UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended ~~June~~September 30, 2018

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

For the transition period from to

Commission File No. 000-24455

CURAEGIS TECHNOLOGIES, ~~INC~~INC..

(Exact name of registrant as specified in its charter)

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

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

1999 Mt. Read Blvd. Building 3, Rochester, New York 14615
(Address of principal executive offices and Zip Code)

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

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one).

Large accelerated filer ☐	Accelerated filer ☐	Non-accelerated filer ☐	Smaller reporting company ☑
			Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

Class		Number of Shares Outstanding at ~~August 6,~~November 13, 2018
Common Stock, $0.01 par value		~~49,999,696~~50,364,549

Table of Contents

CURAEGIS TECHNOLOGIES, INC.

INDEX

		Page
PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements	3

	Condensed Consolidated Balance Sheets as of ~~June~~September 30, 2018 (Unaudited) and December 31, 2017	3

	Condensed Consolidated Statements of Operations – Three Month and ~~Six~~Nine Month Periods Ended ~~June~~September 30, 2018 and 2017 (Unaudited)	4

	Condensed Consolidated Statements of Changes in Stockholders’ Deficit – ~~Six~~Nine Month Period Ended ~~June~~September 30, 2018 (Unaudited)	5

	Condensed Consolidated Statements of Cash Flows – ~~Six~~Nine Month Periods Ended ~~June~~September 30, 2018 and 2017 (Unaudited)	6

	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1819

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2526

Item 4.	Controls and Procedures	2526

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	2526

Item 1A.	Risk Factors	2526

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2526

Item 3.	Defaults Upon Senior Securities	2526

Item 4.	Mine Safety Disclosures	2526

Item 5.	Other Information	2526

Item 6.	Exhibits	2627

SIGNATURE PAGE		2728

EXHIBITS

	Exhibit 31.1
	Exhibit 31.2
	Exhibit 32

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CURAEGIS TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30, 2018 (Unaudited)			December 31, 2017			September 30, 2018 (Unaudited)			December 31, 2017
ASSETS
Current Assets:
Cash	$	89,000		$	194,000		$	95,000		$	194,000
Accounts receivable		1,000			8,000			-			8,000
Inventory (net)		1,741,000			1,744,000			-			1,744,000
Prepaid expenses and other current assets		49,000			27,000			45,000			27,000
Total current assets		1,880,000			1,973,000			140,000			1,973,000

Software (net)		40,000			102,000			17,000			102,000
Property and equipment (net)		99,000			125,000			70,000			125,000
Total non-current assets		139,000			227,000			87,000			227,000
Total Assets	$	2,019,000		$	2,200,000		$	227,000		$	2,200,000

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable	$	249,000		$	167,000		$	231,000		$	167,000
Liability for inventory held at vendor		1,462,000			1,678,000
Other current liabilities		85,000			103,000			139,000			103,000
Accrued interest		165,000			87,000			161,000			87,000
Liability for inventory held at vendor								1,462,000			1,678,000
Deferred revenue		19,000			5,000			14,000			5,000
Capital lease obligation - current		2,000			2,000			2,000			2,000
Total current liabilities		1,982,000			2,042,000			2,009,000			2,042,000

Capital lease obligation, non-current		2,000			3,000			1,000			3,000
Senior convertible notes (net)		5,353,000			3,563,000			5,905,000			3,563,000
Total Liabilities		7,337,000			5,608,000			7,915,000			5,608,000

Commitments		-			-			-			-

Stockholders' Deficit:
Preferred stock, $.01 par value, 100,000,000 shares authorized
Series C, voting, convertible, no dividend, shares issued and outstanding at June 30, 2018 and December 31, 2017: 15,687,500 and 15,937,500, respectively		157,000			159,000
Series C-2, voting, convertible, no dividend, shares issued and outstanding at June 30, 2018 and December 31, 2017: 24,500,000 and 25,000,000, respectively		245,000			250,000
Series C-3, voting, convertible, no dividend, shares issued and outstanding at June 30, 2018 and December 31, 2017: 3,268,000 and 3,388,000, respectively		33,000			34,000
Class A, non-voting, convertible, cumulative dividend $.40 per share per annum, shares issued and outstanding at June 30, 2018 and December 31, 2017: 468,221 and 468,221, respectively		5,000			5,000
Class B, non-voting, convertible, cumulative dividend $.50 per share per annum, shares issued and outstanding at June 30, 2018 and December 31, 2017: 67,500 and 67,500, respectively		1,000			1,000
Common stock, $.01 par value, 400,000,000 shares authorized; shares issued and outstanding at June 30, 2018 and December 31, 2017: 49,849,546 and 48,979,546 respectively		498,000			490,000
Series C, voting, convertible, no dividend, shares issued and outstanding at September 30, 2018 and December 31, 2017: 15,687,500 and 15,937,500, respectively								157,000			159,000
Series C-2, voting, convertible, no dividend, shares issued and outstanding at September 30, 2018 and December 31, 2017: 24,500,000 and 25,000,000, respectively								245,000			250,000
Series C-3, voting, convertible, no dividend, shares issued and outstanding at September 30, 2018 and December 31, 2017: 3,268,000 and 3,388,000, respectively								33,000			34,000
Class A, non-voting, convertible, cumulative dividend $.40 per share per annum, shares issued and outstanding at September 30, 2018 and December 31, 2017: 468,221 and 468,221, respectively								5,000			5,000
Class B, non-voting, convertible, cumulative dividend $.50 per share per annum, shares issued and outstanding at September 30, 2018 and December 31, 2017: 67,500 and 67,500, respectively								1,000			1,000
Common stock, $.01 par value, 400,000,000 shares authorized; shares issued and outstanding at September 30, 2018 and December 31, 2017: 50,308,149 and 48,979,546 respectively								503,000			490,000
Additional paid-in capital		77,021,000			76,494,000			77,454,000			76,494,000
Accumulated deficit		(83,278,000	)		(80,841,000	)		(86,086,000	)		(80,841,000	)
Total Stockholders' Deficit		(5,318,000	)		(3,408,000	)		(7,688,000	)		(3,408,000	)

Total Liabilities and Stockholders' Deficit	$	2,019,000		$	2,200,000		$	227,000		$	2,200,000

See notes to condensed consolidated financial statements.

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CURAEGIS TECHNOLOGIES, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

	Three Months Ended June 30, 2018			Three Months Ended June 30, 2017			Six Months Ended June 30, 2018			Six Months Ended June 30, 2017			Three Months Ended September 30, 2018			Three Months Ended September 30, 2017			Nine Months Ended September 30, 2018			Nine Months Ended September 30, 2017

Revenue	$	8,000		$	8,000		$	16,000		$	17,000
Cost of Revenue		33,000			37,000			70,000			74,000

CURA revenue													$	10,000		$	6,000		$	26,000		$	23,000
Cost of revenue														27,000			37,000			97,000			111,000
Loss on Revenue		(25,000	)		(29,000	)		(54,000	)		(57,000	)		(17,000	)		(31,000	)		(71,000	)		(88,000	)

Costs and expenses:
Engineering and development:
E&D costs, excluding stock-based compensation		301,000			459,000			727,000			944,000
Stock-based compensation		28,000			8,000			7,000			16,000
Total engineering and development		329,000			467,000			734,000			960,000
General and administrative:
G&A costs, excluding stock-based compensation		522,000			709,000			1,124,000			1,439,000
Stock-based compensation		7,000			21,000			30,000			116,000
Total general and administrative		529,000			730,000			1,154,000			1,555,000
Provision for inventory reserve														1,741,000			-			1,741,000			-
Impairment loss														17,000			-			17,000			-
Engineering and development														278,000			211,000			1,012,000			1,171,000
General and administrative														484,000			662,000			1,638,000			2,217,000
Total costs and expenses		858,000			1,197,000			1,888,000			2,515,000			2,520,000			873,000			4,408,000			3,388,000

Loss from operations		(883,000	)		(1,226,000	)		(1,942,000	)		(2,572,000	)		(2,537,000	)		(904,000	)		(4,479000	)		(3,476,000	)

Interest expense		(259,000	)		(165,000	)		(496,000	)		(321,000	)		(271,000	)		(204,000	)		(767,000	)		(525,000	)
Other income		-			1,000			1,000			2,000			-			-			1,000			2,000
Non-operating (expense)		(259,000	)		(164,000	)		(495,000	)		(319,000	)		(271,000	)		(204,000	)		(766,000	)		(523,000	)

Loss before income taxes		(1,142,000	)		(1,390,000	)		(2,437,000	)		(2,891,000	)		(2,808,000	)		(1,108,000	)		(5,245,000	)		(3,999,000	)
Income taxes		-			-			-			-			-			-			-			-
Net Loss		(1,142,000	)		(1,390,000	)		(2,437,000	)		(2,891,000	)		(2,808,000	)		(1,108,000	)		(5,245,000	)		(3,999,000	)

Preferred stock dividends		54,000			62,000			108,000			124,000			55,000			62,000			163,000			186,000
Net Loss attributable to common stockholders	$	(1,196,000	)	$	(1,452,000	)	$	(2,545,000	)	$	(3,015,000	)	$	(2,863,000	)	$	(1,170,000	)	$	(5,408,000	)	$	(4,185,000	)

Net Loss per common share attributable to common stockholders
Basic and Diluted	$	(0.02)		$	(0.03)		$	(0.05)		$	(0.06)		$	(0.06	)	$	(0.02	)	$	(0.11	)	$	(0.09	)
Weighted average number of shares of common stock:
Basic and Diluted		49,571,000			47,810,000			49,302,000			47,591,000			49,646,000			48,321,000			50,189,000			47,768,000

See notes to condensed consolidated financial statements.

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CURAEGIS TECHNOLOGIES, INC.

~~Condensed~~ Consolidated Statement of Changes in Stockholders' ~~Deficit~~Equity

(Unaudited)

Class C
Preferred Stock

Class C-2
Preferred Stock

Class C-3
Preferred Stock

Class A
Preferred Stock

Class B
Preferred Stock

Common Stock

Additional Paid in

Accumulated

Total Stockholders'

Shares

Amount

Shares

Amount

Shares

Amount

Shares

Amount

Shares

Amount

Shares

Amount
Capital Deficit Deficit

Balance at December 31, 2017
15,937,500 $ 159,000 25,000,000 $ 250,000 3,388,000 $ 34,000 468,221 $ 5,000 67,500 $ 1,000 48,979,546 $ 490,000 $76,494,000 ($80,841,000 ) ($3,408,000 )

Conversion of C Preferred Shares to Common
(250,000 ) (2,000 ) 250,000 2,000
Conversion of C2 Preferred Shares to Common
(500,000 ) (5,000 ) 500,000 5,000
Conversion of C3 Preferred Shares to Common
(120,000 ) (1,000 ) 120,000 1,000
Stock-based compensation
37,000 37,000
Issuance of warrants with convertible note
431,000 431,000
Beneficial conversion feature on convertible note
59,000 59,000
Net Loss
(2,437,000 ) (2,437,000 )

Balance At June 30, 2018
15,687,500 $ 157,000 24,500,000 $ 245,000 3,268,000 $ 33,000 468,221 $ 5,000 67,500 $ 1,000 49,849,546 $ 498,000 $77,021,000 ($83,278,000 ) ($5,318,000 )

	Class C Preferred Stock						Class C-2 Preferred Stock						Class C-3 Preferred Stock						Class A Preferred Stock				Class B Preferred Stock				Common Stock				Additional					Total
	Shares			Amount			Shares			Amount			Shares			Amount			Shares		Amount		Shares		Amount		Shares		Amount		Paid in Capital		Accumulated Deficit			Stockholders' Deficit

Balance at December 31, 2017		15,937,500		$	159,000			25,000,000		$	250,000			3,388,000		$	34,000			468,221	$	5,000		67,500	$	1,000		48,979,546	$	490,000	$	76,494,000	$	(80,841,000	)	$	(3,408,000	)

Conversion of C3 Preferred Shares to common stock														(80,000	)		(1,000	)										80,000		1,000							-
Stock-based compensation																																2,000					2,000
Issuance of warrants with convertible note																																208,000					208,000
Beneficial conversion feature on convertible note																																11,000					11,000
Net Loss																																		(1,295,000	)		(1,295,000	)

Balance At March 31, 2018		15,937,500			159,000			25,000,000			250,000			3,308,000			33,000			468,221		5,000		67,500		1,000		49,059,546		491,000		76,715,000		(82,136,000.00	)		(4,482,000	)

Conversion of C Preferred Shares to common stock		(250,000	)		(2,000	)																						250,000		2,000							-
Conversion of C2 Preferred Shares to common stock								(500,000	)		(5,000	)																500,000		5,000							-
Conversion of C3 Preferred Shares to common stock														(40,000	)		-											40,000		-							-
Stock-based compensation																																35,000					35,000
Issuance of warrants with convertible note																																223,000					223,000
Beneficial conversion feature on convertible note																																48,000					48,000
Net Loss																																		(1,142,000	)		(1,142,000	)

Balance At June 30, 2018		15,687,500			157,000			24,500,000			245,000			3,268,000			33,000			468,221		5,000		67,500		1,000		49,849,546		498,000		77,021,000		(83,278,000	)		(5,318,000	)

Stock-based compensation																																42,000					42,000
Issuance of warrants with convertible note																																119,000					119,000
Beneficial conversion feature on convertible note																																161,000					161,000
Common Shares Issued for Interest																												264,453		3,000		63,000					66,000
Common Shares issued upon Note Conversions																												190,150		2,000		47,000					49,000
Exercise of common stock warrant																												4,000		-		1,000					1,000
Net Loss																																		(2,808,000	)		(2,808,000	)

Balance At September 30, 2018		15,687,500		$	157,000			24,500,000		$	245,000			3,268,000		$	33,000			468,221	$	5,000		67,500	$	1,000		50,308,149	$	503,000	$	77,454,000	$	(86,086,000	)	$	(7,688,000	)

See notes to condensed consolidated financial statements.

