. Interest accrued and outstanding on the promissory notes was $21,000 and $15,000 as of March 31, 2020 and December 31, 2019, respectively.
NOTE 7 - RIGHT TO USE BUILDING ASSET
The FASB issued ASU No. 2016-02, “Leases,” which requires a lessee to recognize in its balance sheet the assets and liabilities related to long-term leases that were classified as operating leases under previous guidance. An asset is recognized related to the right to use the underlying asset and a liability is recognized related to the obligation to make lease payments over the term of the lease. The standard became effective for the Company January 1, 2019. As of January 1, 2019, the Company utilized the modified retrospective approach to measure the right to use operating lease agreement associated with the office building. 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-month period ended March 31, 2019 for the terminated lease obligation was $19,000.
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 months ended March 31, 2020 were $16,000 with future maturing lease obligations as follows: $49,000 for the remainder of 2020; $65,000 in 2021 and $64,000 in 2022. Total future lease payments are $195,000 including imputed interest of $18,000.
NOTE 8 - SOFTWARE
Investments in software for the CURA system have been amortized over an estimated useful life of 3 years and were fully amortized as of December 31, 2019. The Company recognized $4,000 in amortization on capitalized software during the three months ended March 31, 2019.
NOTE 9 - PROPERTY AND EQUIPMENT
At March 31, 2020 and December 31, 2019 property and equipment consist of the following:
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
Office equipment
|
|
$
|
199,000
|
|
|
$
|
199,000
|
|
Shop equipment
|
|
|
132,000
|
|
|
|
132,000
|
|
Property and equipment (gross)
|
|
|
331,000
|
|
|
|
331,000
|
|
Less accumulated depreciation
|
|
|
(296,000
|
)
|
|
|
(293,000
|
)
|
Net property and equipment
|
|
$
|
35,000
|
|
|
$
|
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 ended March 31, 2020 for the Company’s business segments follows:
|
|
CURA
|
|
|
Aegis
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
3,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,000
|
|
Margin
|
|
|
2,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,000
|
|
Total costs and expenses
|
|
|
54,000
|
|
|
|
65,000
|
|
|
|
299,000
|
|
|
|
418,000
|
|
Loss from operations
|
|
|
(52,000
|
)
|
|
|
(65,000
|
)
|
|
|
(299,000
|
)
|
|
|
(416,000
|
)
|
Non-operating expense
|
|
|
-
|
|
|
|
-
|
|
|
|
(337,000
|
)
|
|
|
(337,000
|
)
|
Net loss
|
|
$
|
(52,000
|
)
|
|
$
|
(65,000
|
)
|
|
$
|
(636,000
|
)
|
|
$
|
(753,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
$
|
23,000
|
|
|
$
|
4,000
|
|
|
$
|
12,000
|
|
|
$
|
39,000
|
|
Depreciation and amortization
|
|
$
|
-
|
|
|
$
|
3,000
|
|
|
$
|
16,000
|
|
|
$
|
19,000
|
|
Assets at March 31, 2020
|
|
$
|
-
|
|
|
$
|
34,000
|
|
|
$
|
181,000
|
|
|
$
|
376,000
|
|
Segment information for the three months ended March 31, 2019 for the Company’s business segments follows:
|
|
CURA
|
|
|
Aegis
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
7,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,000
|
|
Margin
|
|
|
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
|
)
|
Non-operating 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
|
|
|
$
|
19,000
|
|
|
$
|
30,000
|
|
Assets at March 31, 2019
|
|
$
|
9,000
|
|
|
$
|
50,000
|
|
|
$
|
296,000
|
|
|
$
|
355,000
|
|
NOTE 11 - 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, 2020 the Company issued 94,772 shares of common stock at $0.25 per share in payment of interest on the Company’s 2016 and 2017 Convertible Notes and 112,500 shares of common stock in connection with the issuance of 2019 Convertible Notes. During the three months ended March 31, 2019 the Company 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.
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, 2020 and December 31, 2019 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 $2,759.000 at March 31, 2020 and $2,713,000 at December 31, 2019.
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 and Class B stockholders have a liquidation preference with respect to all accumulated and unsettled dividends. The value of the Class A Preferred stockholders’ liquidation preference was $2,759,000 and $2,713,000 at March 31, 2020 and December 31, 2019, 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, 2020 and December 31, 2019, 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 $496,000 at March 31, 2020 and $488,000 at December 31, 2019.
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, our Class A Preferred stockholders and our Class B Preferred stockholders have a liquidation preference with respect to all accumulated and unsettled dividends. 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, 2020 and December 31, 2019, 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, 2020 and at December 31, 2019.
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, 2020 and December 31, 2019, 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, 2020 and December 31, 2019.
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, 2020 and December 31, 2019, there were 3,238,000 shares of Preferred C-3 stock outstanding.
NOTE 12 - 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, 2020, there are 111,250 options available for future grant under the 2016 Plan.
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, 2020, there are 352,500 options 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, 2020 the Company granted 2,100,000 stock options to certain employees, board members and a consultant. No stock option grants were made during the three months ended March 31, 2019.