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CURAEGIS TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended June 30, 2018			Six Months Ended June 30, 2017			Nine Months Ended September 30, 2018			Nine Months Ended September 30, 2017
Cash flows from operating activities:
Net loss	$	(2,437,000	)	$	(2,891,000	)	$	(5,245,000	)	$	(3,999,000	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		88,000			92,000			123,000			136,000
Amortization of discount reported as interest		289,000			231,000			448,000			373,000
Stock-based compensation		37,000			132,000			79,000			160,000
Provision for inventory reserve								1,741,000			-
Impairment of capitalized shop equipment								17,000			-
Changes in working capital items:
Accounts receivable		7,000			4,000			8,000			9,000
Inventory		3,000			24,000			3,000			(52,000	)
Prepaid expenses and other current assets		(22,000	)		8,000			(18,000	)		14,000
Accounts payable and other current liabilities		(75,000	)		205,000			22,000			332,000
Deferred revenue		14,000			(7,000	)		9,000			(10,000	)

Net cash used in operating activities		(2,096,000	)		(2,202,000	)		(2,813,000	)		(3,037,000	)

Cash flows from investing activities:
Purchase of property, equipment and software		-			(142,000	)		-			(419,000	)

Net cash used in investing activities		-			(142,000	)		-			(419,000	)

Cash flows from financing activities:
Proceeds from issuance of senior convertible note (net)		1,991,000			392,000			2,713,000			1,617,000
Proceeds from exercise of common stock warrant		-			10,000			1,000			10,000

Net cash provided by financing activities		1,991,000			402,000			2,714,000			1,627,000

Net decrease in cash		(105,000	)		(1,942,000	)		(99,000	)		(1,829,000	)
Cash at beginning of period		194,000			2,009,000			194,000			2,009,000
Cash at end of period	$	89,000		$	67,000		$	95,000		$	180,000

Supplemental Disclosures:
Cash used for payment of interest	$	128,000			-		$	219,000		$	66,000
Interest expense paid in common shares							$	66,000		$	-
Debt discount related to warrants and beneficial conversion feature							$	770,000		$	1,050,000

See notes to condensed consolidated financial statements.

Table of Contents

CURAEGIS TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION

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

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

The Company has created the CURA System to market products that reduce fatigue risk in the workplace and help individuals manage their sleep and improve alertness. The CURA System consists of the following capabilities:

●

real-time alertness monitoring utilizing the CURA app,

●

the Group Wellness Index, and

●

the Z-Coach wellness program.

Our goal with the Aegis hydraulic pump technology is to bring to the marketplace a unique concept in hydraulic pumps and motors that will be:

●

smaller, lighter and significantly less expensive than conventional pumps and motors,

●

more efficient,

●

as reliable,

●

~~price competitive,~~ and

●

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 ~~June~~September 30, 2018, we have cash on hand of ~~$89,000,~~$95,000, negative working capital of ~~$102,000,~~$1,869,000, a stockholders’ deficit of ~~$5,318,000~~$7,688,000 and an accumulated deficit of ~~$83,278,000.~~$86,086,000. During the ~~six~~nine months ended ~~June~~September 30, 2018 we ~~raised $1,995,000~~sold $2,720,000 in gross proceeds through the issuance of convertible notes and warrants, proceeds of which have been used to support the ongoing development and marketing of our core technologies and product initiatives.

Management estimates that the fiscal 2018 year cash needs, based on its current development and product plans, will ~~range from~~approximate $4.0 ~~to $4.5~~ million. As of ~~June~~September 30, 2018, the Company’s cash on hand is not sufficient to cover the Company’s future working capital requirements. This raises substantial doubt as to the Company’s ability to continue as a going concern. Management continues to use its best efforts to develop financing opportunities to fund the development and commercialization of the CURA and Aegis products.

Since inception, we have financed our operations by the sale of our securities and debt financings. We need to raise additional funds to meet our working capital needs, to fund expansion of our business, to complete development, testing and marketing of our products, or to make strategic acquisitions or investments. No assurance can be given that necessary funds will be available for us to finance our development on acceptable terms, if at all. Furthermore, such additional financings may involve dilution to our stockholders or may require that we relinquish rights to certain of our technologies or products. In addition, we may experience operational difficulties and delays due to working capital restrictions. If adequate funds are not available from additional sources of financing, we will have to delay or scale back our growth plans.

The Company’s ability to fund its current and future commitments from its available cash depends on a number of factors. These factors include the Company’s ability to (i) launch and generate sales from the CURA division; (ii) generate revenue from the licensing or sale of our hydraulic technologies; orand (iii) decrease engineering and development and administrative expenses. ~~Even if~~If these and other factors are not met, the Company will need to raise funds in order to meet its working capital needs and pursue its growth strategy. Although there can be no such assurances, management believes that sources for these additional funds will be available through either current or future investors.

Table of Contents

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, 2017 contained in the Company’s 2017 Annual Report on Form 10-K filed with the SEC.

Consolidation: The financial statements include the accounts of the Company, our wholly-owned subsidiary Iso-Torque Corporation, and our majority-owned subsidiary, Ice Surface Development, Inc. (56% owned). As of ~~June~~September 30, 2018, each of the subsidiaries is non-operational. All material intercompany transactions and account balances have been eliminated in consolidation.

Use of Estimates: The preparation of financial statements in conformity with ~~U.S. generally accepted accounting principles~~ (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 $15,000.

Inventory: Inventory is stated at the lower of cost or net realizable value with cost determined ~~under~~using the average cost method. ~~We record provisions~~A reserve for excess, obsolete or slow-moving inventory is evaluated and determined based on changes in customer demand, technology developments or other economic factors. During the quarter ended September 30, 2018, the Company recorded a reserve of $1,741,000 in connection with a review of inventory on-hand. This amount recognizes a reserve for the myCadian watch related components and finished goods on hand at September 30, 2018. This inventory may be used in a CURA medical product under development but not yet offered by the Company. The CURA app, currently offered by the Company, does not use these inventory components. The Company will continue to evaluate the adequacy of this reserve in future reporting periods. The allowance for excess, obsolete or slow-moving inventory was $1,741,000 and $6,000 at ~~June~~September 30, 2018 and December 31, 2017.

Accounts Receivable: We carry our accounts receivable at invoice amount less an allowance for doubtful accounts. On a periodic basis, we evaluate our accounts receivable and establish an allowance for doubtful accounts, based on a history of past write-offs and collections and current credit conditions. We do not accrue interest on past due invoices. The allowance for doubtful accounts was zero at ~~June~~September 30, 2018 and December 31, 2017.

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. Depreciation and software amortization expense for the ~~six~~nine months ended ~~June~~September 30, 2018 and 2017 amounted to ~~$88,000~~$123,000 and ~~$92,000,~~$136,000, respectively. Depreciation and software amortization expense for the three months ended ~~June~~September 30, 2018 and 2017 amounted to ~~$44,000~~$35,000 and ~~$46,000,~~$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. During the ~~six~~nine months ended ~~June~~September 30, 2018 ~~and June 30, 2017 no~~the Company recorded $17,000 in impairment charges ~~were recorded.~~resulting from the reduction of estimated useful life on certain capitalized equipment from five years to three years. The Company did not record any impairment charge in the nine-month period ended September 30, 2017.

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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 ~~June~~September 30, 2018 and December 31, 2017. The carrying amount of cash, accounts receivable, prepaid expenses and other current assets, accounts payable, deferred revenue and accrued expenses approximates their fair value due to their short maturity. The carrying amount of capital lease obligations approximates fair value because stated or implied interest rates approximate current interest rates that are available for debt with similar terms. The senior convertible notes can be converted into ~~26,874,775~~29,584,625 shares of common stock with an underlying value of ~~$8,062,000~~$7,692,000 as of ~~June~~September 30, 2018 based on the closing trading price on ~~June~~September 30, 2018.

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 ~~six~~nine months ended ~~June~~September 30, 2018 net revenue from products transferred over time amounted to ~~$12,000~~$19,000 and net revenue from products transferred at a point in time amounted to ~~$4,000.~~$7,000. For the three months ended ~~June~~September 30, 2018 and 2017, net revenue from products transferred over time amounted to ~~$8,000~~$ 7,000 and $6,000 in each ~~quarter. There were no sales from~~quarter, respectively. For products transferred at a point in time during the ~~second~~third quarter of ~~2018.~~2018 and 2017 net revenue amounted to $3,000 and zero respectively.

~~Revenue from~~CURA revenue is recognized (a) upon receipt of payment at the point of sale of the CURA ~~System products is recognized~~app, (b) upon the shipment of myCadian devices ~~to a customer~~ 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. ~~Revenue earned~~The Company recognized $7,000 during the nine months ended September 30, 2018 from the sale of the CURA app ~~since the soft launch~~and devices. Two customers accounted for 93% of these CURA app and device sales in ~~May 2018 is not material.~~2018.

One customer accounted for ~~79%~~76% of total Z-Coach subscription sales made during the ~~six~~nine months ended ~~June~~September 30, 2018 and ~~another~~that customer also accounted for ~~40%~~44% of the sales made in the three months ended ~~June~~September 30, 2018. During the three ~~and six~~ month ~~periods~~period ended ~~June~~September 30, 2017, ~~a single~~one customer accounted for ~~66%~~94% and ~~55%, respectively of~~another during the ~~sales made in each respective period.~~nine months ended September 30, 2017 another accounted for 42%. 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 ~~includes~~costs include personnel-related costs, materials and supplies, depreciation and consulting services.

Patent costs for the three months ended ~~June~~September 30, 2018 and ~~June~~September 30, 2017 amounted to ~~$25,000~~$44,000 and ~~$44,000,~~$46,000, respectively, and are included in general and administrative expenses. Patent costs for the ~~six~~nine months ended ~~June~~September 30, 2018 and ~~June~~September 30, 2017 amounted to ~~$56,000~~$100,000 and ~~$74,000,~~$120,000, respectively, and are included in general and administrative expenses.

Stock-based Compensation: FASB Accounting Standards Codification (“ASC”) 718-10 requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense over the service period (generally the vesting period) in the consolidated financial statements based on their fair values on the grant date. The impact of actual forfeitures prior to vesting is 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.

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During the third quarter of 2018 the Company adopted FASB ~~ASC 505-50,~~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. Using a Black-Scholes valuation model, we periodically reassess the fair value of non-employee options as service conditions are met, which generally aligns with the vesting period of the options, and we adjust the expense recognized in the consolidated financial statements accordingly.

FASB ASC 718-20 requires that modifications of the terms or conditions of equity awards be treated as an exchange of the original award for a new award. Incremental compensation cost is measured as the excess, if any, of the fair value of the modified award over the fair value of the original award immediately before its terms are modified. 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 ~~June~~September 30, 2018, and December 31, 2017, 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 ~~June~~September 30, 2018 and 2017 we excluded ~~87,941,132~~91,575,157 and ~~72,197,708~~74,644,858 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 ~~June~~September 30, 2018 and 2017 as the conditions for their vesting are not probable.

Recent Accounting Pronouncements: In June 2018, the FASB issued ASU No.2018-07, "Compensation - Stock Compensation (Topic 718) Improvements to Nonemployee Share-Based Payment Accounting." The FASB issued this update as part of its Simplification Initiative. The amendments in this update expand the scope of Topic 718 to include share-based payments for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option model and the attribution of cost. The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor's own operations by issuing share-based payment awards. The amendments for this update are effective for public companies for fiscal years beginning after December 15, 2018. Early adoption is permitted but no earlier than the adoption date of Topic 606. An entity should only remeasure liability-classified awards that have not been settled by the date of adoptions and equity classified awards for which a measurement date has not been established through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. Upon transition, the entity is required to measure these nonemployee awards at fair value as of the adoption date. The Company believes the adoption of this standard on our consolidated financial statements and related disclosures will not be material.

On February 25, 2016, the FASB issued ASU No. 2016-02, “Leases,” a comprehensive new lease standard which will supersede previous lease guidance. The standard requires a lessee to recognize inon its balance sheet assets and liabilities related to long-term leases that were classified as operating leases under previous guidance. An asset will be recognized related to the right to use the underlying asset and a liability will be recognized related to the obligation to make lease payments over the term of the lease. The standard also requires expanded disclosures surrounding leases. The standard is effective for fiscal periods beginning after December 15, 2018, and ~~requires~~allows modified retrospective adoption, with early adoption permitted. The Company ~~believes~~continues to evaluate the impact of the adoption of this standard on our consolidated financial statements and related ~~disclosures will not be material.~~disclosures.

In July 2018, the FASB issued ASU 2018-11 and ASU 2018-10 “Codification Improvements to Topic 842, Leases” and “Targeted Improvements” guidance. The Company is reviewing the guidance in these standards but does not believe the new standards will have a significant effect on the Company’s consolidated financial statements as we have limited long term lease contracts in effect. The standard is effective for fiscal periods beginning after December 15, 2018, and allows modified retrospective adoption, with early adoption permitted. The Company continues to evaluate the impact of the adoption of this standard on our consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU 2018-15 “Intangibles – Goodwill and Other- Internal-Use Software (Subtopic 350-40) Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” This guidance was issued to assist in the evaluation of the accounting for fees paid by a customer in a cloud computing (hosting arrangement) by providing guidance for determining when the arrangement includes a software license. If a hosting arrangement includes a license to internal-use-software, then the software license is accounted for by the customer in accordance with Subtopic 350-40, as an intangible asset and to the extent that the payments are made over time, a liability is also recognized. If the agreement does not include a license, the arrangement is treated as a service contract. This guidance is effective for years beginning after December 15, 2019. The Company is reviewing this guidance and does not believe it will have a significant effect on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13 “Fair Value Measurement (Topic 820)” related to changes in disclosure requirements for fair value measurement. The Company does not believe this guidance will have a material effect on the Company’s consolidated financial statements. This guidance is effective for fiscal years beginning after December 15, 2019.

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NOTE 3 – INVENTORY AND RELATED VENDOR LIABILITY

The Company had the following inventory held at our manufacturing vendor and on hand as of ~~June~~September 30, 2018 and December 31, 2017:

	June 30,			December 31,			September 30,			December 31,
	2018			2017			2018			2017
Raw materials	$	1,678,000		$	1,681,000		$	1,678,000		$	1,681,000
Finished goods		69,000			69,000			69,000			69,000
		1,747,000			1,750,000			1,747,000			1,750,000
Less: Reserve for quality		(6,000	)		(6,000	)		(1,747,000	)		(6,000	)
Inventory (net)	$	1,741,000		$	1,744,000		$	-		$	1,744,000
Liability for inventory held at vendor	$	1,462,000		$	1,678,000		$	1,462,000		$	1,678,000

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During 2017, the Company initiated an agreement with a 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. As of ~~June~~September 30, 2018, the Company has $1,678,000 in raw material inventory 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 quarter ended September 30, 2018, the Company recorded a 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 September 30, 2108. Management is developing a CURA medical product that could use this inventory, but that product offering has not been finalized or offered to this potential market. Management will continue to evaluate this reserve in future reporting periods.

NOTE 4 - SENIOR CONVERTIBLE NOTES AND WARRANTS

At ~~June~~September 30, 2018, the Company had ~~$7,821,000~~$8,486,000 in convertible notes outstanding which have been presented net of unamortized debt discounts of ~~$2,468,000,~~$2,581,000, resulting in a carrying value of ~~$5,353,000 as of June 30, 2018.~~$5,905,000. As of December 31, 2017, the Company had $5,825,000 in convertible notes outstanding, presented net of unamortized debt discounts of $2,262,000 resulting in a carrying value of $3,563,000 as of December 31, 2017.

As of ~~June~~September 30, 2018, the Company had outstanding ~~$1,902,000~~$2,027,500 in convertible notes payable to five of our directors and $1,170,000 in convertible notes payable to an investor that is deemed an affiliate.

JULY 2018 Convertible Notes

Face value June 30, 2018	$	400,000
Face value JULY 2018 Convertible Notes issued				$	500,000
Debt discount at issuance		(120,000	)		(153,000	)
Amortization of debt discount since inception		2,000			3,000
2018 Senior Convertible Notes (net)	$	282,000
JULY 2018 Senior Convertible Notes (net)				$	350,000

On July 19, 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 making cumulative investments in this offering of less than $500,000 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 and investors making cumulative investments in this offering of $500,000 and greater were granted warrants to purchase an aggregate number of shares of common stock equal to 25% 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 1933 as amended (the "Securities Act") and Rule 506(c) of Regulation D as promulgated by the Securities and Exchange Commission. The offering was available only to “accredited investors” as defined in Rule 501(a) of Regulation D under the Securities Act.

During the three and nine months ended September 30, 2018, the Company issued $500,000 face value of JULY 2018 Convertible Notes and granted 320,000 warrants with an exercise price of $0.25 per share and 10-year terms. The Company incurred approximately $3,000 in legal costs in connection with the issuance of the 2018 convertible notes. In accordance with FASB ASU 2015-03 Interest-Imputation of Interest (Subtopic 835-30), these debt issuance costs have been presented as a direct deduction from the carrying amount of the Convertible Note liability and reflected as a component of debt discount which is amortized and included in interest expense over the five-year term of the JULY 2018 Convertible Notes.

The Company allocated $153,000 of the proceeds from the JULY 2018 Convertible Notes to debt discount based on the computed fair value of the warrants and the debt issuance costs on the date of investment. As of September 30, 2018, these notes have a face value of $500,000 and are presented net of unamortized debt discount of $150,000 related to warrants, beneficial conversion feature and debt issuance costs resulting in a carrying value of $350,000.

During the nine months ended September 30, 2018, the Company recorded $3,000 in interest expense which includes the amortization of debt discount.

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2018 Convertible Notes

Face value 2018 Convertible Notes issued	$	625,000
Debt discount at issuance		(250,000	)
Amortization of debt discount since inception		8,000
2018 Senior Convertible Notes (net)	$	383,000

On May 8, 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~~five-year maturity. On July 19, 2018, the Company’s board approved a resolution to complete this offering. As of July 19, 2018, investments received on the 2018 SPA totaled $625,000 and included the issuance of 400,000 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 making cumulative investments, in this offering, of less than $500,000 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 and investors making cumulative investments, in this offering, of $500,000 and greater were granted warrants to purchase an aggregate number of shares of common stock equal to 25% 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 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 ~~six~~nine months ended ~~June~~September 30, 2018, the Company issued ~~$400,00~~$625,000 face value of 2018 Convertible Notes and granted ~~310,000~~460,000 warrants with an exercise price of $0.25 per share and ~~10 year~~10-year terms. The Company incurred approximately $4,000 in legal costs in connection with the issuance of the 2018 Convertible Notes. In accordance with FASB ASU 2015-03 Interest-Imputation of Interest (Subtopic 835-30), these debt issuance costs have been presented as a direct deduction from the carrying amount of the ~~Convertible Note~~convertible note liability and reflected as a component of debt discount which is amortized and included in interest expense over the five-year term of the Convertible Notes.

The Company allocated ~~$120,000~~$250,000 of the proceeds from the 2018 Convertible Notes to debt discount based on the computed fair value of the warrants, the beneficial conversion feature, and the debt issuance costs on the date of investment. As of ~~June~~September 30, 2018, these notes have a face value of ~~$400,000~~$625,000 and are presented net of unamortized debt discount of ~~$118,000~~$242,000 related to warrants, beneficial conversion feature and debt issuance costs resulting in a carrying value of ~~$282,000.~~$383,000.

During the ~~six months~~three and nine-month periods ended ~~June~~September 30, 2018, the Company recorded ~~$2,000~~$6,000 and $8,000, respectively in interest expense which includes the amortization of debt discount.

2017 6% Convertible Notes

Face value of 2017 Convertible Notes	$	4,420,000
Face value of 2017 Convertible Notes issued				$	4,420,000
Debt discount at issuance		(1,897,000	)		(1,897,000	)
2017 extinguishment impact on discount		1,183,000			1,183,000
Debt conversion net of unamortized discount					(46,000	)
Amortization of debt discount since inception		127,000			155,000
2017 Senior Convertible Notes (net)	$	3,833,000		$	3,815,000

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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 ~~(the~~(as amended, the “2017 SPA”). On July 19, 2018, the Company’s board approved a resolution to complete this offering. As of July 19, 2018, 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~~five-year maturity and a fixed annual interest rate of 6%. The initial year of interest expense will be paid to the note holders on the first anniversary of each note's issuance and quarterly thereafter. Principal is due in full on each note's maturity date.

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The conversion rate of the notes was originally fixed at $0.50 per share as determined at the close of business on May 31, 2017 and subsequently modified on November 30, 2017 to $0.333 per share. Investors making investments of less than $500,000 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 and investors making investments of $500,000 and greater were granted warrants to purchase an aggregate number of shares of common stock equal to 25% of the number of shares issuable upon the conversion of the notes. Originally, the warrants had a fixed exercise price of $0.50 and a ten-year term from the date of issuance. The conversion price for the warrants was also modified on November 30, 2017 to $0.333 per share. In connection with this amendment, $2,450,000 of face value notes were re-issued, in the fourth quarter of 2017, to reflect a reduction of the conversion price on the notes from $0.50 per share to $0.333 per share. The exercise price of the underlying warrants was also reduced from $0.50 per share to $0.333 per share. The amendment and reissuance of these 2017 Convertible Notes was accounted for as an extinguishment and re-issuance of the replacement notes and warrants in 2017.

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.

The Company issued $1,595,000 in 2017 Convertible Notes during the ~~six~~nine months ended ~~June~~September 30, 2018 representing 4,789,790 potential common stock shares and 1,120,871 warrants. The Company allocated $374,000 of the proceeds received in the ~~first half of~~nine months ended September 30, 2018 to debt discount based on the computed fair value of the warrants issued and the beneficial conversion feature.

During the ~~six months~~quarter ended ~~June~~September 30, 2018, the Company recorded ~~$166,000~~$94,000 in interest expense including $28,000 of amortization of debt discount. During the nine months ended September 30, 2018, the Company recorded $260,000 in interest expense including amortization of debt discount of ~~$48,000.~~$76,000. During the ~~six months~~quarter ended ~~June~~September 30, 2017, the Company recorded ~~$7,000~~$43,000 in interest expense including $28,000 of amortization of debt discount. During the nine months ended September 30, 2017, the Company recorded $50,000 in interest expense including amortization of debt discount of ~~$6,000.~~$34,000.