Summary For the three months ended March 31, 2020 and March 31, 2019, the Company recognized stock compensation expense of $39,000 and $59,000, respectively. As of March 31, 2020, there was $234,000 of total unrecognized compensation costs related to outstanding stock options, which are expected to be recognized over a weighted average of 1 year.
The weighted average grant date fair value of stock options issued during the three months ended March 31, 2020 was $0.10 per share. The weighted average grant date fair value of stock options vested during the three months ended March 31, 2020 and March 31, 2019 was $42,000 and $4,000, 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:
|
|
2020
|
|
|
2019
|
|
Expected term (years)
|
|
|
6.3
|
|
|
|
-
|
|
Expected forfeiture rate
|
|
|
0%
|
|
|
|
-
|
|
Risk-free rate
|
|
|
1.3%
|
|
|
|
-
|
|
Volatility
|
|
|
179%
|
|
|
|
-
|
|
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 our outstanding stock options for the three months ended March 31, 2020:
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term (years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2020
|
|
|
10,740,500
|
|
|
$
|
0.50
|
|
|
|
2.6
|
|
|
$
|
-
|
|
Granted
|
|
|
2,100,000
|
|
|
|
.10
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Canceled or expired
|
|
|
(404,250
|
)
|
|
|
.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2020
|
|
|
12,436,250
|
|
|
$
|
0.43
|
|
|
|
3.5
|
|
|
$
|
21,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2020
|
|
|
7,608,250
|
|
|
$
|
0.53
|
|
|
|
2.4
|
|
|
$
|
5,000
|
|
During the three months ended March 31, 2020, 404,250 options were canceled due to employee turnover, no options expired unexercised and no options were exercised. During the three months ended March 31, 2019, no options expired unexercised, and no options were canceled, or exercised. As of March 31, 2020, the exercise prices on outstanding stock options ranged from $.07 per share to $1.58 per share.
NOTE 13 - WARRANTS
The following summarizes the activity of our outstanding warrants for the three months ended March 31, 2020:
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2020
|
|
|
7,731,707
|
|
|
|
0.45
|
(A)
|
|
|
6.2
|
(B)
|
|
$
|
33,000
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Canceled or expired
|
|
|
(100,000
|
)
|
|
|
2.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2020
|
|
|
7,631,707
|
|
|
|
0.42
|
(A)
|
|
|
6.1
|
(B)
|
|
$
|
41,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2020
|
|
|
7,006,707
|
|
|
$
|
0.46
|
|
|
|
6.1
|
(C)
|
|
$
|
40,000
|
|
|
(A)
|
The weighted average exercise price for warrants outstanding as of March 31, 2020 and 2019 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, 2020 and 2019 excludes 743,500 warrants with no expiration date.
|
|
(C)
|
The weighted average remaining contractual term for warrants exercisable as of March 31, 2020, and 2019 excludes 118,500 warrants with no expiration date.
|
NOTE 14 - RELATED PARTY TRANSACTIONS
As of March 31, 2020, and December 31, 2019, the Company had $2,363,000 and $2,477,000, respectively, in principal amounts of senior convertible notes outstanding that were held by various members of our board of directors. These notes represent 9,071,562 of potential shares of common stock at March 31, 2020 and 9,388,378 of potential shares of common stock at December 31, 2019. Underlying warrants issued and outstanding in connection with these notes represent 1,184,273 and 1,239,288 of potential shares of common stock at March 31, 2020 and December 31, 2019. The Company had $161,000 and $164,000 at March 31, 2020 and December 31, 2019, respectively in accrued interest on convertible notes due to board members.
As of March 31, 2020 and December 31, 2019, the Company had outstanding $1,670,000 and $1,170,000, respectively, in principal amount of a senior convertible note held by an investor that is deemed an affiliate. These notes represent 8,013,333 of potential shares of common stock at March 31, 2020 and 4,680,000 of potential shares at December 31, 2019. Underlying warrants issued and outstanding in connection with these notes represent 468,000 of potential shares of common stock at March 31, 2020 and at December 31, 2019. The Company had $109,000 and $88,000, respectively in accrued interest on convertible notes due to this investor at March 31, 2020 and December 31, 2019.
As of March 31, 2020 and December 31, 2019, the Company had unsecured subordinated promissory notes outstanding of $425,000 payable to a board member. As of March 31, 2020, the Company had $20,000 in accrued interest on the promissory notes. These notes earn interest at 6% per annum and have a maturity date of June 30, 2020.
NOTE 15 - SUBSEQUENT EVENTS
Paycheck Protection Program
On April 20, 2020 the Company received a $227,700 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. The term of the note is 18 months.
Common Shares Issued in Payment of Interest Expense
Subsequent to March 31, 2020, the Company issued 123,074 shares of common stock representing $21,000 in payment of interest to noteholders.
Shares issued in Connection with 2019 Convertible Notes
Subsequent to March 31, 2020, the Company issued 37,500 shares of commons stock to an investor in connection with their investment in the 2019 Convertible Notes.