As of ~~June~~September 30, 2018, the outstanding 2017 Convertible Notes had a face value of ~~$4,420,000~~$4,370,000 and ~~are~~have been presented net of unamortized debt discount of ~~$587,000~~$555,000 resulting in a carrying value of ~~$3,833,000. During the quarter ended June 30, 2018, the Company recorded $92,000 in interest expense including $28,000 of amortization of debt discount.~~$3,815,000. As of December 31, 2017, the 2017 Convertible Notes had a face value of $2,825,000 and were presented net of unamortized debt discount of $261,000 resulting in a carrying value of $2,564,000.

2016 6% Convertible Notes

Face value December 31, 2016	$	3,000,000
Face value 2016 Convertible Notes issued				$	3,000,000
Debt discount at issuance		(2,551,000	)		(2,551,000	)
Debt conversion net of unamortized discount					(3,000	)
Amortization of debt discount since inception		789,000			911,000
2016 Senior Convertible Notes (net)	$	1,238,000		$	1,357,000

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~~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 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.

In connection with the issuance of the 2016 Convertible Notes, the Company granted 1,200,000 warrants with an exercise price of $0.25 per share and 10 year terms. The Company incurred $28,000 in debt issuance costs in connection with the issuance of the Convertible Notes. In accordance with FASB ASU 2015-03 Interest-Imputation of Interest (Subtopic 835-30), these debt issuance costs have been presented as a direct deduction from the carrying amount of the Convertible Note liability and reflected as a component of debt discount which is amortized and included in interest expense over the five-year term of the Convertible Notes.

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The Company allocated $2,551,000 of the proceeds from the 2016 Notes to debt discount based on the computed fair value of the warrants, the beneficial conversion feature and the debt issuance costs on the date of investment. In connection with the issuance of the 2016 Convertible Notes, the Company granted 1,200,000 warrants with an exercise price of $0.25 per share and 10-year terms. The Company incurred $28,000 in debt issuance costs in connection with the issuance of the 2016 Convertible Notes. In accordance with FASB ASU 2015-03 Interest-Imputation of Interest (Subtopic 835-30), these debt issuance costs have been presented as a direct deduction from the carrying amount of the convertible note liability and reflected as a component of debt discount which is amortized and included in interest expense over the five-year term of the 2016 Convertible Notes.

As of ~~June~~September 30, 2018, ~~these notes have~~the outstanding 2016 Convertible Notes had a face value of ~~$3,000,000~~$2,990,000 and ~~are~~have been presented net of unamortized debt discount of ~~$1,762,000 related to warrants, beneficial conversion feature and debt issuance costs~~$1,663,000 resulting in a carrying value of ~~$1,238,000.~~$1,357,000. As of December 31, 2017, the 2016 Convertible Notes had a face value of $3,000,000 and were presented net of unamortized debt discount of $2,001,000 related to warrants, beneficial conversion feature and debt issuance costs resulting in a carrying value of $999,000.

During the three months ended ~~June~~September 30, 2018, the Company recorded ~~$165,000~~$167,000 in interest expense including amortization of debt discount of ~~$120,000.~~$122,000. During the ~~six~~nine months ended ~~June~~September 30, 2018 the Company recorded ~~$328,000~~$495,000 in interest expense including amortization of debt discount of ~~$238,000.~~$360,000. During the three months ended ~~June~~September 30, 2017, the Company recorded ~~$158,000~~$160,000 in interest expense including ~~$113,000~~$115,000 in amortization of debt discount. During the ~~six month~~nine-month period ended ~~June~~September 30, 2017 the Company recorded ~~$314,000~~$475,000 in interest expense including ~~$225,000~~$339,000 in amortization of debt discount.

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NOTE 5 – SOFTWARE

The Company invested in software for the CURA System during 2015. These assets are amortized over an estimated useful life of 3 years. Amortization expense recognized for the ~~six~~nine months ended ~~June~~September 30, 2018 and 2017 was ~~$63,000 in each period.~~$85,000 and $94,000 respectively. Amortization expense recognized for the three months ended ~~June~~September 30, 2018 and 2017 was ~~$32,000 in both periods.~~$23,000 and $31,000 respectively.

The net value of capitalized software at ~~June~~September 30, 2018 and at December 31, 2017 was ~~$40,000~~$17,000 and $102,000, respectively. Future amortization expense is expected to be ~~$29,000~~$6,000 in 2018 and $11,000 in 2019.

NOTE 6 - PROPERTY AND EQUIPMENT

At ~~June~~September 30, 2018 and December 31, 2017 property and equipment consist of the following:

	June 30, 2018			December 31, 2017			September 30, 2018			December 31, 2017
Office equipment	$	249,000		$	249,000		$	249,000		$	249,000
Shop equipment		231,000			231,000			182,000			231,000
Leasehold improvements		253,000			253,000			253,000			253,000
		733,000			733,000			684,000			733,000
Less accumulated depreciation		(634,000	)		(608,000	)		(614,000	)		(608,000	)
Net property and equipment	$	99,000		$	125,000		$	70,000		$	125,000

Depreciation expense for the ~~six~~nine months ended ~~June~~September 30, 2018 and 2017 was ~~$25,000~~$38,000 and ~~$29,000~~$42,000 respectively. Depreciation expense for the three months ended ~~June~~September 30, 2018 and 2017 was $13,000 and ~~$14,000,~~$13,000, respectively.

NOTE 7- 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 ~~June~~September 30,, 2018 for the Company’s business segments follows:

	CURA			Aegis			Corporate			Total			CURA			Aegis			Corporate			Total

Revenue	$	8,000		$	-		$	-		$	8,000		$	10,000		$	-		$	-		$	10,000
Loss on Revenue		(25,000	)		-			-			(25,000	)		(17,000	)		-			-			(17,000	)
Total Costs and Expenses		373,000			160,000			325,000			858,000
Total costs and expenses														1,976,000			206,000			338,000			2,520,000
Loss from operations		(398,000	)		(160,000	)		(325,000	)		(883,000	)		(1,993,000	)		(206,000	)		(338,000	)		(2,537,000	)
Other expense		-			-			(259,000	)		(259,000	)
Non-operating expense														-			-			(271,000	)		(271,000	)
Net loss	$	(398,000	)	$	(160,000	)	$	(584,000	)	$	(1,142,000	)	$	(1,993,000	)	$	(206,000	)	$	(609,000	)	$	(2,808,000	)

Stock based compensation	$	5,000		$	26,000		$	4,000		$	35,000		$	-		$	8,000		$	34,000		$	42,000
Depreciation and amortization	$	37,000		$	5,000		$	2,000		$	44,000		$	28,000		$	5,000		$	2,000		$	35,000
Capital expenditures	$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-
Assets at June 30, 2018	$	1,810,000		$	65,000		$	144,000		$	2,019,000
Assets at September 30, 2018													$	23,000		$	60,000		$	144,000		$	227,000

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Segment information for the~~six~~nine months ended ~~June~~September 30,~~, 201~~8 2018 for the Company’s business segments follows:

	CURA			Aegis			Corporate			Total			CURA			Aegis			Corporate			Total

Revenue	$	16,000		$	-		$	-		$	16,000		$	26,000		$	-		$	-		$	26,000
Loss on revenue		(54,000	)		-			-			(54,000	)		(71,000	)		-			-			(71,000	)
Total costs and expenses		896,000			291,000			701,000			1,888,000			2,872,000			497,000			1,039,000			4,408,000
Loss from operations		(950,000	)		(291,000	)		(701,000	)		(1,942,000	)		(2,943,000	)		(497,000	)		(1,039,000	)		(4,479,000	)
Other expense		-			-			(495,000	)		(495,000	)
Non-operating expense														-			-			(766,000	)		(766,000	)
Net loss	$	(950,000	)	$	(291,000	)	$	(1,196,000	)	$	(2,437,000	)	$	(2,943,000	)	$	(497,000	)	$	(1,805,000	)	$	(5,245,000	)

Stock based compensation	$	(11,000	)	$	28,000		$	20,000		$	37,000		$	(11,000	)	$	36,000		$	54,000		$	79,000
Depreciation and amortization	$	74,000		$	10,000		$	4,000		$	88,000		$	102,000		$	15,000		$	6,000		$	123,000
Capital expenditures	$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-
Assets at June 30, 2018	$	1,810,000		$	65,000		$	144,000		$	2,019,000
Assets at September 30, 2018													$	23,000		$	60,000		$	144,000		$	227,000

Segment information for the three months ended ~~June~~September 30, 2017 for the Company’s business segments follows:

	CURA			Aegis			Corporate			Total

Revenue	$	6,000		$	-		$	-		$	6,000
Loss on Revenue		(31,000	)		-			-			(31,000	)
Total costs and expenses		381,000			134,000			358,000			873,000
Loss from operations		(412,000	)		(134,000	)		(358,000	)		(904,000	)
Non-operating expense		-			-			(204,000	)		(204,000	)
Net loss	$	(412,000	)	$	(134,000	)	$	(562,000	)	$	(1,108,000	)

Stock based compensation	$	2,000		$	2,000		$	24,000		$	28,000
Depreciation and amortization	$	38,000		$	4,000		$	2,000		$	44,000
Capital expenditures	$	263,000		$	14,000		$	-		$	277,000
Assets at September 30, 2017	$	609,000		$	80,000		$	229,000		$	918,000

Segment information for the nine months ended September 30, 2017 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
666,000 137,000 394,000 1,197,000
Loss from operations
(695,000
)
(137,000
)
(394,000
)
(1,226,000
)
Other expense
- - (164,000
)
(164,000
)
Net loss
$ (695,000
)
$ (137,000
)
$ (558,000
)
$ (1,390,000
)

Stock based compensation
$ 2,000 $ 2,000 $ 25,000 $ 29,000
Depreciation and amortization
$ 38,000 $ 5,000 $ 3,000 $ 46,000
Capital expenditures
$ 97,000 $ 34,000 $ - $ 131,000
Assets at June 30, 2017
$ 308,000 $ 71,000 $ 128,000 $ 507,000

~~Segment information for the six months ended June 30, 201~~7 ~~for the Company’s business segments follows:~~

	CURA			Aegis			Corporate			Total			CURA			Aegis			Corporate			Total

Revenue	$	17,000		$	-		$	-		$	17,000		$	23,000		$	-		$	-		$	23,000
Loss on revenue		(57,000	)		-			-			(57,000	)		(88,000	)		-			-			(88,000	)
Total costs and expenses		1,425,000			269,000			821,000			2,515,000			1,807,000			402,000			1,179,000			3,388,000
Loss from operations		(1,482,000	)		(269,000	)		(821,000	)		(2,572,000	)		(1,895,000	)		(402,000	)		(1,179,000	)		(3,476,000	)
Other expense		-			-			(319,000	)		(319,000	)
Non-operating expense														-			-			(523,000	)		(523,000	)
Net loss	$	(1,482,000	)	$	(269,000	)	$	(1,140,000	)	$	(2,891,000	)	$	(1,895,000	)	$	(402,000	)	$	(1,702,000	)	$	(3,999,000	)

Stock based compensation	$	78,000		$	4,000		$	50,000		$	132,000		$	80,000		$	6,000		$	74,000		$	160,000
Depreciation and amortization	$	75,000		$	11,000		$	6,000		$	92,000		$	113,000		$	15,000		$	8,000		$	136,000
Capital expenditures	$	108,000		$	34,000		$	-		$	142,000		$	372,000		$	47,000		$	-		$	419,000
Assets at June 30, 2017	$	308,000		$	71,000		$	128,000		$	507,000
Assets at September 30, 2017													$	609,000		$	80,000		$	229,000		$	918,000

NOTE 8 - 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 ~~six~~nine months ended ~~June~~September 30, 2018 we issued ~~870,000~~874,000 shares of common stock in connection with ~~various~~ conversion notices received from a Series C, C-2 and C-3 ~~convertible~~ preferred ~~stockholders.~~stockholders and warrant exercises. The Company also issued 264,453 common shares at $0.25 per share in payment of interest on the Company's 2016 and 2017 Convertible Notes. During the ~~six~~nine months ended ~~June~~September 30, 2017, the Company issued ~~1,113,000~~1,596,500 shares of common stock in connection with conversion notices received from convertible preferred stockholders.

Preferred Stock

Our certificate of incorporation permits the Company to issue up to 100,000,000 shares of $.01 par value preferred stock.

~~Table of Contents~~

Class A Preferred Stock

At ~~June~~September 30, 2018 and December 31, 2017, 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 ~~$2,438,000~~$2,484,000 at ~~June~~September 30, 2018 and $2,346,000 at December 31, 2017.

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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 ~~$2,438,000~~$2,484,000 and $2,346,000 at ~~June~~September 30, 2018 and December 31, 2017, 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 ~~June~~September 30, 2018 and December 31, 2017, 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 ~~$437,000~~$445,000 at ~~June~~September 30, 2018 and $420,000 at December 31, 2017.

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 ~~$437,000~~$445,000 and $420,000 at ~~June~~September 30, 2018 and December 31, 2017, 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 ~~June~~September 30, 2018 and December 31, 2017 respectively, there were 15,687,500 and 15,937,500 shares of Series C Preferred stock outstanding. The value of the Series C Preferred stockholders’ liquidation preference was $6,275,000 at ~~June~~September 30, 2018 and $6,375,000 at December 31, 2017.

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 ~~June~~September 30, 2018 and December 31, 2017 respectively, there were 24,500,000 and 25,000,000 shares of Preferred C-2 stock outstanding. The value of the Series C-2 Preferred stockholders’ liquidation preference was $4,900,000 at ~~June~~September 30, 2018 and $5,000,000 as of December 31, 2017.

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

The Company issued ~~6,042,000 shares of~~the Series C-3 Voting Convertible Preferred Stock in a private placement transaction during 2016, generating net proceeds of $1,495,000 after related legal costs. During the ~~six~~nine months ended ~~June~~September 30, 2018 and 2017 we issued 120,000 and ~~1,050,000~~1,494,000 shares of common stock, respectively, in connection with conversion notices received from Series C-3 convertible preferred stockholders.

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NOTE 9 - STOCK OPTIONS

2016 Stock Option Plan At the 2016 Annual Meeting the ~~shareholders~~stockholders 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.

2011 Stock Option Plan In 2011, ~~shareholders~~stockholders 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.

Under the Company’s 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 non-qualified stock options, the exercise price may be less than the fair market value of our stock on the date of grant. Stock option grants to non-employees are revalued at each reporting date to reflect the expense over the vesting period. 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 ~~six~~nine months ended ~~June~~September 30, 2018, we granted a total of ~~1,067,500~~1,517,500 stock options to employees and non-employee consultants. These included stock options granted at exercise prices ranging from ~~$0.23~~$0.20 to $.35 per share, exercisable for 10 years that generally vest at a rate of 25% on each anniversary of the grant.

The expense recognized for options that are granted to consultants (i.e., non-employees) reflect fair value, based on updated valuation assumptions using the Black-Scholes valuation model at each measurement period. Such expense is apportioned over the requisite service period of the consultant, which is concurrent with the vesting dates of the various tranches.

Summary For the three months ended ~~June~~September 30, 2018 and 2017, cost related to stock option awards amounted to ~~$35,000~~$42,000 and ~~$29,000,~~$28,000, respectively. For the ~~six~~nine months ended ~~June~~September 30, 2018 and 2017, cost related to stock option awards amounted to ~~$37,000~~$79,000 and ~~$132,000,~~$160,000, respectively.

During the ~~six~~nine months ended ~~June~~September 30, 2018, option expense was reduced by approximately $82,000 as a result of option forfeitures resulting from employee turnover during the period. There were no forfeitures, cancellations or option exercises during the ~~six month~~nine-month period ended ~~June~~September 30, 2017.

As of ~~June~~September 30, 2018, there was approximately ~~$246,000~~$325,000 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 ~~six~~nine months ended ~~June~~September 30, 2018 and 2017 was ~~$0.25~~$0.27 and $0.76, respectively. The total grant date fair value of stock options vested during the ~~six~~nine months ended ~~June~~September 30, 2018 and 2017 was approximately ~~$259,000~~$347,000 and ~~$3,000,~~$97,000, 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:

	2018		2017		2018	2017
Expected term (years)		6.3		6.6	6.3	6.6
Expected forfeiture rate		0%		0%	0%	0%
Risk-free rate		2.6%		2.1%	2.9%	2.1%
Volatility		130%		130%	137%	130%
Dividend yield		0%		0%	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 as of ~~June~~September 30, 2018:

	Shares			Weighted Average Exercise Price		Average Remaining Contractual Term (years)		Aggregate Intrinsic Value		Shares			Weighted Average Exercise Price		Average Remaining Contractual Term (years)		Aggregate Intrinsic Value
Outstanding at January 1, 2018		9,682,000		$	.54						9,682,000		$	.54
Granted		1,067,500			.24						1,517,500			.27
Exercised		-			-						-			-
Canceled or expired		(391,875	)		.57						(396,875	)		.57

Outstanding at June 30, 2018		10,357,625	��	$	.51		3.9	$	170,000
Outstanding at September 30, 2018											10,802,625		$	.50		3.9	$	127,000

Exercisable at June 30, 2018		6,643,500		$	.60		3.3	$	15,000
Exercisable at September 30, 2018											6,754,750		$	.59		3.0	$	7,000

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As of ~~June~~September 30, 2018, there were ~~10,357,625~~10,802,625 stock options outstanding under the Company’s stock option plans, ~~6,643,500~~6,754,750 of which were vested at that date; leaving ~~2,542,375~~2,097,375 options available for future grant under the plans. As of ~~June~~September 30, 2018, the exercise prices of outstanding stock options ranged from $.22 per share to $1.58 per share.

NOTE 10 - WARRANTS

The following summarizes the activity of our outstanding warrants as of ~~June~~September 30, 2018:

						Weighted										Weighted
			Weighted			Average							Weighted			Average
			Average			Remaining		Aggregate					Average			Remaining			Aggregate
			Exercise			Contractual		Intrinsic					Exercise			Contractual			Intrinsic
	Shares		Price			Term		Value		Shares			Price			Term			Value

Outstanding at January 1, 2018		5,214,836	$	.57	(A)						5,214,836		$	.57	(A)
Granted		1,430,871		.32							1,900,871			.32
Exercised		-		-							(4,000	)		.25
Canceled or expired		-		-							-			-

Outstanding at June 30, 2018		6,645,707	$	.50	(A)	6.8	(B)	$	103,000
Outstanding at September 30, 2018											7,111,707		$	.48	(A)		6.8	(B)	$	73,000

Exercisable at June 30, 2018		6,020,707	$	.48		6.3	(C)	$	102,000
Exercisable at September 30, 2018											6,486,707		$	.46			6.3	(C)	$	72,000

	(A)	The weighted average exercise price for warrants outstanding as of ~~June~~September 30, 2018 and January 1, 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 ~~June~~September 30, 2018 and December 31, 2017 excludes 743,500 warrants with no expiration date.
	(C)	The weighted average remaining contractual term for warrants exercisable as of ~~June~~September 30, 2018, and December 31, 2017 excludes 118,500 warrants with no expiration date.

NOTE 11 - RELATED PARTY TRANSACTIONS

As of ~~June~~September 30, 2018, the Company ~~has $1,902,000~~issued $2,027,500 aggregate principal amount of senior convertible notes held by five members of its board of directors. The Company ~~also~~recorded $28,000 and $84,000 in interest expense in connection with these senior convertible notes for the three and nine month periods ended September 30, 2018, respectively.

The Company has $1,170,000 aggregate principal amount of senior convertible notes held by an investor that is deemed an affiliate through the ownership of the majority of our Series C and C-2 Preferred Stock. ~~(See Note 6 regarding~~The Company recorded $17,000 and $52,000 in interest expense in connection with these senior convertible notes for the ~~2017 Convertible Note.)~~three and nine month periods ended September 30, 2018, respectively.

We occupy a leased facility for our corporate headquarters building, located in Rochester, New York, which consists of both executive offices and manufacturing space. The facility is owned by a partnership in which a Company director is associated. The Company recognized $98,000 and $81,000 respectively, in rent expense for the nine-month periods ended September 30, 2018 and 2017.

NOTE 12 - SUBSEQUENT EVENTS

~~2017 Convertible Notes~~

Subsequent to June 30, 2018, a 2017 note-holder converted $50,000 in notes into 150,150 common shares. On July 19, 2018, the Company's board approved a resolution to complete the 2017 Convertible Note and Warrant offering. Total investments received on the 2017 Notes aggregated $4,420,500 and included the issuance of 2,307,207 common stock warrants.

~~2018 Convertible Notes~~

~~Subsequent to June~~September 30, 2018, the Company issued ~~$225,000~~56,400 common shares at $0.25 per share in ~~2018 Convertible Notes including the issuance~~payment of ~~90,000 warrants related~~interest to ~~these notes. Included in these amounts is the issuance~~note holders of ~~$25,000 in notes to the Company’s Chief Executive Officer and the issuance of 10,000 warrants. On July 19, 2018,~~ the Company's ~~board approved a resolution to complete the 2018~~2017 Convertible ~~Note and Warrant offering. Total investments received on the 2018 Notes aggregated $625,000 and included the issuance of 400,000 common stock warrants.~~Notes.

July 2018 Convertible Notes

On July 19, 2018, the Company's board approved a resolution to offer up to $2.5 million in non-interest bearing convertible notes and warrants (the "July 2018 Notes") in connection with the July 24, 2018 Securities Purchase Agreement (the "July 2018 SPA"). The ~~July~~Company issued $475,000 aggregate principal amount of JULY 2018 Notes ~~have a five year maturity~~ and ~~no interest rate. The conversion rate for the July 2018 Notes was set at a fixed rate of $0.25 per share. Investors making investments less than $500,000 will be granted 10%~~ warrants to purchase ~~an aggregate number of~~190,000 shares of common stock equal to 10% of the number of shares issuable upon the conversion of the notes and investors making investments of $500,000 or greater will be granted warrants to purchase an aggregate number of shares of common stock equal to 25% of the number of shares issuable upon the conversion of the notes. The warrants have a fixed exercise price of $0.25 per share and a ten year term from the date of issuance. The July 2018 Notes will be 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 is available only to "accredited investors' as defined by Rule 501(a) of Regulation D under the Securities Act.

~~The Company has issued $250,000 in July 2018 Notes and 100,000 warrants~~ since ~~the authorization of this offering.~~September 30, 2018.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. This report contains certain forward-looking statements that are based on the beliefs of management as well as assumptions made by and information currently available to management. The statements contained in this report relating to matters that are not historical facts are forward-looking statements that involve risks and uncertainties, including, but not limited to, future demand for our products and services, the successful commercialization of our products, general domestic and global economic conditions, government and environmental regulations, competition and customer strategies, changes in our business strategy or development plans, capital deployment, business disruptions, including those caused by fires, raw material supplies, environmental regulations, and other risks and uncertainties, certain of which are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ materially from those forward-looking statements set forth herein. When used in this report, the words “anticipate”, “believe”, “estimate” or “expect” or words of similar import are intended to identify forward-looking statements. For further discussion of certain of the matters described above and other risks and uncertainties, see below and in “Risk Factors” in Part 1 Item 1A of our 2017 annual report on Form 10K.

Undue reliance should not be placed on our forward-looking statements. Except as required by law, we disclaim any obligation to update any factors or to publicly announce the results of any revisions to any of the forward-looking statements contained in this quarterly report on Form 10-Q to reflect new information, future events or other developments.

The following discussion and analysis should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and Notes thereto appearing elsewhere in this Form 10-Q.

Overall Business Strategy

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

●

real-time alertness monitoring utilizing the CURA app,

●

the Group Wellness Index and

●

the Z-Coach wellness program.

The Aegis hydraulic pump technology has been designed to bring to the marketplace a unique concept in hydraulic pumps and motors that will be:

●

smaller, lighter and significantly less expensive than conventional pumps and motors,

●

more efficient,

●

as reliable,

●

~~price competitive,~~ and

●

unique in its ability to scale larger, allowing more powerful pumps and motors.

It is important to note, regarding both the CURA and Aegis products, that the cycle time from the initiation of the sales process to revenue realization can be highly variable especially for a start-up entity. In addition to the activities to be undertaken by us to implement our plan of operation detailed below, we may expand and/or refocus our marketing activities depending upon future circumstances and developments.

Information regarding the Company and all of our inventions, including regular updates on technological and business developments, can be found on our website www.curaegis.com. The website and its contents are not incorporated by reference into this report.

CURA Division: the myCadian ™ watch, the CURA System, and Z-Coach e-learning

The Company’s CURA division is developing a proprietary technology and suite of products designed to (i) measure the decrease in a person’s alertness and (ii) to train individuals on how to improve alertness levels. The CURA System will enable the user and third parties to anticipate and avert undesired or disastrous situations caused by the degradation of alertness. With the information provided from the CURA software analytics, employees can work with Z-Coach, our proprietary sleep training and education solution, to correct sleep issues and improve overall wellness.

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CurAegis has engaged sleep study experts and neurologists to assist with the analysis and validation of our new technologies. The Company believes a solutions approach can be created to indicate a “degradation of alertness” and thus give immediate and important information to the user and other parties. Action taken upon a warning of a change in alertness will lead to a better and safer environment. The CURA system is designed to be a real-time alertness ~~and emergency monitoring~~ system that addresses sleep and fatigue management solutions. This is especially important when an individual’s alertness is essential in properly performing tasks, fulfilling responsibilities and averting disasters. The Company has filed for patent protection for these inventions.

The CURA ~~Platform~~platform is designed to predict and detect a degradation of alertness in a user and reveal sleep and fatigue problems. The CURA ~~Platform~~platform was expanded during ~~the first quarter of~~ 2018 to support other wearable technology and ~~includes~~has been designed to include an API (Application Programming Interface) to facilitate safety reporting for corporate customers. The CURA Platform will include:

	●	a proprietary tool that combines signal processing and pattern recognition to guide users and third parties about the alertness of the wearer,
	●	a risk assessment that identifies the degradation of alertness potentially affecting the wearer’s ability to perform tasks,
	●	a comprehensive assessment for wellness, alertness and sleep,
	●	real-time reporting that distills complex data into actionable information on mobile and desktop platforms,
	●	predictive reporting for a user to take action when alertness begins to wane - before fatigue becomes dangerous,
	●	flexible settings to provide employers a customized tool within existing safety definitions and to create protocols for a unique environment, and
	●	pricing that makes it affordable across a broad-based workforce.

~~Management~~The Company developed marketing and sales programs in support of the CURA ~~sales~~app soft-launch that occurred in May ~~2018.~~2018 and is now pursuing prospective customer orders. At this time, we cannot predict the duration of this initial cycle of the sales process and project the timing to close future sales.

The Company has invested in controlled clinical studies at the Sleep and Chronobiology Laboratory at the University of Colorado-Boulder and at the University of Rochester Medical Center. These studies have been used to validate our actigraphy data collection as well as calibrate our proprietary technologies and algorithms.

The Z-Coach tool is a critical component of the CURA ~~System~~platform and was created by highly respected fatigue management scientists. We acquired the Z-Coach tool in 2015. Z-Coach learning topics include: Risks and Costs of Fatigue, Fundamentals of Sleep, Fatigue Mitigation and Countermeasures. Z-Coach participants gain an awareness of the dangers inherent in the lack of sleep and learn to utilize lifestyle tools to make changes to improve their health, mood, productivity and safety. The Z-Coach modules have been designed for a range of industry professionals, including aviation, trucking and busing industry and for corporate workers. These Z-Coach modules are a key component to the CURA™ System.

Aegis Division: Hydraulic Pump

On May 4, 2018, the Company signed a Memorandum of Understanding (the "MOU") with a major hydraulics manufacturer to assess the Aegis pump/motor technology. This ~~MOU includes~~manufacturer visited the Company’s headquarters the week of September 24, 2018 to further evaluate our pump and motor technology. The result of these discussions was a ~~jointly developed testing protocol for technology evaluation. The MOU allows the manufacturer thirty days after testing to notify the Company of their intent~~verbal commitment to initiate negotiations ~~for~~on an ~~exclusive relationship.~~agreement to form a relationship with the Company. The Company ~~plans to send a team~~had not formalized the nature of ~~Aegis engineers to one~~this relationship at the time of ~~the manufacturer's facilities in the third quarter of 2018 to observe the testing procedures outlined in the protocol. The manufacturer~~this filing but will ~~be sending a team of engineers and senior executives to observe and monitor the testing.~~continue active discussions on this objective. The Company believes the Aegis pump/motor technology ~~will~~can significantly change the hydraulics industry in the future.

The development of our hydraulic pump has taken on added significance in light of U.S. government emissions regulations for off road diesel engines. To help achieve these standards, companies are attempting to run diesel engines, and their hydraulic pumps, at lower rotational speeds. This requires larger displacement hydraulic pumps to be installed to compensate for the decrease in rotational speed. Among other advantages, the Aegis hydraulic technology allows a larger displacement pump to fit into the same or smaller footprint than that of existing pumps. This enables manufacturers to keep the current equipment layout without the need for expensive modifications to accommodate larger hydraulic pumps.

Our Aegis engineering team has completed a production prototype and is working ~~with leaders in the pump industry~~ to align the prototype capability with specific customer applications. The Company reached significant milestones in the design and testing of this production ~~prototype. The Company is currently evaluating market opportunities that could result~~prototype in ~~an agreement with a market leader in the hydraulic industry.~~2017 and 2018. Engineering testing, design and expansion of pump and motor functionalities is continuing.

We have invested in software, test equipment and personnel to enhance our development efforts ~~and began a design~~ of ~~the~~our hydraulic pump to improve the overall performance while maintaining the advantages we have in size and weight. We have built our own testing facility, which would have otherwise taken place at a third-party testing facility. Our engineer and design team has progressively made adjustments to the valve and piston technology and each change has resulted in an improvement in the measured efficiency of the pump. We have filed for patent protection for our novel non-rotating group pump concept, and we are also working on additional patents as a result of engineering breakthroughs in our design process.

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Results of Operations for the three months ended ~~June 30~~September, 30, 2018 and 2017

Revenue, Cost of Revenue and Loss on Revenue

For the three months ended
June 30,

Variance

2018

2017

Revenue
$ 8,000 $ 8,000 $ -
Cost of revenue
33,000 37,000 (4,000 )
Loss on revenue
$ (25,000
)
$ (29,000
)
$ (4,000 )

	For the three months ended September 30,						Variance Incr (decr)
	2018			2017
CURA Revenue	$	10,000		$	6,000		$	4,000
Cost of Revenue		27,000			37,000			(10,000	)
Loss on Revenue	$	(17,000	)	$	(31,000	)	$	(14,000	)

~~The Company recorded $8,000 in revenue during both of the three months ended June 30, 2018 and June 30, 2017 from the sale of Z-Coach subscriptions.~~ During the ~~second~~third quarter of 2018 ~~twenty three~~sixteen Z-Coach Aviation subscriptions were sold to five customers. During the third quarter of 2017 thirty-six Z-Coach Aviation subscriptions were sold to three customers. Quarter-to-date revenue earned from the sales of the CURA app as of September 30, 2018 was $3,000. The Company did not have revenue from sales of CURA system units in the three months ended September 30, 2017.

As of ~~June~~September 30, 2018, and December 31, 2017, the Company has deferred revenue of ~~$19,000~~$14,000 and $5,000, respectively attributed to Z-Coach subscription revenue that will be recognized ratably as our performance obligations are satisfied. ~~The Company did not have revenue from sales of CURA system units in the three months ended June 30, 2018 or June 30, 2017.~~

~~The Company recorded $33,000 in cost of revenue during the three month period ended June 30, 2018 and $37,000 in the three month period ended June 30, 2017.~~ The cost of revenue includes: ~~(i)~~ software amortization and hosting fees incurred to provide the Z-Coach product to subscribers. Software amortization is based upon the straight-line amortization of the capitalized software over an estimated useful life of 36 months.

The Z-Coach modules have been designed for a range of industry professionals, including aviation, trucking and busing industry and for corporate workers. Z-Coach provides fatigue safety training over a ~~twelve month~~twelve-month subscription period. The user has unlimited access to this tool during the subscription period. Customers are billed at the acceptance of the subscription and revenue is recognized ratably over the subscription period as our performance obligations are satisfied and when collection is reasonably assured.

Provision for inventory and asset impairment

The Company recorded a provision for the myCadian watch components and finished goods of $1,741,000 during the three month period ended September 30, 2018. This inventory was sourced in 2017 from a third-party vendor engaged to manufacture and assemble the myCadian watch. The Company is currently offering the CURA app which does not require the use of the myCadian watch. Management is developing an alternate CURA medical product that may use this inventory but this product offering has not been finalized or offered for sale.

The Company also recorded an asset impairment for $17,000 related to the write off of the book value of CURA capital assets that had been assigned a five year life upon acquisition. This impairment loss reflects a shorter useful life on these assets as of September 30, 2018.

Engineering and ~~Development Costs~~development costs and ~~Expenses~~expenses

	For the three months ended June 30,				Variance			For the three months ended September 30,				Variance
	2018		2017		Incr (decr)			2018		2017		Incr (decr)
Wages and benefits	$	181,000	$	222,000	$	(41,000	)	$	161,000	$	98,000	$	63,000
Professional fee and advisors		71,000		84,000		(13,000	)
Professional fees									36,000		4,000		32,000
Parts and shop supplies		26,000		123,000		(97,000	)		45,000		73,000		(28,000	)
Computer and software maintenance		10,000		13,000		(3,000	)		9,000		16,000		(7,000	)
Depreciation and amortization		11,000		11,000		-			11,000		11,000		-
Other costs and expenses		2,000		6,000		(4,000	)		5,000		-		5,000
		301,000		459,000		(158,000	)		267,000		202,000		65,000
Stock-based compensation		28,000		8,000		20,000			11,000		9,000		2,000
Total Engineering and Development	$	329,000	$	467,000	$	(138,000	)	$	278,000	$	211,000	$	67,000

Engineering and development expenses for the three months ended June 30, 2018 amounted to $329,000 as compared to $467,000 in the three months ended June 30, 2017. Non-cash stock-based compensation attributable to stock options for the three months ended June 30, 2018 was $28,000 compared to non-cash stock-based compensation attributable to stock options of $8,000 for the three months ended June 30, 2017. The increase in stock compensation expense is new options granted during the second quarter of 2018 offset by employee turnover in the second quarter of 2018.

The ~~decrease~~$67,000 increase in engineering and development costs ~~associated with~~is primarily attributed to wages and ~~parts and shop supplies reflects~~professional fees reflecting the advanced stage of development for the CURA and AEGIS products. As the Company ~~get~~gets closer to product commercialization and development milestones are achieved, the engineering efforts become more focused resulting in lower ~~cost of wages and~~ parts and shop supplies. The Company will continue to invest in the CURA and Aegis product development efforts during 2018.

The increase in stock compensation expense reflects 450,000 new options granted during the third quarter of 2018, there were no option grants in the third quarter of 2017.

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General and ~~Administrative Costs~~administrative costs and ~~Expenses~~expenses

	For the three months ended June 30,				Variance			For the three months ended September 30,				Variance
	2018		2017		Incr (decr)			2018		2017		Incr (decr)
Wages and benefits	$	305,000	$	407,000	$	(102,000	)	$	276,000	$	418,000	$	(142,000	)
Professional fees and advisors		69,000		141,000		(72,000	)
Professional fees									80,000		111,000		(31,000	)
Facilities and occupancy		35,000		34,000		1,000			35,000		40,000		(5,000	)
Insurance		26,000		28,000		(2000	)		19,000		22,000		(3,000	)
Conferences and travel		13,000		38,000		(25,000	)		11,000		34,000		(23,000	)
Shareholder support		19,000		23,000		(4,000	)
Computer expense									9,000		6,000		3,000
Marketing									10,000		-		10,000
Stockholder support									5,000		10,000		(5,000	)
Depreciation and amortization		2,000		3,000		(1,000	)		2,000		2,000		-
Other costs and expenses		53,000		35,000		18,000			6,000		-		6,000
		522,000		709,000		(187,000	)		453,000		643,000		(190,000	)
Stock-based compensation		7,000		21,000		(14,000	)		31,000		19,000		12,000
Total General and Administrative	$	529,000	$	730,000	$	(201,000	)	$	484,000	$	662,000	$	(178,000	)

~~General and administrative expense for the three months ended June 30, 2018 amounted to $529,000 compared to $730,000~~The decrease of $178,000 in the three months ended June 30, 2017. Non-cash stock-based compensation expense for the three months ended June 30, 2018 was $7,000 compared to $21,000 for the three months ended June 30, 2017. Excluding the non-cash stock-based compensation expense, general and administrative ~~expense for the three months ended June 30, 2018 amounted to $522,000 compared to $709,000~~expenses in the ~~three months ended June 30, 2017. The decrease of $201,000 in the second~~third quarter of 2018 compared to the prior year period is attributed primarily to employee turnover, reduced spending with professional advisors and ~~decreases~~reduced travel costs. There were eleven employees in ~~professional fees~~general and ~~advisors.~~ administrative functions at September 30, 2018 compared to fifteen at the same date in 2017.

Non-operating ~~Income and Expense~~expense

	For the three months ended June 30,						Variance			For the three months ended September 30,						Variance Incr (decr)
	2018			2017						2018			2017
Interest expense	$	(259,000	)	$	(165,000	)	$	(94,000	)	$	(271,000	)	$	(204,000	)	$	67,000
Other income		-			1,000			(1,000	)		-			-			-
	$	(259,000	)	$	(164,000	)	$	(95,000	)	$	(271,000	)	$	(204,000	)	$	67,000

During the three months ended ~~June~~September 30, 2018, the Company recognized ~~$109,000~~$112,000 in interest expense on the 6% convertible notes and ~~$150,000~~$159,000 of amortization on debt discount classified as interest expense related to convertible notes. At ~~June~~September 30, 2018 and ~~June~~September 30, 2017, the Company had ~~$7,821,000~~$8,486,000 and ~~$3,400,000,~~$4,626,000, respectively in convertible notes outstanding. (See Note 4.)

Net Loss for the three months ended ~~June~~September 30, 2018 and 2017

The net loss for the three months ended ~~June~~September 30, 2018 was ~~$1,142,000,~~$2,808,000, compared with a net loss in the three months ended ~~June~~September 30, 2017 of ~~$1,390,000.~~$1,108,000. The net loss attributable to common stockholders for the three months ended ~~June~~September 30, 2018 was ~~$1,196,000~~$2,863,000 as compared to ~~$1,452,000~~$1,170,000 for the three months ended ~~June~~September 30, 2017. The weighted average basic and diluted common shares outstanding amounted to ~~49,571,000~~49,646,000 and ~~47,810,000~~48,321,000 for each of the three months ended ~~June~~September 30, 2018 and 2017, respectively. Basic and diluted loss per common share for each of the three months ended ~~June~~September 30, 2018 and 2017 was ~~$0.02~~$0.06 and ~~$0.03.~~$0.02.

Results of Operations for the ~~six~~nine months ended ~~June 30~~September, 30, 2018 and 2017

Revenue, Cost of Revenue and Loss on Revenue

	For the six months ended June 30,						Variance			For the nine months ended September 30,						Variance Incr (decr)
	2018			2017						2018			2017
Revenue	$	16,000		$	17,000		$	(1,000	)
CURA Revenue										$	26,000		$	23,000		$	3,000
Cost of revenue		70,000			74,000			(4,000	)		97,000			111,000			(14,000	)
Loss on revenue	$	(54,000	)	$	(57,000	)	$	(3,000	)	$	(71,000	)	$	(88,000	)	$	(17,000	)

The Company recorded ~~$16,000~~$26,000 and $ 23,000 in revenue during the ~~six~~nine months ended ~~June~~September 30, ~~2018.~~2018 and September 30,2017, respectively. Z-Coach sales aggregated ~~$12,000~~$19,000 and CURA ~~pilot~~app and device sales aggregated ~~$4,000~~$7,000 during the ~~first half of~~nine months ended September 30, 2018. During the ~~first half of~~nine months ended September 30, 2018, ~~one~~two hundred and ~~ninety~~six Z-Coach Aviation subscriptions were sold to ~~seven~~nine customers. During the nine months ended September 30, 2017, one hundred and forty-seven Z-Coach Aviation subscriptions were sold to eight customers. As of ~~June~~September 30, 2018, and December 31, 2017, the Company has deferred revenue of ~~$19,000~~$14,000 and $5,000, respectively attributed to Z-Coach subscription revenue that will be recognized ratably as our performance obligations are satisfied.

The Company recorded ~~$70,000~~$97,000 in cost of revenue during the ~~three month~~nine-month period ended ~~June~~September 30, 2018 and ~~$74,000~~$111,000 in the ~~six month~~nine-month period ended ~~June~~September 30, 2017. The cost of revenue includes: (i) software amortization and hosting fees incurred to provide the Z-Coach product to subscribers and (ii) product costs incurred in the delivery of pilot programs shipped during the period related to the CURA system. Software amortization is based upon the straight-line amortization of the capitalized software over an estimated useful life of 36 months.

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Table of Contents

Provision for inventory and asset impairment

The Company recorded a provision for the myCadian watch components and finished goods of $1,741,000 in the third quarter of 2018. The Company is currently offering the CURA app which does not require the use of the myCadian watch. Management is developing an alternate CURA medical product that may use this inventory but that product offering is not yet finalized and offered for sale.

Also during the third quarter of 2018, the Company recorded an asset impairment of $17,000 related to the write off of the net book value of capitalized assets that had been assigned a five year life upon acquisition. The impairment life reflects a shorter useful life on these assets at September 30, 2018.

~~Engineering~~Engineering and ~~Development Costs~~development costs and ~~Expenses~~expenses

	For the six months ended June 30,				Variance			For the nine months ended September 30,				Variance
	2018		2017		Incr (decr)			2018		2017		Incr (decr)
Wages and benefits	$	431,000	$	497,000	$	(66,000	)	$	592,000	$	595,000	$	(3,000	)
Professional fee and advisors		200,000		209,000		(9,000	)
Professional fees									236,000		213,000		23,000
Parts and shop supplies		48,000		177,000		(129,000	)		93,000		245,000		(152,000	)
Computer and software maintenance		22,000		28,000		(6,000	)		31,000		44,000		(13,000	)
Depreciation and amortization		21,000		23,000		(2,000	)		32,000		34,000		(2,000	)
Other costs and expenses		5,000		10,000		(5,000	)		10,000		15,000		(5,000	)
		727,000		944,000		(217,000	)		994,000		1,146,000		(152,000	)
Stock-based compensation		7,000		16,000		(9,000	)		18,000		25,000		(7,000	)
Total Engineering and Development	$	734,000	$	960,000	$	(226,000	)	$	1,012,000	$	1,171,000	$	(159,000	)

Engineering and development expenses ~~for~~decreased by $159,000 during the ~~six~~nine months ended ~~June~~September 30, 2018 ~~amounted to $734,000 as~~ compared to ~~$960,000~~the comparable period in ~~the six months ended June 30,~~ 2017. Non-cash stock-based compensation attributable to stock options ~~for~~during the ~~six months ended June 30, 2018~~period was ~~$7,000,~~$18,000, reflecting $66,000 in forfeitures related to employee turnover experienced during the period. ~~Non-cash stock-based compensation attributable to stock options was $16,000 for the six months ended June 30, 2017.~~ The decrease in engineering and development costs ~~associated with wages~~is primarily attributed to decreased spending for parts and supplies which reflects the advanced stage of development for the CURA and AEGIS products. As the Company get closer to product commercialization and development milestones are achieved, the engineering efforts become more focused resulting in lower cost of wages and parts and shop supplies. The Company will continue to invest in the CURA and Aegis product development efforts during 2018.

General and ~~Administrative Costs~~administrative costs and ~~Expenses~~expenses

	For the six months ended June 30,				Variance			For the nine months ended September 30,				Variance
	2018		2017		Incr (decr)			2018		2017		Incr (decr)
Wages and benefits	$	683,000	$	812,000	$	(129,000	)	$	959,000	$	1,230,000	$	(271,000	)
Professional fees and advisors		175,000		316,000		(141,000	)
Professional fees									255,000		427,000		(172,000	)
Facilities and occupancy		78,000		74,000		4,000			113,000		114,000		(1,000	)
Insurance		46,000		37,000		9,000			65,000		59,000		6,000
Conferences and travel		24,000		70,000		(46,000	)		35,000		104,000		(69,000	)
Shareholder support		37,000		51,000		(14,000	)
Computer expense									29,000		35,000		(6,000	)
Marketing Expense									30,000		2,000		28,000
Stockholder support									42,000		61,000		(19,000	)
Depreciation and amortization		4,000		6,000		(2,000	)		6,000		8,000		(2,000	)
Other costs and expenses		77,000		73,000		4,000			43,000		42,000		1,000
		1,124,000		1,439,000		(315,000	)		1,577,000		2,082,000		(505,000	)
Stock-based compensation		30,000		116,000		(86,000	)		61,000		135,000		(74,000	)
Total General and Administrative	$	1,154,000	$	1,555,000	$	(401,000	)	$	1,638,000	$	2,217,000	$	(579,000	)

General and administrative expense for the six months ended June 30, 2018 amounted to $1,154,000 compared to $1,555,000 in the six months ended June 30, 2017. Non-cash stock-based compensation expense for the six months ended June 30, 2018 was $30,000 compared to $116,000 for the six months ended June 30, 2017. Excluding the non-cash stock-based compensation expense, general and administrative expense for the six months ended June 30, 2018 amounted to $1,124,000 compared to $1,439,000 in the six months ended June 30, 2017. The decrease of ~~$401,000~~$579,000 in general and administration expenses for the ~~second quarter of~~nine month period ended September 30, 2018 reflects the reduction in headcount, reduction in cost of professional services, reduced travel, conferences and ~~related stock option forfeitures,~~marketing brochures. There were eleven employees in general and ~~decreases~~administrative functions at September 30, 2018 compared to fifteen at the same date in ~~professional fees and advisors.~~ 2017.

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Non-operating Income and Expense

	For the six months ended June 30,						Variance			For the nine months ended September 30,						Variance
	2018			2017				Incr (decr)		2018			2017			Incr (decr)
Interest expense	$	(496,000	)	$	(321,000	)	$	(175,000	)	$	(767,000	)	$	(525,000	)	$	242,000
Other income		1,000			2,000			(1,000	)		1,000			2,000			(1,000	)
	$	(495,000	)	$	(319,000	)	$	(176,000	)	$	(766,000	)	$	(523,000	)	$	243,000

During the ~~six~~nine months ended ~~June~~September 30, 2018, the Company recognized ~~$207,000~~$319,000 in interest expense on the 6% convertible notes and ~~$289,000~~$448,000 of amortization on debt discount classified as interest expense related to convertible notes. As of ~~June~~September 30, 2018, the company has ~~$7,820,500~~$8,486,000 in ~~face value~~debt outstanding that earns of 6% ~~convertible notes outstanding~~per annum compared to ~~$5,825,000~~$4,626,000 at ~~December 31,~~September 30, 2017.

Net Loss for the ~~six~~nine months ended ~~June 30~~September, 30, 2018 and 2017

The net loss for the ~~six~~nine months ended ~~June~~September 30, 2018 was ~~$2,437,000,~~$5,245,000, compared with a net loss in the ~~six~~nine months ended ~~June~~September 30, 2017 of ~~$2,891,000.~~$3,999,000. The net loss attributable to common stockholders for the ~~six~~nine months ended ~~June~~September 30, 2018 was ~~$2,545,000~~$5,408,000 as compared to ~~$3,015,000~~$4,185,000 for the ~~six~~nine months ended ~~June~~September 30, 2017. The weighted average basic and diluted common shares outstanding amounted to ~~49,302,000~~50,189,000 and ~~47,591,000~~47,768,000 for each of the ~~six~~nine months ended ~~June~~September 30, 2018 and 2017, respectively. Basic and diluted loss per common share for each of the ~~six~~nine months ended ~~June~~September 30, 2018 and 2017 was ~~$0.05~~$0.11 and ~~$0.06.~~$0.09.

Preferred stock dividends accrued totaled ~~$108,000~~$163,000 in the ~~six~~nine months ended ~~June~~September 30, 2018 and ~~$124,000~~$186,000 in ~~June~~September 30, 2017.

Liquidity and Capital Resources

As of ~~June~~September 30, 2018, cash on-hand totaled ~~$89,000,~~$95,000, a net decrease of ~~$105,000~~$99,000 since the beginning of the year. During the ~~six~~nine months ended ~~June~~September 30, 2018 we used ~~$2,096,000~~$2,813,000 of cash in operating activities. A net loss of ~~$2,437,000~~$5,245,000 was adjusted for ~~$414,000~~$2,408,000 in non-cash expenses for inventory reserves, depreciation, amortization, stock-based compensation, and ~~$73,000~~a non-cash charge for asset impairment during the period. There also were $24,000 in changes in working capital ~~components.~~components during the nine-month period. The decrease in cash used in operations in the ~~six~~nine months of 2018 compared to 2017 was driven by the change in net loss and total accounts payable and accrued liabilities from 2017 to 2018. In the ~~six~~nine months of 2017, the net loss of ~~$2,891,000~~$3,999,000 was adjusted for ~~$455,000~~$669,000 in non-cash expenses for depreciation, amortization and stock-based compensation and ~~$234,000~~$293,000 in changes in components of working capital.

The Company ~~invested $142,000~~did not invest in capitalized software and property and equipment in the ~~six~~nine months ~~of 2017; there was no~~ended September 30, 2018 and invested $419,000 in capital ~~investment~~investments in the ~~first six~~nine months ~~of 2018.~~ended September 20, 2017.

During the ~~six~~nine months ended ~~June~~September 30, 2018, the Company generated ~~$1,991,000~~$2,714,000 in net cash from financing activities resulting from the issuance of convertible ~~notes.~~notes and a warrant conversion. During the ~~six~~nine months ended ~~June~~September 30, 2017, the Company generated ~~$402,000~~$1,627,000 in cash from financing activities from issuance of convertible notes and from the exercise of a common stock warrant.

Current Cash Outlook and Management Plans

As of ~~June~~September 30, 2018, we have cash on hand of ~~$89,000,~~$95,000, negative working capital of ~~$102,000,~~$1,869,000, a stockholders’ deficit of ~~$5,318,000~~$7,688,000 and an accumulated deficit of ~~$83,278,000.~~$86,086,000. During ~~six~~nine months ended ~~June~~September 30, 2018 we raised ~~$1,995,000~~$2,720,000 in gross proceeds through the issuance of convertible notes and warrants, the proceeds of which have been used to support the ongoing development and marketing of our core technologies and product initiatives.

Management estimates that the twelve-month 2018 cash needs, based on its current development and product plans, will ~~range from~~be approximately $4.0 ~~to $4.5~~ million. As of ~~June~~September 30, 2018, the Company’s cash on hand is not sufficient to cover the Company’s future working capital requirements. This raises substantial doubt as to the Company’s ability to continue as a going concern. Management continues to use its best efforts to develop financing opportunities to fund the development and commercialization of the CURA and Aegis products.

Since inception, we have financed our operations by the sale of our securities and debt financings. We need to raise additional funds to meet our working capital needs, to fund expansion of our business, to complete development, testing and marketing of our products, or to make strategic acquisitions or investments. No assurance can be given that necessary funds will be available ~~for~~to us to finance our development on acceptable terms, if at all. Furthermore, such additional financings may involve dilution to our ~~shareholders~~stockholders or may require that we relinquish rights to certain of our technologies or products. In addition, we may experience operational difficulties and delays due to working capital restrictions. If adequate funds are not available from additional sources of financing, we will have to delay or scale back our growth plans.

The Company’s ability to fund its current and future commitments from its available cash depends on a number of factors. These factors include the Company’s ability to (i) launch and generate sales from the CURA division; (ii) generate revenue from the licensing or sale of our hydraulic technologies or; (iii) decrease engineering and development and administrative expenses. ~~even if~~If these and other factors are not met, the Company will need to raise funds in order to meet its working capital needs and pursue its growth strategy. Although there can be no such assurances, management believes that sources for these additional funds will be available through either current or future investors.

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Critical Accounting Policies

Revenue Recognition

The Company has two sources of revenue: (i) from the sale of CURA ~~System~~platform products and (ii) from stand-alone Z-Coach subscriptions. Revenue from the sale of CURA ~~System~~ products is recognized upon the shipment of myCadian devices to a customer and upon the company’s satisfaction of all performance obligations as described in customer agreements. The Z-Coach Program provides fatigue training over an annual subscription period of twelve months. The Z-Coach Program allows the user unlimited access during the annual subscription period. Customers are billed at the acceptance of the subscription, and revenue is recognized ratably over the subscription period as our performance obligations are satisfied and when collection is reasonably assured. Our collection terms provide customers standard terms of net 30 days. Future performance obligations are reflected in deferred revenue.

Income Taxes

We account for income taxes using the asset and liability method, the objective of which is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting and the tax basis of our assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. A valuation allowance related to deferred tax assets is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Stock-Based Compensation

FASB ASC 718-10 requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense over the requisite service period (generally the vesting period) in the consolidated financial statements based on their fair values on the grant date. The impact of forfeitures is recognized as incurred. In addition, the realization of tax benefits in excess of amounts recognized for financial reporting purposes will be recognized as a financing activity in accordance with FASB ASC 718-10. The Company adopted FASB ASC 718-10 during the third quarter of 2018.

No tax benefits were attributed to the stock-based compensation expense because a valuation allowance was maintained for substantially all net deferred tax assets. We elected to adopt the alternative method of calculating the historical pool of windfall tax benefits as permitted by FASB ASC 718-10-65. This is a simplified method to determine the pool of windfall tax benefits that is used in determining the tax effects of stock compensation in the results of operations and cash flow reporting for awards that were outstanding as of the adoption of FASB ASC 718-10.

FASB ASC 505-50, “Equity-Based Payments to Non-Employees,” requires all share-based payments to non-employees, including grants of stock options, to be recognized in the consolidated financial statements as expense over the service period of the consulting arrangement or until performance conditions are expected to be met. Using a Black-Scholes valuation model, we periodically reassess the fair value of non-employee options as service conditions are met, which generally aligns with the vesting period of the options, and we adjust the expense recognized in the consolidated financial statements accordingly.

~~Safe Harbor Cautionary Statement Regarding Private Securities Litigation Reform Act of 1995~~

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. This report contains and incorporates by reference certain forward-looking statements that are based on the beliefs of management as well as assumptions made by and information currently available to management. The statements contained and incorporated by reference in this report relating to matters that are not historical facts are forward-looking statements that involve risks and uncertainties, including, but not limited to, future demand for our products and services, the successful commercialization of our products, general domestic and global economic conditions, government and environmental regulations, competition and customer strategies, changes in our business strategy or development plans, capital deployment, business disruptions, including those caused by fires, raw material supplies, technical failures, environmental regulations, and other risks and uncertainties, certain of which are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ materially from those forward-looking statements set forth herein. When used in this report, the words “anticipate”, “believe”, “estimate” or “expect” or words of similar import are intended to identify forward-looking statements.

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

Item 4. CONTROLS AND PROCEDURES

Disclosure controls and procedures

Evaluation of Disclosure Controls and Procedures

Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded, as of ~~June~~September 30, 2018, that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), as of the end of such period, are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Changes in Internal Control Over Financial Reporting

There have been no significant changes in our internal control over financial reporting during the quarter ended ~~June~~September 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

There have no significant changes in our internal control over financial reporting during the ~~six~~nine months ended ~~June~~September 30, 2018 that have materially affected, or are reasonable likely to materially affect, our internal control over financial reporting.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the ~~three months~~three-month period ended ~~June~~September 30, 2018 and thereafter, through the ~~date of~~ filing of this Form ~~10Q,~~10-Q, other than sales of securities previously reported on a Form ~~10Q~~10-Q or Current Report on Form 8-K, ~~filed on July 13, 2018,~~ the Company issued and sold the following securities without registration under the Securities Act of 1933, as amended (the ~~"Securities Act"~~“Securities Act”):

~~a) $195,000 aggregate principal amount of 2017 Convertible Notes;~~

~~b) $625,000 aggregate principal amount of 2018 Convertible Notes; and~~

~~c) $250,000 aggregate principal amount of senior convertible promissory notes (the "Convertible Note") and warrants, described below.~~

On July 19, 2018, the Company's board of directors approved the offering and sale of up to $2.5 million aggregate principal amount of Convertible Notes pursuant to a securities purchase agreement, date July 24, 2018 (the "July 2018 SPA"). The Convertible Notes have a five year maturity and do not bear interest. The Convertible Notes are convertible into common stock at a conversion price of $0.25 per share, subject to adjustment. Investors purchasing less than $500,000 principal amount of Convertible Notes will receive 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 Convertible Notes, and investors purchasing at least $500,000 principal amount of Convertible Notes will receive warrants to purchase an aggregate number of shares of common stock equal to 25% of the number of shares issuable upon conversion of the Convertible Notes. The warrants have a fixed exercise price of $0.25 per share and a ten year term from the date of issuance.

The use of proceeds associated with the Convertible Notes is to support the ongoing development and marketing of our core technologies and product initiatives, and for general working capital purposes. The Convertible Notes are being 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 is available only to "accredited investors" as defined in Rule 501(a) of Regulation D. The descriptions of the Convertible Notes, the July 2018 SPA, and the warrants are qualified in their entirety by reference to Exhibits attached hereto, which are incorporated by reference herein.
(a)
$225,000 aggregate principal amount of senior convertible promissory notes (the “2018 Convertible Notes”) and warrants to purchase 90,000 shares of common stock.
(b)
$975,000 aggregate principal amount of senior convertible promissory notes (the “JULY 2018 Convertible Notes”) and warrants to purchase 510,000 shares of common stock.
(c) 320,853 restricted common shares to holders of the Company's 2016 and 2017 Convertible Notes for accrued interest.
(d) On November 1, 2018, the Company's board approved a resolution to extend the expiration date of a warrant agreement for 400,000 potential common shares, issued on October 15, 2010, to To The Point Consulting until October 14, 2025.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

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Item 6. Exhibits

The following Exhibits, as applicable, are attached to this Quarterly Report (Form 10-Q). The Exhibit Index is found on the page immediately succeeding the signature page and the Exhibits follow on the pages immediately succeeding the Exhibit Index.

~~10.1~~	~~Form of Convertible Notes Securities Purchase Agreement dated July 24,2018~~

~~10.2~~	~~Form of Convertible Note~~

~~10.3~~	~~Form of Common Stock Purchase Warrant~~

31.1	Rule 13a-14(a)/15d-14(a) Certifications – CEO

31.2	Rule 13a-14/15d-14 Certifications – CFO

32	Section 1350 Certifications

100	XBRL-related documents
	None.

101	The following materials from CurAegis Technologies, Inc.’s Quarterly Report on Form 10-Q for the period ended ~~June~~September 30, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations for the three and ~~six~~nine month periods ended ~~June~~September 30, 2018 and 2017 (ii) Condensed Consolidated Balance Sheets as of ~~June~~September 30, 2018 and December 31, 2017, (iii) Condensed Consolidated Statements of Cash Flows for the ~~six~~nine month periods ended ~~June~~September 30, 2018 and 2017, and (iv) Notes to Condensed Consolidated Financial Statements*

	* Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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SIGNATURES

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

	CURAEGIS TECHNOLOGIES, INC.
Dated: ~~August 7,~~November 14, 2018	By:	/s/ Richard A. Kaplan
		Richard A. Kaplan,
		Chief Executive Officer

Dated: ~~August 7,~~November 14, 2018	By:	/s/ Kathleen A. Browne
		Kathleen A. Browne,
		Chief Financial and Accounting Officer

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	(b)	$975,000 aggregate principal amount of senior convertible promissory notes (the “JULY 2018 Convertible Notes”) and warrants to purchase 510,000 shares of common stock.
	(c)	320,853 restricted common shares to holders of the Company's 2016 and 2017 Convertible Notes for accrued interest.
	(d)	On November 1, 2018, the Company's board approved a resolution to extend the expiration date of a warrant agreement for 400,000 potential common shares, issued on October 15, 2010, to To The Point Consulting until October 14, 2025.